FSAPM ASSIGNMENT

ANALYSIS REPORT ON JINDAL STEEL & POWER LTD.

SUBMITTED TO DR. P. JANAKI RAMADDU

ANKITA DAS(FINANCE-A) 3/3/2011 REGN. NO.10SBCM0376 ALLIANCE BUSINESS SCHOOL 1

ACKNOWLEDGEMENT

Apart from my own effort, the success of this project depends largely on the encouragement and guidelines of my Professor. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this report.

I would like to show my greatest appreciation to DR. P.JANAKI RAMADDU. I cant say thank you enough for his tremendous support and help. I feel motivated and encouraged every time I attend his session. Without his encouragement and guidance this project would not have materialized.

TABLE OF CONTENT

1. 2. 3. 4.

COMPANYS PROFILE BRIEF INTRODUCTION OF MANAGEMENT COMPANYS OVERVIEW ANALYSIS OF ANNUAL REPORT ON THE BASIS OF: y DEPRECIATION y INVENTORY VALUATION y FOREIGN EXCHANGE y DEFERRED TAX

5. Z-SCORE RATIO ANALYSIS 6. REFERENCES

JINDAL STEEL & POWER LTD. S PROFILE: JSLS is a part of O.P. Jindal group set up in 1970, which is at present a multi-billion, multi-national and multi-product steel conglomerate. JSLS is an ISO: 9001, ISO: 14001 and OHSAS 18001 certified company and has come a long way from its incorporation in 29th September of the year 1980 as Jindal Ceramics Limited. JSLS is India's largest stainless steel manufacturer having manufacturing facilities at three locations - Hisar, Vizag and Orissa. Manufactures different ranges of flat steel products and serves the domestic and international markets. JSLS has recently changed its name from JSL Limited to JSL Stainless limited; special resolution for the same has been passed in AGM and has already taken approval from Registrar of Companies, Delhi & Haryana. JSLS is well poised to be the top cost competitive SS producer in India. It has around 40% share in domestic SS market (more than 70% market share in organized stainless steel sector) & for high end applications the market share is about 75%. High level of integration from mining to manufacturing with captive thermal power, flexibility to produce all grades and service all major markets and ability to produce specialty products such as precision strips, coin blanks. Hence JSLS isrightly positioned to en-cash on expanding domestic high growth stainless steel market.

BRIEF INTRODUCTION OF MANAGEMENT: The management team consists of individuals who have significant experience in the Indian stainless steel industry. Most of the senior management team have over two decades of experience in their respective industries and have been instrumental in JSL s growth. Its management team has the industry knowledge and skill necessary to provide strategic leadership and direction to explore new emerging opportunities in the stainless steel sector, improve its current operations and successfully implement and operate JSL s Orissa Project. JSL s management team provides the company with a significant competitive edge. Chairperson: Savitri Jindal She became non-executive chair of the Jindal Organisation on her late husband O. P. Jindal s death in a helicopter crash in 2005. Today she is the richest women in India and world s fourth richest mother with a net worth of $12.2 billion. Vice Chairman & Managing Director: Ratan Jindal He is a commerce graduate and has studied Management from Wharton Business School, U.S.A. He has been Director of Nalwa Sons Investments Ltd (formerly Jindal Strips Ltd) from 1979 to 2005. Also he is a Member of Board of the International Stainless Steel Forum, Chairman of the Economics & Statistics Committee of ISSF and member of the prestigious US-based Young Presidents Organization Directors: Naveen Jindal He is a management graduate from University of Texas, Dallas. At a very young age, Mr. Naveen Jindal has transformed JSPL (as an Executive Vice Chairman & Managing Director), a moderately performing company in the steel sector, into a world class company, the highest wealth creator in the country. Also he is a Member of Parliament since 2004 representing the Kurukshetra constituency in the state of Haryana.
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Suman Jyoti Khaitan He is an Advocate and the founder of Khaitan & Partners, Advocates & Notaries, a multi-practice law firm and has more than 20 years experience in the legal field. T S Bhattacharya He is M. Sc. in Nuclear Physics; Post M.Sc. from Saha Institute of Nuclear Physics; and PGDBM in Management Science from Jamnalal Bajaj Institute of Management, Mumbai. He is also an Associate of Indian Institute of Bankers and possesses 38 years of rich banking experience. James Alistair Kirkland Cochrane He is MBA from Strathclyde Graduate Business School UK. Since 2006, he has been the president of International Chromium Development Association. Jurgen Hermann Fechter He is qualified chartered accountant in South Africa. Member of executive board of VDEH Steel Institute and a member of the board of directors of ISSF. Director Finance: Arvind Parakh He is a Chartered Accountant and has 28 years of work experience in corporate finance and business management. Associated with JSL Stainless for 11 years.

