Final l&t Crisil Report

ASSIGNMENT FOR CORPORATE FINANCE ON Qualitative and Quantitative Analysis on

“Larsen & Toubro Limited”

Submitted to : Prof. T.V. Submitted from :

Amritesh (05)Anshul Pandey (07)

Madhu Vinita (40)Pankaj Kumar Bothra (53)

Prachi Agarwal (55)Rajnish Kumar (65)

ACKNOWLEDGEMENTS

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I take immense pleasure in thanking Prof. T.Vishwanathan , our course facilitator for

introducing us to the basic concepts of Corporate Finance and initiating us into undertaking this

topic.

CONTENTS

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SUBJECT PAGE No.

1. Company Overview………........................................................ 04

2. Business Risk Analysis of Larsen & Toubro......................... 06

3. PEST Analysis........................................................................... 10

4. SWOT Analysis……………..…………………...…………........... 13

5. Company Overview………....................................................... 14

6. Ratio Analysis of JSW Steel….............................................. 15

A. Profitability Ratios............................................................... 05

B. Liquidity Ratios.................................................................... 06

C. Gearing/ Solvency Ratios.................................................... 08

Conclusion for Ratio Analysis ......................................................... 10

1. COMPANY OVERVIEW

Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector. More than Seven decades of a strong, customer-focused approach and the continuous quest for world-

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class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision.

2. HISTORY OF LARSEN & TOUBRO

The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry. Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity.

In 1938, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India. All they had was a dream and the courage to dare. Their first office in Mumbai (Bombay) was so small that only one of the partners could use the office at a time! In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. Again, the internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected.

In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass. By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had become one of the Top-25 Indian companies. Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence.

The L&T vision reflects the collective goal of the company. It was drafted through a large scale interactive process which engaged employees at every level, worldwide. L&T has a global presence.

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A thrust on international business over the years has seen overseas revenues growing steadily. The company has manufacturing facilities in India, China, Oman and Saudi Arabia. It has a global supply network with offices in 10 locations worldwide, including Houston, London, Milan, Shanghai, and Seoul. Customers include global majors in over 30 countries.

Achievements of L&T

Built India's first indigenous hydrocracker reactor.

Built the world's largest continuous catalyst regeneration reactor.

Built the world's biggest fluid catalytic cracking regenerator.

Built the world's longest product splitter.

Built Asia's highest viaduct - Panvalnadi for the Konkan Railway.

Built the world's longest LPG pipeline.

Built the world’s longest cross country conveyor.

Key Products of L&T:

Turnkey projects

Hydrocarbon, Power, Cement and allied machineries, Engineering services, Railway projects,

Construction

Construction services, Building products, Infrastructure concessions, Engineering services, International products .

Engineered products and systems

Refinery, Oil and gas, Petrochemicals, Fertilizer, Coal gasification, Aerospace, Thermal power plant, Nuclear power plant, Defense, Cement

Electrical and electronic product and systems

Switchgears, Electrical solutions, Metering systems and relays, Medical equipment, Control and automation, Petroleum dispensers and systems, tooling solutions

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IT and engineering services

IT services, Engineering services, Embedded systems.

Machinery valves and industry consumables

Financial services

1. Infrastructure finance

2. Equipment finance

Shipbuilding

Key Competitors of L&T:

NHAI

Nagarjuna Construction

DLF

Gammon India

Hindustan Construction

Mission of L&T:

To compete and grow in a globalised business environment, L&T is implementing a strategic plan (Lakshya) for 2010-15. The plan has been drawn up in consultation with a leading international strategy consultant. It has set ambitious growth target for each business. Create long term value for the customers through superior product structuring by capitalizing on our knowledge pool.

Congruency between Vision, Mission and Core Values:

There is clear accord & harmony among Vision, Mission & Core Values.

1. Core Value: Performance Driven

Vision: Attaining global benchmarks, constantly creating value, meeting

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expectations of employees, stakeholder’s and society, total customer

satisfaction, enhancing shareholder value.

Mission: To compete and grow, ambitious target setting for each sector

2. Core value: Innovation & Excellence

Vision: Indian Multinational, professionally managed, Entrepreneurial and

empowered team, L&T-ites shall be innovative, shall foster a culture of

caring, continous learning, high corporate governance standards &

constantaly creating value.

