Professional Documents
Culture Documents
Industry in India
IIM Lucknow, IPMX
06 Jul 2015
MANAC Project
Submitted to Prof Prakash Singh
Submitted By:
Deepak Parthasarathi
Siddharth Jain
Sundar Viswanathan
Veeral Kamalia
Vengada Ramanan
Visharad Pandey
IPMX08016
IPMX08048
IPMX08052
IPMX08057
IPMX08058
IPMX08061
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JSW Steel:
One of the largest Indian private sector steel producer, Jindal South West Steel or JSW Steel is
the flagship company of the JSW Group. Originally incepted as single steel mill in 1982, JSW
steel is now a US$ 9 billion global conglomerate spread over six locations in India and with a
footprint that extends to the US, South America and Africa.
The company's strategy of always staying on the leading edge of technical advancement has
led to partnerships with global sector leaders such as JFE Steel, Marubeni Itochu Steel, Praxair
and Severfield Rowen Plc. This technological edge has helped JSW's plants rank among the
lowest-cost steel producers in the world. The strong focus on innovation and research and
development (R&D) has led to JSW Steel being recognized worldwide as a purveyor of highend, value-added steel. Nearly 40 percent of its products today are high value steels and nearly
one-fifth is exported.
It recently inaugurated India's most modern cold rolling mill; wins the Prime Minister's Trophy for
Excellence in Performance.
Tata Steel:
Leaders in the Indian Steel Sector, Tata Steel was founded in 1907 by Mr. J N Tata. It started
as Asia's first integrated private sector steel company and presently is among the top ten global
steel companies with an annual crude steel capacity of nearly 30 million tonnes per annum
(MTPA). It is now the world's second-most geographically-diversified steel producer with
operations in 26 countries, commercial presence in over 50 countries and a strength of 80,000
employees across five continents.
Tata Steel founded India's first industrial city, Jamshedpur, where it established the country's
first integrated steel plant. The company is focused not only on the execution of the plant
facilities but also on addressing the socio-economic infrastructure needs of an industrial
enterprise of this scale. Presently, it has plans for two new Greenfield steel projects in the Indian
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SAIL:
SAIL is India's largest steel producing company. With a turnover of Rs. 49,350 crore, the
company is among the seven Maharatnas of the country's Central Public Sector Enterprises.
SAIL has five integrated steel plants, three special plants, and one subsidiary in different parts
of the country. It is a fully integrated iron and steel maker, producing both basic and special
steels for domestic construction, engineering, power, railway, automotive and defense industries
and for sale in export markets. It is expected to receive a part of the 12000 crore funding based
on the make in India initiative by the Narendra Modi Government.
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Constraints:
a. Demand-side:
The growth in the steel market is expected to be muted in the short term on account of poor
growth in core consumer sectors such as infrastructure and construction. However, the demand
is expected to rebound in the latter half of 2015 with growth in infrastructure as announced in
the Twelfth Five-year Plan. Growth in the automobile and consumer durable sectors will also
help demand growth in the long term.
Sales of the steel industry are estimated to have grown by seven per cent for the year ended
March 2015. Surge in imports and weak demand led to the mediocre performance by steel
companies. Steel companies faced a hit on both the realizations and volumes front. Steel prices
declined by 6.9 per cent during 2014-15. Sales volumes also fell due to weak demand and rise
in imports. Going forward, sales of the industry are expected to grow by nine per cent in 201516. In 2015-16, industry is expected to perform well owing to rise in demand.
b. Supply-side:
The large steel players and new entrants have announced capacity addition of about 71 MTPA
till 2017. Regulatory hurdles and land acquisition challenges remain the largest supply-side
constraint for the Indian steel market. Procurement of iron ore continued to be a problem for
steel manufacturers in the first half of 2014-15.The domestic prices of iron ore were
considerably higher as compared to international prices during this period. The raw material
costs are likely to rise by 8.2 per cent, a tad faster than sales.
At the net level, profits growth will be restricted to 8.3 per cent in 2015-16. Among postoperating expenses, financial charges and depreciation are likely to rise by 12.1 per cent and
10.7 per cent, respectively. Owing to this, net profit as a percentage of total income is likely to
remain unchanged at 3.1 per cent.