COMPANY S OVERVIEW: JSL Stainless (JSLS) is India's largest SS (stainless steel) manufacturer in terms of production volume and net sales with total installed capacity of 0.72 mtpa (100% capacity utilisation) having manufacturing facilities at three locations - Hisar, Vizag and Orissa. It has 40% share in domestic SS market (more than 70% market share in organized SS sector) and manufactures different ranges of flat steel products serving domestic as well as international markets. Investment Rationale Largest Organised SS Player in India: JSLS is well poised to be the top cost competitive SS producer in India. It has around 40% share in domestic SS market & for high end applications the market share is about 75%. High level of integration from mining to manufacturing with captive thermal power, flexibility to produce all grades, service all major markets and ability to produce specialty products such as precision strips, coin blanks. Hence JSLS is rightly positioned to en-cash on expanding domestic high growth stainless steel market. Robust SS Industry Growth in India: In year 2009 the global stainless steel production was 24.6 mtpa which is expected to grow by 15% to around 28.5 mtpa in year 2010. In first half of year 2010 crude SS production has reached 15.5 million tons. The growth of Indian stainless steel industry is driven mainly by increase in per capita income, infrastructure / end use industry growth, higher Indian GDP and new application development. The consumption pattern of stainless steel will see drastic change and sectors like transportation, tubes, and construction to boost demand in coming years.

Proactive Debt Restructuring: JSLS approached CDR to ensure long term viability and use available cash for its expansion projects. The company can also competently raise more cash/debt for its expansion plans. JSLS has successfully managed to reduce around 1% in senior & subordinate debt and also interest of ` 839 crore on loan of above `3000 crore is converted as term loan for which the repayment to start after 1st April, 2012. Further, JSLS targeting to reduce its interest from 9.5% to around 8.5% by March 2011. Fully Integrated Capacity Addition: World s largest integrated SS greenfield project of one mtpa in Orissa Phase II will lead JSLS to 13th place in world for SS production. New fully integrated capacity will benefit JSLS to reduce its dependence on raw materials, increased product range and also spend lower on logistic costs being closer to port. Besides the mining linkages, the company would also benefit from assured supply of key inputs. Commissioning of new 500 MW captive power plant would further reduce the manufacturing costand will help improve margins going ahead.

ANALYSIS OF ANNUAL REPORT ON THE BASIS OF: DEPRECIATION INVENTORY VALUATION FOREIGN EXCHANGE DEFERRED TAX

EXPLANATION : DEPRECIATION: According to AS-6, Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology & market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined. PURPOSE OF DEPRECIATION: 1. Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount, irrespective of an increase in the market value of the assets. 2. Historical cost of a depreciable asset represents its money outlay or its equivalent in connection with its acquisition, installation and commissioning as well as for additions to or improvement thereof. The historical cost of a depreciable asset may undergo subsequent changes arising as a result of increase or decrease in long term liability on account

exchange fluctuations, price adjustments, changes in duties or similar factors. 3. The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. ANALYSIS OF JINDAL S DEPRECIATION EFFECT: Depreciation on fixed assets is provided on straight-line method (SLM) at the rates and in the manner specified in Schedule XIV to the Companies Act, 1956. Leasehold Land and Aircraft are being amortised over the period of lease. In the case of assets where impairment loss is recognised, the revised carrying amount is depreciated over the remaining estimated useful life of the asset. Certain Plant and Machinery have been considered as continuous process plant on the basis of technical assessment and depreciation on the same is provided for accordingly. Intangible Assets are amortised over the expected duration of benefits not exceeding ten years.
EXPLANATION:

There is no change in depreciation method adopted by the company & it has remain consistent with straight line method since years. Depreciation during the year includes Rs. 5.48 crs (previous year Rs. 1.28 cr) transferred to pre-operative expenses. y Assets taken on lease like Land & Aircraft are amortised by Rs. 1.80 crs & Rs. 16.26 crs over the period of lease. y In Jindal, carrying cost of assets is exceeding its recoverable amount , for which they implemented revised carrying cost which depreciated over remaining economic life of assets. y Depciation of Rs. 444.60 crs is charged on continous process from plant & machinery. y Intangible assets i.e. software licences ,are amortised for Rs. 1.34 crs.

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INVENTORY VALUATION: According to AS-2, Valuation of inventory are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process. Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets. METHODS: 1. Standard : Under the Standard costing method approach, both inventory and the cost of goods sold are based on the standard fixed cost assigned to the items within the item manager at the time of reporting. 2. First-in, First-out (FIFO) : Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income. 3. Last-in, First-out (LIFO) : Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the three approaches, and the lowest net income. 4. Weighted Average : Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units
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currently in stock at the time of reporting. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO. 5. Average : Under the average approach, both inventory and the cost of goods sold are based upon the average cost of all units received in stock.