Mission: Included are the opportunity of diversifaction, creat long term value by setting new standard & through superior product structuring, capitalizing, on our knowledge pool & consulation with the leading international strategy consultant

3. Core Value: Integrity

Vision : Enterpreneurial and empowered team, proffessionaly managed and

committed, foster a culture of caring, trust (show uprightness and honesty

as an important part of integrity).

Mission: Capitalizing on our knowledge

4. Core value : Customer Focus & Mutual Respect

Vision: Customer satisfaction, enhancing shareholder value, fostering a culture of

caring, trust, meeting expectation of society, employees and shareholders

Mission: Create long term value for our customer through superior product

structuring, partnering our customer by offering solutions, deep

understanding of Indian sector and full range of financial products.

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Vision of L&T:

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PRODUCT RANGES:

JSW Steel is among the largest integrated steel companies in India, having established production facilities at close proximity to the mineral resources as well as to the market for its products. Our cost of production is among the lowest in the country. The integrated steel plant produces hot rolled coils in various Carbon and Low Alloy grade of steel for wide application ranging white goods, automobiles, line-pipe, railway wagons etc…

PRODUCTS:

HR coils

Galvanized sheets

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CR coils

Pellets

CR Coils

Wire rods

Billets

Colour coated products

2. BUSINESS RISK ANALYSIS

It is formulated on following parameters:

INDUSTRY RISK:

Recovery in advanced economies in the Steel Industry has been slower than expected due to tighter bank lending, Increased fiscal, Financial uncertainty and moderation in demand. Also, Concerns remains over Euro area sovereign debt problems, lowering risk appetite. However Euro Area industrial production growth was at 5.3% YoY in Aug 2011 as compared to 4.4% in July 2011.

INCENTIVES FOR NEW INVESTMENTS AND NEW PRODUCT APPROVAL:

JSW Steel Ltd. commissioned the new blast furnace in July 20, 2011. The company quickly ramped the blast furnace, and achieved the 80% utilization level in just 2 months.

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Also the company in this financial year, got the approval from the following Automobile Companies: 1)160 mm dia Bar for Tata Motors 2) Steel for Front Axle Beam for Volvo- Eicher Motors & 3) Steel for Bull Gears for Mahindra & Mahindra Tractors

LEGISLATION REGARDING POLLUTION CONTROL MEASURES:

To create an environmental friendly and pollution free environment , the JSW Foundation builds model villages by developing rural infrastructure complete with roads and drainage system. To improve living standards, it creates sanitary facilities for providing effective disposal of solid waste. The Foundation also sensitizes rural eco-friendliness through enhanced tree planting.

The Foundation builds libraries and has also build an art centre for accelerating rural socio-cultural development. To create garbage-free villages, the Foundation sets up garbage management units using proper garbage handling mechanism. It takes utmost care to create rural awareness on the importance of hygiene and the crucial role people can play to make that a reality. To minimize waste produced the Foundation has introduced scientific recycling and reusing technologies.

MARKET POSITION:

JSW's steel producing portfolio includes 3.1 mtpa capacities of Ispat Industries also, which was acquired by the Sajjan Jindal-led firm in last December i.e December 2010. Its Vijayanagar and Salem units are currently producing about 7.8 mtpa.

Besides SAIL and JSW, Tata Steel and Essar Steel are two other big domestic producers, having a capacity of 7 mtpa and 8 mtpa, respectively.

The sources have confirmed that JSW Group has set a target to become a global conglomerate with USD 100 billion turnover by 2020 and 40 mtpa steel producing capacity.

The Group, which marks its presence in US, Chile, Mozambique and South Africa apart from India, had posted a turnover of about USD 9 billion in 2010-11 and the Company is eyeing to close the current fiscal with a turn over of USD 14 billion.

Moreover, the Sajjan Jindal-led firm has also announced that it will increase the capacity of its Vijayanagar plant to 12 mtpa by 2014 from 10.2 mtpa of today and has sought government approval to expand its capacity to 16 mtpa.