This standard provides some guidance on determining the value of inventories and cost
formulas.
Inventory includes raw materials, WIP and finished goods.
Finished and semi-finished products produced and purchased by the Company are carried
at lower of cost and net realisable value.
Work-in-progress is carried at lower of cost and net realisable value.
Coal, iron ore and other raw materials produced and purchased by the Company are
carried at lower of cost and net realisable value.
Stores and spare parts are carried at cost. Necessary provision is made and expensed in
case of identified obsolete and nonmoving items.
Cost of inventories is generally ascertained on the weighted average basis. Work-inprogress and finished and semi-finished products are valued on full absorption cost basis.
Cost of goods is the summation of cost of purchase, cost of conversion (costs of material other
than direct materials i.e. direct labour and variable overheads) and other costs. Exclusion from
cost of inventories include abnormal wastage of material and labour.
International: (IAS 2)
IAS 2 requires the use of First-in, First-out (FIFO) principle whereby the items which have been
in stock the longest are considered to be the items that are being used first, ensuring those
items which are held in inventory at the reporting date are valued at the most recent price. As an
alternative, costs of inventories may be assigned by using the weighted average cost formula.
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Depreciation
India (Accounting Standard 6)
Depreciation is provided on straight-line method based on the estimated useful life of the asset
but subject to the minimum rates specified in Schedule XIV to the Companies Act, 1956.
Where the historical cost of a depreciable asset undergoes a change, the depreciation on the
revised unamortised depreciable amount is provided over the residual useful life of the asset.
Classification of plant and machinery into continuous and non-continuous is made on the basis
of technical opinion and depreciation provided accordingly.
Depreciation on addition/deletion during the year is provided on pro-rata basis with reference to
the month of addition/deletion.
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Recognition of Revenues:
India (Accounting Standard 9):
Sales include excise duty and are net of rebates and price concessions. Sales are recognized at
the time of dispatch of materials to the buyers including the cases where delivery documents
are endorsed in favor of the buyers. Where the contract prices are not finalized with government
agencies, sales are accounted for on provisional basis. Marine export sales are recognized on:
i) The issue of bill of lading, or
ii) Negotiation of export bills upon expiry of laycan period, in cases where 'realization of material
value without shipment is provided in the letters of credit of respective contracts, whichever is
earlier. Export incentives under various schemes are recognized as income on certainty of
realization. The iron ore fines not readily useable/saleable included in inventory, are recognized
on disposal.
International (IAS18):
Revenue is measured at the fair value of the consideration received or receivable. Revenue is
reduced for estimated customer returns and other similar allowances. Revenue from the sale of
goods is recognized when the Company has transferred to the buyer the significant risks and
rewards of ownership of the goods, no longer retains control over the goods sold, the amount of
revenue can be measured reliably, it is probable that the economic benefits associated with the
transaction will flow to the Company, and the costs incurred or to be incurred in respect of the
transaction can be measured reliably. Revenue from the sale of iron ore is recognized when the
risk and rewards of ownership are transferred to the buyer. The selling price is contractually
determined on a provisional basis, based on a reliable estimate of the selling price and
adjustments in the price may subsequently occur depending on movements in the reference
price or contractual iron ore prices to the date of the final pricing and final product specifications
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Page 10
Indian GAAP
AS-9 Revenue Recognition
On transition to IFRS
IAS-18 Revenue
Revenue Definition
Depreciation
Recognized on an accrual
Recognized on an accrual basis
Interest Expense
basis. Practice varies with
using the effective interest method
respect to discounts.
Acquired Intangible
Revaluations are permitted in rare
Revaluations are not permitted
assets
circumstances
Capitalization
of
Permitted as a policy choice. But not
Required
borrowing costs
required.
Current Ratios
Current Ratio = (Current Assets / Current Liability).
The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The
higher the current ratio, the more capable the company is of paying its obligations.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability
to turn its product into cash. Companies that have trouble getting paid on their receivables or
have long inventory turnover can run into liquidity problems because they are unable to alleviate
their obligations.