PURPOSE: A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognised. This Standard deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realisable value. ANALYSIS OF JINDAL S VALUATION OF INVENTORIES: Raw Materials and Stores & Spares are valued at lower of cost, computed on weighted average basis, and net realizable value. Cost includes the purchase price as well as incidental expenses. Scrap is valued at estimated realisable value. Work-in-progress is valued at lower of estimated cost and net realisable value and finished goods are valued at lower of cost and net realisable value. Cost for this purpose includes direct cost and appropriate administrative and other overheads.
EXPLANATION:

For the valuation of Inventory company has used weighted average method & net realizable value method.The profit of the company has went up due to sales & the company has valued its inventory at lower cost.
INVENTORY CONTRIBUTION 2010 % STORES & SPARES RAW MAT. FINISHED GOODS WIP SCRAP TOTAL 347.28 26.14076 300.6 22.62702 560.43 42.18517 119.72 9.011667 0.47 0.035378 1328.5 100 2009 % 281.08 23.23052 297.19 24.56197 570.32 47.13544 61.37 5.072068 0 0 1209.96 100

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If we see the above table then we can see that company is converting its rawmaterial into finished goods fastly, which shows better position of the company, as finished goods is approx 42 % out of total inventory, but previous year it was 47% , which shows that company s spares ,WIP & Scraps proportion has increased, which should be controlled. FOREIGN EXCHANGE: According to AS-11, Foreign exchange is the exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX." PURPOSE: An enterprise may carry on activities involving foreign exchange in two ways. It may have transactions in foreign currencies or it may have foreign operations. In order to include foreign currency transactions and foreign operations in the financial statements of an enterprise, transactions must be expressed in the enterprise s reporting currency and the financial statements of foreign operations must be translated into the enterprise s reporting currency. The principal issues in accounting for foreign currency transactions and foreign operations are to decide which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates. ANALYSIS OF JINDAL S FOREIGN EXCHANGE EFFECT: Foreign currency transactions are recorded at the rate of exchange prevailing at the date of the transaction. Monetary foreign currency assets and liabilities are translated at the year-end exchange rates and resultant gains / losses are recognised in the profit & loss account for the year, except to the extent that they relate to new projects till the date of capitalisation which are carried to preoperative expenses and those relating to fixed assets which are adjusted to the carrying cost of the respective assets.

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In case of forward foreign exchange contracts, exchange differences are dealt with in the profit & loss account over the life of the contract except those relating to fixed assets in which case they are capitalised with the cost of respective fixed assets. Non-monetary foreign currency items are carried at historical cost. In case of foreign subsidiaries, with non-integral foreign operations, revenue items are converted at the average rate prevailing during the year. All assets and liabilities are converted at the rates prevailing at the end of the year. Exchange difference arising on conversion is recognised in Foreign Currency Translation Reserve.
EXPLANATION:

Foreign exchange volatility increases the risk of unstable revenues from export market. Jindal has incurred a foreign exchange loss of Rs. 641 crs in FY-09. y Foreign currency used- Rs.3147.38 crs y Foreign currency earned- Rs.410.41 crs y Nominal amounts of derivative contracts entered into by the company & outstanding is Rs. 2177.89 crs( Previous year Rs. 2250.11) y The principal component of foreign currency loans/debts not hedged by derivative instruments amount to Rs. 1569.51 crs(Previous year Rs. 2101.75 crs.). y To overcome the situation company is taking initiative to increase exports & developing new export markets this financial year. DEFFERED TAX: According to AS-22, Deferred tax is the tax effect of timing differences. Taxable income is calculated as per tax laws.Hence there is a difference between the tax income and accounting incomeThis difference can be classified into  Permanent differences Difference originated in one period which do not reverse subsequently  Timing differences
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Difference originated in one period which is capable of reversal in one or more subsequent periods

PURPOSE: As per AS-22, a company is liable to provide for deferred tax liability on the first day it accounts for such income. The basic premise being that revenues and expenses of an accounting period should meet matching principle and disparity in computing income for tax and book purposes should be appropriately resolved. Differences between the two sets of computation of income can be classified into two categories; permanent and timing differences. Permanent differences arise with respect to expenditure legitimately incurred but are wholly or partially disallowed for tax purposes. Such expenses do not give rise to deferred tax provision. Temporary differences are those that arise due to timing reasons. A typical example is provision for depreciation with varying rates for book purposes and tax purposes. Rates prescribed for company law are minimum rates, taking into consideration useful life of the asset.