The company is also hoping to secure funding for its proposed 10 mtpa steel plant in West Bengal by the end of this fiscal.

Keeping an eye on the Huge demand of Steel worldwide, JSW Steel had achieved highest ever quarterly production of crude steel of 1.647 million tones in January-March quarter. While the total sales of the company during the quarter ended March 31, 2011 stood at 1.733 million tonnes.

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OPERATING EFFICIENCY:

JSW has taken several steps to improve operational efficiency, to preserve margin in spite of disproportionate increase in raw material costs relative to increase in the steel product prices. We are also focusing on enhancing our backward integration in addition to improving product mix and growing volumes.

JSW Steel is expanding its capacities from 7.8 mtpa to 11 mtpa.The Company had announced to expand this capacity by another 2 mtpa to 13 mtpa by June 2013. The Company has further plans of implementing two more greenfield projects of 10 mtpa each in phases in West Bengal and Jharkhand. This capacity is in addition to the 3.3 mtpa capacity of recently acquired Ispat Industries Ltd, which has been renamed to JSW Ispat Steel Ltd.

Major Competitors:

Steel Authority of India (SAIL)

Rashtriya Ispat Nigam Ltd. (RINL)

ISPAT

Tata Steel Co. (TISCO)

Essar Steel

Lloyds Steel Industries Ltd.

National Mineral Development Corporation (NMDC)

Technology:

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Human Resources:

All the process of a successful Human Resource policy is followed by JSW Steel Ltd. like Mentoring Young Trainees, Prudent mix of Energy and Experience of the Employees, Rewards & Recognitions, Effective financial Communication, etc.

An effective structure of Communication followed in the Company is shown below:

Research & Development:

At JSW Steel Ltd., innovation is driven by its skilled R& D team. It works to redefine national and Global benchmarks in Iron & Steel manufacture. The result has improved productivity and has consistently decline costs. The R&D team comprises 44 Qualifies members who work along with shop- floor teams to design and implement shop-floor processes; its efforts are facilitated by a full-fledged R&D centre equipped with contemporary infrastructure, Pilot Testing and Simulation facilities. R&D activities are focused on Plant performance improvement, new process development, Product and Grade development, to strengthen its infrastructure.Energy

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conservation and Waste management. The innovation-centric mindset at the company is reflected in its investment in R&D – The company invested Rs 42.44 Crores in 2010-2011

Corporate Social Responsibilities:

Environment:

To create an environmental friendly environment, the Foundation builds model villages by developing rural infrastructure complete with roads and drainage system. To improve living standards, it creates sanitary facilities for providing effective disposal of solid waste. The Foundation also sensitizes rural eco-friendliness through enhanced tree planting.

The Foundation builds libraries and has also build an art centre for accelerating rural socio-cultural development. To create garbage-free villages, the Foundation sets up garbage management units using proper garbage handling mechanism. It takes utmost care to create rural awareness on the importance of hygiene and the crucial role people can play to make that a reality. To minimize waste produced the Foundation has introduced scientific recycling and reusing technologies.

Livelihood:

To create livelihoods for rural women by providing revolving fund, skill training and other linkage services to empower rural women to reduce gender-based discrimination.

For Ex: To provide more earning options by breaking the barrier of gender division of jobs, women are being trained and placed in other unorthodox jobs like power-tiller operation, pump operation, mechanical & electrical maintenance, driving job etc.

3. PESTAL Analysis

1. Political Factors:

(i) SEZ Act to Boost infrastructural Development

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SEZ is the new destination for real investor. Currently 150 SEZs are approved out of 85 SEZs are in the IT/ITES area and the 10-15 SEZs in the electronics area. 130 SEZs are developed by real estate developers which constitute of about 50% of the total SEZ area. IT SEZ should be developed and made operational within the period of six months from the date of notification. Thus, 130 approved SEZ would result in investment of US$ 12bn immediately.

(ii) Cement Prices Reduced for State Infrastructure Projects:

The continued thrust on the infrastructure development will provide impetus to the healthy growth in demand, protecting the bottom-line of cement companies to an extent. The reduction in the CST and in Freight rates on diesel and limestone will be marginally positive for some companies.

