Group Research Project Jindal Steel Works Ltd
Total Page：16
File Type：pdf, Size：1020Kb
9/10/2015 Group Research Project Jindal Steel Works Ltd. & Steel Authority of India Ltd. Group 2, Section C1 Great Lakes Institute of Management, Chennai Statement of Integrity We declare that all the material presented and submitted as part of this assignment is our original work. For all the other material references and citations are mentioned. We understand that plagiarism is the severest form of academic fraud. If any copying is detected in this assignment, we bear the complete responsibility and the consequences that might follow. Section: C1 Group Number: 2 Group Members: 1. Ankita Dhar - FT163013 2. Anisha Kashyap - FT163012 3. Gunjan Kaur Jabbal - FT163026 4. Divya Ogoti - FT163020 5. Himanshu Malik - FT163031 6. Himanshu Aggarwal - FT163029 7. Gautam Gupta - FT163024 8. Abhinav Choudhary - FT163003 1 Executive Summary This report provides an elaboration of the steel industry of India as well highlights the comparison parameters of the current and prospective profitability, liquidity and financial stability of two major players of the industry – Jindal Steel Works Ltd. and Steel Authority of India Ltd. The analysis of the players includes trend prevalent in the industry, horizontal and vertical analysis of the organizations as well as ratios such as Interest Coverage, Solvency, Profitability and Performance. Other calculations include Z-Score analysis, Financial Statements Case analysis and Total Assets and earnings per share to name a few. All calculations can be found in the attached excel files. Results of data analyzed show that SAIL has had a drastic downturn for the last five years whereas JSW has improved its value in the market by adoption of certain new technologies at timely intervals. The report finds the prospects of the companies in their respective current positions are not positive. The major areas of weakness require further investigation and remedial action by management. Some challenges that are being faced by the company as discovered during the Qualitative Analysis of the organizations are, There have been multiple fluctuations in the market and the numerous possibilities of China's entrance into the exporting markets Thought the domestic demand has remained untapped and unfulfilled, there is a reduced demand for steel across the world, due to the current economic scenario. Taking into consideration the above challenges and understanding the financial as well as non-financial statuses of both the companies, some of the recommendations discussed in the report are as follows: Both the companies have the capacity to improve their respective cost structures to improve their interest coverage ratios respectively Jindal Steel Works needs to reduce the eternal risk levels by the acquisition of captive mines as that is one of the major weaknesses that the organization faces There are multiple untapped rural segment demands, that the organizations are still not focusing upon The industry looks optimistic due to the increasing demands for infrastructure and developments across the country. 2 Economic Analysis Current Economy Analysis of India • India to see double digit growth around 8-10% in GDP in coming years. • Current account deficit to decline to about 1% in 2015-16 • India need to adhere to fiscal deficit of 4.1% of GDP to aim for 3% • India needs to be committed to fiscal consolidation to enhance revenue generation. • More reforms need to be created for anvil, GST to expand direct benefit transfers to be effective. • Food grains production will exceed last 5 year average by 8.5 million tons. • Niti Ayog to enhance fiscal federalism. • External sectors will be gaining strength. • Balance required between “Make in India” and “”Skilling India” • Services sector negotiations to be done at WTO which is crucial for removing market access barriers. • Manufacturing and services are sectors equally important to grow. • PPP model to be revitalized to revive reinvestment. • BSE Sensex trading more than 200 points higher as per government tables • Growth at market prices seen between 8.1-8.5 pct. in 2015/16 on basis of new GDP calculation formula • Inflation likely to be below target of central bank by 0.5 – 1 % • Gold imports into India, the world’s top consumer, jumped 55 per cent to 57.2 tons in January, ahead of an expected cut in the import duty in Saturday’s Union Budget. Figure 1 Figure 2 3 Figure 3 Figure 4 4 Future Trend of Economy Figure 5 Figure 6 5 Figure 7 Figure 8 6 Figure 9 Figure 10 Figure 11 7 Figure 12 Figure 13 Future Performance of SAIL based on Economic Trends • March quarter performance of JSW has been negatively affected by high input costs, low demand and pricing pressure. • Impairment also seen in abroad subsidiaries. • Low demand and high input cost will lead to low production volumes. • Operating income can drop per ton of steel sold. • The sharp drop in operating income was due to lower realizations and lower operating. • Reliance securities remain optimistic on JSW’s future performance despite of last quarter low performance. • Along with domestic pressures JSW is forced to face pressure from foreign subsidiaries. • Above factors can lead to fall in consolidated revenue and consolidated operating profit decline. • Only silver lining for JSW is that it believes that if systematic demand for steel would gradually pick up, their business would stabilize. 