ANALYSIS OF JINDAL S DEFERRED TAX: In accordance with Accounting Standard (AS-22) Accounting for Taxes on Income issued by the Institute of Chartered Accountants of India, deferred taxes resulting from timing differences between book and tax profits are accounted for at the tax rate substantively enacted by the Balance Sheet date to the extent the timing differences are expected to be crystallised. Deferred tax assets are recognised to the extent there is reasonable/virtual certainty of realising such assets against future taxable income.

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EXPLANATION:
DEFERRED TAX VALUATION 2009 A.DEFERRED TAX ASSETS Disallowance u/s 43-B of the Income tax act, 1961 Prov. For doubtful debts TOTAL DEFERRED TAX ASSETS B.DEFERRED TAX LIABILITIES Diff. between book & tax dep. Misc. exp. Written off TOTAL DEFERRED TAX LIABILITIES NET DEFERRED TAX -78.07 -1.79 -79.86 2010 -87.01 -1.52 -88.53

678.6 1.03 679.63 599.77

802.5 1.03 803.53 715

y The Net Deferred tax liability for the current year is less when compared to the previous year. In the current year, net deferred tax liability is Rs. 803.53 crs whereas in the previous year it was Rs. 679.63 crs. Deferred tax liability refers to future tax obligation those results from the origination of a temporary difference that causes pre-tax book income to exceed taxable income.

y Deferred tax liabilities arise where tax relief is provided in advance of an accounting expense, or income is accrued but not taxed until received.

y It means that the company has earned money and recorded a tax expense on the income statement, but has not yet paid the cash tax y Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be used in future fiscal periods. Here deferred tax assets are increasing from previous period which shows the company can use its assets in coming fiscal year.
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Z- SCORE ANALYSIS OF TITAN INDUSTRIES AND JINDAL STEEL & POWER LTD.
DEFINATION OF Z-SCORE: A company failure or bankruptcy prediction method

developed by Professor Edward Altman of New York University. A company's Z score is a positive function of five factors: (net working capital) / (total assets) ,(retained earnings) / (total assets) ,(EBIT) / (total assets), (market value of common and preferred) / (book value of debt) ,(sales) / (total assets). Although the weights are not equal, the higher each ratio, the higher the Z score and the lower the probability of bankruptcy. Also called Zeta. The original Z-score formula was as follows: Z = 0.012T1 + 0.014T2 + 0.033T3 + 0.006T4 + 0.999T5. T1 = Working Capital / Total Assets. Measures liquid assets in relation to the size of the company. T2 = Retained Earnings / Total Assets. Measures profitability that reflects the company's age and earning power. T3 = Earnings Before Interest and Taxes / Total Assets. Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability. T4 = Market Value of Equity / Book Value of Total Liabilities. Adds market dimension that can show up security price fluctuation as a possible red flag. T5 = Sales/ Total Assets. Standard measure for sales turnover (varies greatly from industry to industry). Altman found that the ratio profile for the bankrupt group fell at -0.25 avg, and for the non-bankrupt group at +4.48 avg.

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ALTMAN'S Z-SCORE RATIO ANALYSIS

WEIGHTED RATIO (4)-0.8 (4)-0.8

RATIO 1.RETURN ON ASSETS 2.SALES TO TOTAL ASSETS

FORMULA EBIT/T.A. SALES/T.A. M.V. OF EQUITY/T.L.

WEIGHT FACTOR X.3.3 X.0.999

3.EQUITY TO DEBT 4.WORKING CAPITAL TO TOTAL ASSETS

X.0.6

(4)-0.8

WORKING CAPITAL/T.A. RETAINED EARNINGS/T.A.

X.1.2

(4)-0.8

5.RETAINED EARNINGS

X.1.4

(4)-0.8

KEY FACTORS: y Z-score above 2.99--you're in good shape y Z-score between 2.99 AND 1.81--warning signs y Z-score below 1.81--big trouble--could be heading toward bankruptcy

Z.SCORE ANALYSIS FOR TITAN & JINDAL

RATIO 1.RETURN ON ASSETS 2.SALES TO TOTAL ASSETS 3.EQUITY TO DEBT 4.WORKING CAPITAL TO TOTAL ASSETS 5.RETAINED EARNINGS TITAN 1.42 5.82 0.05 JINDAL 0.6 0.48 3.6^-03

1.33 1.18

0.12 0.61

If we compare & analyse the above table then we can see that TITAN financial position is better than JINDAL. For JINDAL, its a red alert as there is a high chance of being bankrupt than TITAN.
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REFERENCES: y JINDAL POWER & STEEL LTD. ANNUAL REPORT y CAPITAL-LINE y TITAN INDUSTRIES LTD. ANNUAL REPORT

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