(iii) FDI Liberalization to Augment Industry Growth:

Recent amendments by the government have made accessibility to the required capital much easier. Opening of FDI in construction and allowing developers to raise capital in international market has led to development of larger projects benchmarked against international standard.

(iv) REITs (Real Estate investment trusts) to Positively affect real Estate Business

The proposed introduction of REMF(Real Estate Mutual Fund) and REIT will boost real estate investment from the small investor’s point of view. This will allow small investors to enter real estate market with the contribution as less than Rs 10,000. The concept of REIT is on the verge of entering India and would be structured as company dedicated to owing and in most cases operating income producing real estate such apartments, shopping centre’s, offices & warehouses.

2. ECONOMIC FACTORS:

Growth in Construction Activity Stimulating GDP Growth:

India is witnessing tremendous growth & expansion of construction activities and construction is largest component of GDP. It has been growing at a rate over 10% in

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the past few years when GDP growth is around 8%. Within construction; sector such as roads, railways, housing and power have been keen drivers.

(i) Rate Hikes Unlikely to Slow down Growth:

It has been analysed that the residential prices has been increased by about 15-20% on average in the last one year. There has been strong growth in demand supported by rising disposable incomes, low interest rates, and fiscal incentives on both interest and principal payment and increasing urbanization.

3. SOCIAL FACTORS :

(i) Shifting Consumption Pattern to Fuel industry Growth

The consumption pattern of Indian households is undergoing a gradual, but steady change. The share of food and beverages, which used to constitute almost 50% of household spend until 2003 is fall to 45% by FY08. We expect the share of discretionary items to consistently rise given the rising affordability and changing aspiration levels. Increased exposure to western lifestyle has altered the consumption pattern of Indian people.

(ii) Rising Urbanization to Boost Industrial Growth:

Urban infrastructure consist of drinking water, sanitation, sewage systems, electricity and gas distribution, urban transport, primary health services, and environmental regulation. Many of these services are in the nature of local public goods with the benefits from improved urban infrastructure. The urban population in India will grow by 85 million over the next 10years.

(iii) Green Building in India:

The green building movement has gained tremendous momentum during 3 to 4 years, ever since the Green Business centre embarked on achieving the prestigious LEED rating for their own centre at Hyderabad. The Platinum rating for green building has sensitized the stakeholders of construction industry. There is tremendous potential for construction of green building in India. The estimated market potential for green building will be about $ 400 million in 2010.

4. TECHNOLOGICAL FACTORS:

(i) Low Technology Adoption to Hinder Growth:

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The poor state of technology adopted by the construction sector adversely affects its performance. Upgrading of technology is required both in the manufacturing of construction material and in construction activities. As a large number of construction materials are manufactured in the unorganised sector, effective monitoring and regulation of the production of these material to ensure proper quality become difficult. Use of low grade technology in the construction sector lead to low value addition and low productivity, apart from poor or substandard quality of construction and time overruns in projects.

(ii) Construction As Per Indian Requirements:

The construction needs to be done as per Indian standards and requirements which will demand considerable changes from the international requirements. The Infrastructure requirements of India are much different as the population spread, increasing urbanization, increasing slums, the small space for roads, the water problems are more.

(iii) Ready-Mix-Concrete being Experienced With:

The Ready mix concrete business in India is in its infancy. For example, 70% of cement produced in a developed country like Japan is used ready mix concrete business there. Here in India, Ready Mix concrete business uses around 2% of total cement production. The increasing use of ready mix not only saves time but also improves quality.

5. ENVIORMENTAL FACTORS:

Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability

With the entry of global companies into the Indian market, advanced technologies, are used in engineering & Construction.

With the development or evolution of infrastructure sector, many of the MNC enter into Indian market

Environmental situation affect the infrastructure sector.

Infrastructure such as roads and bridges affect the many sector such as automobile sector etc.

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LEGAL FACTORS

Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry.

Indian government infrastructure policy aimed at promoting an integrated, phased and conductive growth of the Indian infrastructure sector.

Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world

Establish an international hub for engineering & construction companies so that new technology can be used.

Legal provisions relating to safety measure

4. SWOT ANALYSIS

SOWT ANALYSIS:

Strengths

Larsen and Toubro (L&T) is India's largest engineering and construction company.