Current Ratio
FY-10
FY-11
FY-12
FY-13
FY-14
Industry
1.7
1.9
1.5
1.5
1.3
Tata Steel
1.4
1.6
1.0
0.9
0.6
JSW
0.7
0.9
1.1
1.1
1.0
SAIL
2.3
2.6
2.0
1.9
1.6
Tata Steel: Current assets decreased in FY 2012 whereas current liability increased at a
relatively sharper rate.
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Page 13
FY-10
FY-11
FY-12
FY-13
FY-14
Industry
1.0
1.0
1.1
1.2
1.3
Tata Steel
0.7
0.7
0.6
0.6
0.5
JSW
1.2
0.7
0.9
0.9
1.1
SAIL
0.5
0.6
0.5
0.7
0.7
Tata Steel:
There is not much variation observed in Debt Equity ratio over the observed periods
JSW Steel
There is a sharp decline for year 2010-2011. Company could meet its entire repayment
schedule in 2010-2011. This led to reduction in debt equity ratio from 1.19 in 2009-2010
to .72 in 2010-2011.
SAIL
With SAIL meeting Capex requirements mainly through internal resources, the
companys market borrowings were reduced. This led to small reduction in Debt Equity
ratio for year 2011-2012.
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COGS
------------------------------------Average Inventory
For Tata Steel, Inventory Turnover ratio has marginally decreased. This is due to the fact
that Net Inventories were increasing YoY at a faster rate than COGS.
For SAIL, in the last two years, Inventory Turnover Ratio has decreased. This is due to
the fact that COGS increased every year except 2012-2013 year whereas Inventory
increased throughout.
For JSW, over the last 5 years, the sales are showing an upward trend resulting in
gradual increase in Inventory Turnover Ratio.
Inventory Turnover
Ratio
FY-10
FY-11
FY-12
FY-13
FY-14
Industry
3.7
3.4
3.4
3.1
3.1
Tata Steel
4.2
4.1
4.0
4.3
4.1
JSW
5.3
5.4
5.6
5.5
6.2
SAIL
3.5
3.4
3.2
2.4
2.5
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Credit Sales
----------------------------Average Debtors
The Debtors Turnover Ratio is usually supplemented by Average Collection period. The usage
of two involves:
Calculation of Daily Sales, given by:
Sales per Day =
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Tata Steel, Debtors Turnover Ratio has increased from 2010 to 2011 because of
decrease in collection period...
SAIL, we observe a decrease because of the increase in collection period - due to the
recession and the credit crunch faced by many customers.
Gathered from: Journal of Business Management, Commerce and Research, Vol-11, No-6, December-2013
For JSW, We observe gradual reduction in the Debtors turnover ratio because the
Account Receivables were increasing YoY indicating much more liberal Collection period
leading to only marginal improvement in Sales.
FY-10
FY-11
FY-12
FY-13
FY-14
Industry
15.6
16.2
16.0
13.2
12.5
Tata Steel
61.5
74.3
55.7
49.8
59.1
JSW
34.5
36.1
32.7
24.7
24.2
SAIL
12.6
12.5
11.5
10.9
10.6
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This Ratio indicates the efficiency with which the firm is using its investments in Fixed Assets
such as plants, machinery and Land. The formula for this ratio is:
Fixed Assets Turnover Ratio=
Sales (or Cost of Sales)
--------------------------------------------------------Net Fixed Assets
Tata Steel, Fixed Assets Turnover Ratio has been increasing from 2010 to 2012
signaling more sales per unit of Fixed Assets but the trend is declining in the last two
years.
SAIL, decrease in Asset Turnover Ratio is observed from 2010 to 2014 because they
have accumulated Fixed Assets at a much higher rate (220%) than the rate of increase
in sales (15%).
JSW, Sales have increased 150% from 2010 to 2014 in tandem with the 90% increase in
Fixed Assets leading to marginal increase in Asset Turnover Ratio.