8 Future Performance of JSW based on Economic Trends • Should look forward to expansion of mines so that they do not have to procure ores from outside market to meet demand. • To avoid falling market share, SAIL should use strong marketing campaigns. • Should resolve environment and forest clearance issues, and Sail's modernization and expansion plan issues. • Should integrate and operationalize upstream and downstream production facilities in short span of time. • Depressed steel prices will put lot of pressure on NRS (Net Realized sales), therefore SAIL should increase their share of value added steels. • Should undertake cost awareness initiatives when it comes to procuring funding for expansion plans. • It is pertinent that techno-economics of production are internationally benchmarked, and the latter can't happen till the capitalization of all of the Sail's production units are balanced. 9 Industry Overview Background: Indian Iron and steel industry is a century old. New industrial policy adopted by government of India has opened it up for investment from private sector. Imports and FDI are other boosting factors. Huge demand is coming from automobile sector, real estate and infrastructure sector. Current Scenario: Steel sector in India accounts for nearly 2% of country’s Gross Domestic Product and employs around 600,000 employees. Consumption: India is second to China when it comes to consumption of iron and steel. However with rising incomes and iron being raw material in many other industries like automobile infrastructure etc., demand of Iron and steel is bound to rise. However India’s current per capita finished steel consumption is at 52 Kgs which is well below the world average of 203 Kgs. Industry Structure: Iron and Steel industry can be divided mainly into 2 main sectors mainly public and private. However on the basis of method of production used, industry can be divided into two different producers. Integrated Producers: These are those who convert iron ore into steel. Big players under this category are SAIL (Steel Authority of India Limited), TISCO (Tata Iron and Steel Company Limited) and RINL (Rashtriya Ispat Nigam Limited) Secondary Producers: These are mini plants who make steel by melting scrap or sponge iron. Players in this category are Essar Steel and Ispat Industries. Investments: As per the data released by DIPP (Department of Industrial Policy and Promotion) Indian mining and metallurgical industries have got Foreign Direct Investment of US$1669.49 million US$8527.34 million respectively in period of April 2000 to February 2015. Challenges: o Un-remunerative prices o High cost of capital o Low labor productivity o High costs of basic inputs and services Opportunities: o Unexplored rural market o Export market penetration 10 Production Scenario Figure 14 Figure 15 Figure 16 Figure 17 11 Imports of Iron and Steel Figure 18 Exports of Iron and Steel Figure 19 Five trends in India’s Steel Industry Consolidation: Many mergers and acquisitions would be seen in order to get hold of land and regulatory policies. o In December, JSW Steel agreed to buy a controlling stake in loss-making rival Ispat Industries that would push its capacity to the top most position. It also agreed to buy Bellary Steel. Doggedness of foreign firms: There have been lot of delays in success of joint venture of foreign and Indian players due to land delays in approval. However these have discouraged none. Japan's JFE Holdings in talks with JSW for a stake buy. Japan's Kobe Steel and SAIL in talks for a joint venture. South Korean POSCO got an approval for its 12 million ton plant in eastern Orissa state last month after waiting since 2005, and its plans for another plant in Karnataka and a joint venture with Steel Authority of India (SAIL) in Jharkhand remain. Relocation of Smaller Plants: Investors are looking towards the west coast that has less iron ore, but is closer to Africa from where coking coal can be imported. o JSW has chosen Karnataka state in the south for making new steel plants, away from east India that is mineral rich, but is suffering due to land-acquisition problems. Making use of low grade raw materials: Initially blast furnaces used to take iron ore lumps and coking coal. But now technology will enable them to use cheaper iron ore fines and non-coking coal which is available in India in abundance. o SAIL's joint venture plan with POSCO is for using the Finex technology that can use iron ore fines directly in the blast furnace.