It has created international presence by operating supply network offices in 10 locations worldwide, including Houston, London, Milan, Shanghai and Seoul.

L&T has created a strong brand name by building worlds largest Tubular Reactor for a petrochemical plant and has also built world's longest Product Splitter and longest LPG pipeline.

Larsen and Toubro's order book has reported continuous growth. The company has a strong pipeline of projects in domestic as well as international markets, which is likely to ensure a steady revenue growth

Weaknesses

In spite of having a diversified expertise, the revenues of the company are highly concentrated

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Opportunities

The company has acquired the switchgear business of TAMCO Corporate Holdings of Malaysia in April 2008

With TAMCO the company will be able to offer a comprehensive range of MV switchgear and become a significant player in the MV segment in India

L&T has also entered into various joint ventures in the recent past. L&T has joint venture agreement with Tamil Nadu Industrial Development Corporation Limited, Mitsubishi Heavy Industries and A.A. Turki Contracting & Trading Corporation (ATCO) of the Kingdom of Saudi Arabia.

These joint ventures boost and strengthen the operational efficiency of the company, as well as provide it with avenues to generate additional revenues and also leverage its strong presence in order to exploit the growing capital goods and infrastructure industry

Growing Indian capital goods and infrastructure industry as the government has planned a series of measures to encourage private sector participation and increase spending on infrastructure. Capacities are being ramped up in Railways, Roads, Ports, Airports and Urban infrastructure to sustain the momentum of double digit growth in the industrial sector.

Threats

Larsen & Toubro faces stiff competition in the international market with construction majors in the Middle East including ABB of Sweden and Bechtel of the US. Stiff competition could erode the company's market share and reduce its profitability.

Engineering and construction companies such as Larsen & Toubro (L&T) are facing pressure on their earnings due to the high interest rates on working capital. L&T's interest costs increased more than three-fold in the first six months of FY2009, which would impact its profit before tax (PBT). Rising interest rates would put pressure on the margins of the company

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Strengths

Strong Economic growth of country

L&T’s experience in India

Order book of over 100,000 crores

Brand name of Larsen & Toubro

An experienced employee base

Diversified business group

Strong financial results

Weakness

Slowdown in middle east

Average experience

employee age nearing retirement

Huge attrition rate

Low employee satisfaction

Week Global Reach

Lack of Innovation

Opportunities

Major Infrastructure projects

coming up (govt.)

India’s growth rate above 10%

Opportunities from Other

south Asian Countries (less dev)

Global economic recovery

Investment in Defense sector

Threats

Inflationary and cost pressures

Threat of a second

Global Financial Turmoil

Vendor issues

Government policies

Competitors

Taxation policies

SWOT conclusions:

Larsen & Toubro e-engineering has a rare advantage of regrouping engineers of all type, all specialty and experience to offer price competitive services to worldwide customers. The company is however still young but due to the quality of the recruitment “Specialized engineers” the young age of the company is not a real problem. The main treats for the French market are the fear of out-sourcing and the bad image it can have. However the low prices and the experience of the company with many big European firms should help

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Company Overview

JSW Steel (JSTL) has demonstrated excellent project execution skills over the past decade, growing its capacity 6x to 10mtpa through brownfield expansions at Vijaynagar. With the acquisition of Ispat Industries and Salem Steel, it controls 14mtpa capacity. Its main production facilities are located in proximity to rich iron ore reserves at Karnataka. It has investments in iron ore mining in Karnataka and Chile. Its other overseas investments include plate and pipe mill operations and coal mines in the US. JSTL has the lowest conversion cost due to operational efficiencies. Its strategic location near iron ore rich Bellary-Hospet belt helps it to keep iron ore purchase costs low; however, the recent ban on iron ore mining at Bellary and subsequent unavailability of adequate quantity at lower costs can derail volume growth. Earnings have high sensitivity to steel and raw material prices due to high financial and operating leverage.