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FY-10
FY-11
FY-12
FY-13
FY-14
Industry
1.8
1.8
1.7
1.3
1.3
Tata Steel
2.1
2.5
2.9
2.1
1.7
JSW
1.1
1.2
1.3
1.3
1.4
SAIL
3.0
3.0
2.9
2.6
2.1
Profitability Ratios
The Profitability ratios are on a decline because of the following reasons in the large steel
industry.
FY-10
27%
41%
27%
29%
FY-11
23%
43%
21%
21%
FY-12
20%
38%
16%
17%
FY-13
17%
30%
17%
12%
FY-14
19%
32%
16%
13%
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FY-10
22%
36%
20%
26%
FY-11
18%
39%
16%
18%
FY-12
15%
35%
10%
13%
FY-13
12%
25%
12%
9%
FY-14
14%
28%
10%
9%
FY-10
22%
33%
22%
28%
FY-11
18%
37%
18%
20%
FY-12
14%
32%
12%
14%
FY-13
11%
25%
13%
10%
FY-14
12%
28%
10%
11%
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Net Margin (%) = (Net Profit/Revenue)*100, where Net Profit = Revenue - COGS - Operating
Expenses - Interest and Taxes
This measurement is a ratio of net profits to revenues for a company or business segment typically expressed as a percentage that shows how much of each currency unit earned by
the company is translated into profits. Companies that are able to expand their net margins over
time will generally be rewarded with share price growth, as it leads directly to higher levels of
profitability.
FY-10
11%
18%
11%
17%
FY-11
10%
21%
9%
11%
FY-12
7%
18%
6%
8%
FY-13
5%
14%
6%
5%
FY-14
5%
15%
5%
4%
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EPS
Earnings per share = Net profit available to Equity-holders/Number of ordinary shares
outstanding
This is a measurement of the profit available to the equity shareholders on a per share basis
that is the amount they can get on every share held. It is calculated by dividing the profits
available to the equity shareholders by the number of the outstanding shares. This does not
reveal how much has been paid to the shareholders as dividend nor how much of the earnings
are retained in the business. It only shows how much earnings theoretically belong to the
ordinary shareholders (per share basis)
EPS
FY-10
FY-11
FY-12
FY-13
FY-14
Tata Steel
49.8
65.7
62.7
54.9
65.9
JSW
12.3
12.1
12.0
12.2
13.0
SAIL
16.3
11.6
9.0
5.5
4.5
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Return On Capital
Employed (%)
Industry
Tata Steel
JSW
SAIL
FY-10
11%
13%
15%
15%
FY-11
9%
14%
12%
11%
FY-12
8%
13%
9%
7%
FY-13
6%
11%
10%
5%
FY-14
6%
12%
8%
3%
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FY-10
15%
16%
9%
20%
FY-11
17%
18%
14%
21%
FY-12
17%
19%
9%
22%
FY-13
20%
15%
11%
36%
FY-14
24%
15%
14%
45%
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ROA = Profit Margin (Net Income/Sales) * Total Asset Turnover (Sales/Total Assets)
ROA for the industry is showing declining trend over the period from 2010 through 2014. While
the asset turnover ratio is fluctuating less, the profit margin is down sloping steeply in the
industry.
Du Pont Analysis
Industry
Tata Steel
JSW
SAIL
FY-10
7%
7%
10%
14%
FY-11
5%
8%
7%
8%
FY-12
4%
7%
6%
6%
FY-13
3%
6%
5%
3%
FY-14
2%
7%
4%
3%
JSW and sail follow the same trend and the profit margins deteriorate rapidly and hence
the ROA decreases. The change in profit margin ranges from 6% to 13%. This slump is
mainly due to increase in raw material cost.
During this period the demand increased as the global economy was recovering slowly.
Moreover, there was a structural change in terms of the contract structure of the key raw
materials for the primary steelmakers. Therefore, volatility over steel prices became
inevitable.
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In addition to that increase in demand from china, decrease in supply of raw materials
from India and Australia have added more volatility to the raw materials price. These
factors contributed to the fewer profit margins.
Though Tata steel's profit margin fluctuated little there was not much volatility. Tata steel
was able to procure the raw materials from its mines form various regions like from
Europe, Asia and Australia. Hence there was less volatility. Hence, the ROA was
relatively stable for the Tata steel.
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