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6. RATIO ANALYSIS

A. PROFITABILITY RATIOS:

1) Profit Margin

Profit Margin = Profit after Tax/ Sales

March 2009 March 2010 March 20113.02 10.4 8

Interpretation:

Profit margin Ratio for the year 2009 was 3.02 because of the reason of low profit after tax value i.e. Rs 4585 mn. The net sales in the corresponding year amounted to Rs. 140012.5 mn, but for the year ending march 2010 the ratio increased to 10.4 as the Profit after tax value seen a tremendous increase to Rs. 20227.4 mn. The reason for the same was due to the tremendous increase in operating profit of the company. While for year 2011 the ratio decreased to 8 because of the fall in the profit after tax value of the company which was valued at Rs 20106.7 mn. The fall in the profit margin suggests that the company should keep a check on its increasing expenditure.

2) Asset Turnover Ratio

Asset Turnover Ratio = Net sales / Total Assets

March 2009 March 2010 March 20110.88 0.96 1

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Interpretation:

The Asset turnover Ratio is the measure of efficiency with which the assets are utilized. There was an increase in net sales of the company from the year 2009 to 2010 i.e Rs 40012.30mn while the total assets increased from Rs. 20596.6 mn. This shows that the company has been able to utilize its assets properly but there was a minute increase in 2011 as compared to 2010.

3) Return on Equity

Return on Equity = Profit after Tax / Shareholder’s Equity

March 2009 March 2010 March 20116.14 23.86 15.65

Interpretation:

The shareholder’s fund for the year ended march 2009 was Rs. 79592.5 mn whereas the value for the year ended march 2010 was Rs. 970634 mn. The profit after tax value increased from Rs. 4585 mn to Rs. 20227.4 mn over the same period. This implies that the shareholder’s funds has been utilised more efficiently. But, mainly the reason for such enormous increase in the ROE ratio is attributed to the large increase in the PAT value of the company. Also, the total Reserves of the company has increased from Rs. 74145 mn to Rs. 91674.7 mn over the same period. This indicates that the company’s ability to withstand the emergency shocks has also improved.

Also, there has been decrease in the ROE value from the FY 2009-2010 to FY 2010-2011. This is because of the fact that the PAT value of the company has decreased from Rs. 20227.4 mn to Rs. 20106.7 mn.

B. LIQUIDITY RATIOS

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1) Debtor Turnover Ratio

Debtor turnover = Net sales / Total Debtors


Interpretation:

The Debtor Turnover Ratio shows the number of times each year the company’s debtors turns into cash. In the year 2009 the debtor turnover ratio for the company was highest as compared to 2010 and 2011. This implies that the portfolio of debtors was good in year 2009. But the significant decline in the year 2010 and 2011 indicates that the management of receivables in the company has deteriorated over the period.

2) Inventory turnover Ratio

Inventory Turnover = Cost of goods sold / Total inventories


Interpretation:

The ratio indicate that the inventory holding period for JSW Steel has increased over the year. This implies that the company should dispatch the order as soon as possible. The operating cycle time increased over the year implying that the company’s funds were struck in receivables and inventories for a longer period.

3) Fixed assets turnover ratio

Fixed Assets Turnover= Net sales

Total fixed assets

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Interpretation:

The Net sales has increased from Rs. 140012.5 mn to Rs. 231632.4 mn,from the year ending March 2009 to March 2011, whereas the Avg. Fixed Assets has increased from Rs. 168967.5 mn to Rs. 274073.5 mn. The above ratios implies that the company has been able to utilize its fixed assets more efficiently in the year 2010-2011. The net sales over the years has grown to a larger extent as compared to the increase in the Average fixed assets over the years.

4) Current Ratio:

Current Ratio= Current Assets/Current Liabilities


Interpretation:

It is a widely used indicator of a company’s ability to pay its debts in the short-term. For the year ending Mar 2011, the C.R for JSW Steel has increased from 0.73 to 1.01 from the year ending Mar 2010. The reason for such an increase has been due to around double the increase in the Current Assets during this period. Also, there has been a considerable increase in the “Cash and Bank Balances “of the company.

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5) Quick Ratio:

Quick Ratio= QUICK Assets/ Current Liabilities


Interpretation:

The Quick Assets (Current Assets- Inventories) represents the assets that can be readily convertible to cash. The Liquid Ratio for the company has increased from 0.39 for the year ending Mar’10 to 0.60 for the year ending Mar’11.

This suggests that the firm’s short-term debt paying capacity has improved over the year.

C. GEARING RATIOS/SOLVENCY RATIOS:

1) DEBT-TO-EQUITY RATIO:

Debt- to- Equity Ratio= (Short-term Debt+ Long-term Debt)/ Shareholder’s Equity.


Interpretation:

This ratio measures the relationship of the Capital provided by the creditors to the amount provided by the shareholders. The Debt-to-Equity ratio of any company must be less than 1.

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This ratio for JSW Steel was 1.2 for the year ending Mar’10.This was because the Total Debts of the co. for that year was Rs. 115181 millions whereas the Total Shareholder’s Equity amounted to Rs. 97063.40 millions. Such excessive use of debt financing is considered risky for any company.

Whereas, the ratio improved to 0.72 for the financial year ending Mar’11 as the total Debts of the co.shown a minor increase to Rs. 119513.40 millions whereas the Total Shareholder’s Equity amounted to Rs. 172252.70 millions. The company was able to increase the Shareholder’s Equity by such a huge margin due to the increase in the Subscribed Equity Capital from Rs. 1870.5 millions to Rs 2231.20 millions.

2) INTEREST COVERAGE RATIO:

Interest Coverage ratio= Profit Before Interest and Tax/Interest Expense


Interpretation:

There has been a tremendous increase in the Interest Coverage ratio from 1.81 for FY 2008-2009 to 4.13 for FY 2009-2010. The PBIT for the company has more than doubled in 1 year period. For JSW Steel Ltd., the Interest Coverage ratio in 2011 is much higher as compared to the other years and the company is in a much favourable position to pay its interest obligations. A too high Interest coverage ratio is because of using a small dose of debt in the Capital structure. Thus, the company’s has turned out to be in a more favourable position of raising a Bank Loan than ever.

3) Dividend per share:

March 2009 March 2010 March 20111 9.50 12.25

Interpretation:

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It basically indicates the dividend per share value declared by the company to its shareholders. The fluctuation and dividend depends upon the profits of the company. , declaration of dividend is optional for the company and they can use these dividends for the diversification of their business. But the dividend per share is an important tool to inform the shareholders that the company is doing well in the market. The Dividend per share for the year ending march 2011 has increased over its previous financial year despite of the fact that the PAT value has decreased over the same year. This has been possible because of the increasing amount of “RESERVES AND SURPLUS” of the company.

CONCLUSION FOR RATIO ANALYSIS

The company over the years have given dividends to its shareholders at an increased rate. Also, the consistent increase in the company’s Liquidity ratios indicates that the firm’s ability to pay its short term liabilities have also improved. Also, the firm’s credit standing has also improved over the years. This has let the company able to take Loans from the financial institutions for its Development works. The decrease in the value of Debtor Turnover and Inventory Turnover is a cause of worry for the Management. Thus, the Management should work on its effective ways to control the inventory and the receivables.

COST OF CAPITAL OF JSW STEEL LTD.

What is Cost of Capital?

Cost of Capital is the rate of return that a firm must earn on its project investments to maintain its

Market value and attract funds.

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COMPONENTS OF CAPITAL:

a) DEBENTURES

b) PREFERENCE SHARES

c) EQUITY SHARES

d) RETAINED EARNINGS

Cost of capital is the cost at which the company acquires its funds for different operations. It

is taken from the investor’s point of view. It is the expected return of the investors on their

different type of investments in different portfolios. The cost of capital helps the company to

evaluate the financial feasibility of a venture or project

CAPITAL STRUCTURE OF JSW STEEL LTD.

PARTICULARS AMOUNT (In crores)

Equity Share Capital 223.12

Preference Share Capital 279.03

Reserves and Surplus 16.13

Debentures 2422.36

COMPUTATION OF OVERALL COST OF CAPITAL

1. COST OF DEBT

FORMULA:

COST OF IRREDEMABLE DEBT = INTEREST (1-TAX RATE)

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COST OF REDEEMABLE DEBT = [I (I-t) + (RV-SV)/n] / (RV+SV)/2

Here, In the annual report of the JSW Steel Ltd. 2010-2011, Under the Schedule 3 “Secured

Loans”, is the amount of Debentures that the co. has raised.

But, in the annual report, it has not been clearly mentioned that whether the given Debentures

are Redeemable or Irredeemable. The amount of debentures is as follows:

Cost of Debt = (I/SV)*100

Here, Interest = PBIT- PBT = Rs. (36332- 27822.8) mn = Rs. 8509.2 mn

SV= Total Debt = Rs. 119513.40 mn

Hence, Cost of Debt ( Before Tax) , Ki = 7.11%

Thus, After Tax Cost of Debt , Kd = Ki(1-t) = 7.11(1- 0.35) = 4.62% .

[Note: The Debentures are irredeemable]

2. COST OF PREFERENCE SHARE CAPITAL

Cost of 10% Cumulative Redeemable Preference Share Capital

Kp = [d + (RV-SV)/n] / [(RV+SV)/2].

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Here, d= 10% of Rs 10 Face value of Preference Share = Rs1.

RV = Rs. 279.03 Crores.

SV = RV – Floatation Cost

= Rs.( 279.03 – 10% of 279.03) crores = Rs. 251.13 crores

n=( 2018- 1994) yrs =24 yrs.

Hence, Kp =[1 + (279.03 cr. – 251.13 cr.) /14] / [(279.03 cr.+ 251.13 cr.)/2]

Hence, Kp= 1.13%

Note: JSW Steel Ltd. raised the Preference Share Capital on its incorporation i.e, in the year

1994. The 10% Cumulative Redeemable Preference Share Capital is going to be redeemed at 15th

Dec, 2018.

3. COST OF EQUITY CAPITAL

The cost of equity capital can be calculated by two methods

A) DIVIDEND APPROACH

CALCULATION OF COST OF EQUITY CAPITAL (Dividend Approach Method)

FORMULA:

Ke = ( D / P) + g

Where, Ke = Cost of Equity

D = Expected dividend for the year ending 31st March 2011.

P = Current Market Price, as on 31st March 2011

g = Growth Rate.

Year Dividend(Rs.) % Change

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2006-2007 12.50 Nil

2007-2008 14.00 12

2008-2009 1.00 -92.85

2009-2010 9.50 850

Thus, Expected Growth Rate, g = (12- 92.85 + 850)/3 % = 256.5%

Now, Ke = (D/P) + g = [9.50 (3.565) / 952.55] + 256.5% = 256.53%

Since, there has been a large variations in the Dividend per share for the Company for

the last 3-4 yrs, Hence the Cost of Equity which we have got is an absurd value.

So, we will calculate it using the other method i.e.

B) CAPITAL ASSET PRICING MODEL (CAPM)

FORMULA:

Ke = Rf + ß (Km-Rf) ,where

Ke – cost of capital

Rf – risk free return on equity which is 7.2%

ß – Beta of the stock which is 1.78 (From the Excel Sheet)

Km – market return (Calculated from average returns indicated by SENSEX index of last 5

years, which has been taken from the Excel Sheet), which is 12.29%

calculation of beta and market value.xls

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Hence, Ke = Rf + ß (Km-Rf)

= 7.2 + 1.78 ( 12.29 – 7.2 )

= 16.26 %

4. COST OF RETAINED EARNINGS

Since cost of capital for retained earnings is also the opportunity cost hence it is equivalent to

fully subscribed issue or additional shares, which is measured from cost of equity shares.

No retained earnings are mentioned in the balance sheet of the company. So cost of retained

earnings is zero.

COMPUTATION OF OVERALL COST OF CAPITAL OF JSW STEEL LTD. BY WEIGHTED AVERAGE METHOD

Particulars Amount (in

crores)

Weights Specific Cost Weighted Cost

Equity Share

Capital

223.12 0.08 0.04 .0032

Preference

Share Capital

279.03 0.10 0.01 .001

Debentures 2422.36 0.82 0.16 .13

Total 2924.51 1 13.42

Hence, the Overall Cost of Capital for JSW STEEL LTD. is 13.42%

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Final l&t Crisil Report

Documents

Transcript of Final l&t Crisil Report