Executive Summary

Industry Overview
Steel Industry is one of the most important industries of a country. It acts like the backbone of any
economy and plays a crucial role in overall growth and development. The contribution of steel sector to
India’s GDP is over two percent and it currently employs around 25 lakhs people in steel and allied
sectors. As of 2018, India is the world’s 2nd largest producer of crude steel (up from 8th in 2003).
During the lean period from 2014 to 2017, excess steel capacity was found to be the single
phenomenon damaging the interests of the global steel producers in terms of lowering the prices and
thereby the profitability of the industry. A gradual downward trend in global prices of iron ore, coking
coal and scrap from the current level projects a good outlook for the steel industry which sees uplift on
the demand front.
The World steel association forecasts a growth of 1.8% in the global steel consumption in 2018.The
GoI initiative of approving National Steel Policy in 2017 aims at increasing the per capita steel
consumption to 160 kgs by 2030. This will act as a tailwind in improving India’s steel output which is
touted to grow at a CAGR of 8.9% in the next five years.
Important financial ratios for the two major steel producing companies in India – TATA Steel and
JSW Steel have been compared below:
Liquidity Ratios
The CR for Tata Steel has remained constant over the 3 years, although comparatively higher than the
industry standards. Since it is < 1, the firm is either unable to meet its current obligations or is using
long term funds to meet them. Increase in the ratio during 2017-18 is mainly on account of proceeds
from issue of equity shares amounting Rs. 9087 crores for expanding production facility and expanding
in Europe by way of forming a strategic JV resulting in net changes in current financial/other liabilities
amounting Rs. 7,471 crores. In contrast with Tata Steel, CR for JSW Steel has been steadily increasing
over 3 years and this has been mainly on account of increasing inventory. Increase in the inventory
balance lying with the company is in line with the increase in revenues during the period. The CR is
greater than 1, implying the company is able to meet its short-term obligations. The QR has been high
for both Tata Steel and JSW when compared to industry standards. It was as low as 0.52 in 2016-17 for
Tata and 0.23 in 2015-16 for JSW because of huge piling up of inventories on account of global
slowdown in steel demand and excessive dumping by China leading to decrease in demand.
Profitability Ratios
The Operating Profit Margin for Tata has increased by 3 times during the current year which is
mainly on account of higher volumes and improved realizations which has been offset by higher
operational costs at the plant in Thailand and hence the ratio is slightly less than the industry average
while the operating profit for JSW had increased to 20% during 2016-17 which is twice the profit
earned by the industry mainly on account of backward integration projects taken up to reduce cost
reduction and improving the yield and productivity along with increase in overall steel consumption by
7.9%. During the current year, the operating margin is in line with the industry standards.
Return on Equity decreased during 2016-17 for Tata mainly on account of deferred tax expense
incurred and loss from discontinued operations in specialty steels business and Long products Europe
business amounting to Rs. 3,864 crore. During the current year the increase in RoE in spite of issuance
of equity shares amounting to Rs. 9,087 crores is on account of reasons mentioned above while for
JSW it has increased during the period mainly on account of increase in PAT because of the reasons
mentioned above. There has been no major change in equity share capital during the period. The same
is higher when compared to industry standards.
Solvency Ratios
The Debt Equity Ratio for Tata Steel averages around 1.5 which is smaller than the industry avg. of
around 2.35 during FY 2016-17; i.e. the firm uses comparatively less debt compared to equity to
finance its assets. The ratio has reduced during the year mainly on account of increase in equity share
capital on account of rights issue amounting to Rs. 9,087 crores which is compensated by increase in
long term debt, while for JSW the ratio was less for FY 2015-16 and FY 2016-17 when compared with
the industry standards and higher in FY 2017-18. It ranges from 1.2 to 1.9 which means that the
company does not have huge debt obligation and finances its assets using equity also. There has been
decrease in the ratio during the year on account of repayment of long term debt and increase in equity
on account of profits transferred to retained earnings during respective years. Also there is no major
difference in the ratio when compared with Tata Steel during the year. ICR has been nearly two times
the industry standards for Tata Steel, similarly, JSW also has an ICR above industry standards; i.e. the
company has substantial EBITDA in order to meet its interest cost requirements and hence the lenders
will be quite happy. Also the same has increased by 3.5 times during 2017-18 on account of increase in
profits and hence the company will not foresee any risk on account of interest burden.
Efficiency Ratios
Receivable turnover multiple for both Tata Steel and JSW has been increasing over the years since
the companies are able to negotiate well with its customers in order to realize the payments within time.
Decrease in Debtors working cycle has allowed the companies to manage their working capital well in
2017-18, still below the industry standard of 23 days. Payable turnover multiple is less as compared
to industry for both companies and hence the companies enjoy comparatively longer credit period. This
is owing to the long time presence, market share and volume of production. However, the Creditors
working cycle for both the companies has been reduced for certain vendors to meet its demand
requirements although JSW has been able to enjoy better credit working cycle when compared to Tata.
Valuation Ratios
Tata Steel experienced a huge drop in Earnings per Share during 2016-17 mainly on account of loss
from discontinued operations and global fall in steel prices. However, during the current year there has
been substantial increase in the ratio to 128 on account of increase in the profits. On the other hand,
JSW has not issued or bought back any equity shares during the period. There has been increase in
earnings per share during the period on account of increase in PAT by way of improving the yield and
productivity by way of diversified sourcing, optimization of logistics and cost digitalization projects
along with increase in overall steel consumption by 7.9%. Over the years the market value of both the
companies has been increasing on account of several acquisitions made by the company, growth
potential, sustainability, Corporate governance, extensive CSR activities carried out along with
consistency in dividend payments. Hence, the PE multiple has been increasing for both the companies
and have become blue chip stocks to invest in.
DuPont Framework Analysis (Refer annexure for the Framework Table):
1. Operating margin has been increasing on account of increase in volumes of sales and recovery of global
prices for both the companies.
2. Interest burden is increasing in spite of increase in interest on account of long term debt availed mainly
due to increase in EBIT for both the companies.
3. The impact of other income has been positive for Tata Steel during the current FY 2017-18 mainly on
account of company making exceptional profit on account of non-cash accounting surplus arising from
formation of British Steel Pension scheme while for JSW, there is no major impact of Other Income on
account of very minimal exceptional items, the ratio is close to 1.
4. The tax efficiency has increased for Tata Steel during the year on account of tax benefits availed may be
on account of carry forward of previous year unutilized losses and hence the overall tax expense has
reduced for the company while for JSW, the tax efficiency has been increasing over the period on account
of good tax avoidance management followed by the company.
5. ATR has been inconsistent for Tata Steel since it is less than one the company has not been able to
utilize its assets effectively. The company must lease assets and liquidate obsolete assets to improve sales
while for JSW, it has been increasing for the company at slower pace and since it is less than one the
company has not been able to utilize its assets effectively. The company must lease assets and liquidate
obsolete assets to improve sales.
6. Leverage has reduced considerably for Tata Steel during the year on account of reduction in overall debt
as a percentage of total liabilities mainly on account of right shares issued by the company while for JSW,
leverage portion has been continuously reducing during the period on account of reduction in overall debt
in the capital structure of the company.
Recommendations:
Growth Potential – A global cyclical upturn in steel prices, triggered by China reducing its excess
capacities citing environmental issues and government policies to stimulate demand and growth for
both the companies, for JSW, anti-dumping measures by government, making long products which
are outside the threat from imports gives positive outlook. For Tata Steel, diversified segment, brand
value and global presence are key factors. Improved sales performance along with reduction in losses
has made these two top stocks for investors where there is huge growth potential. Additionally, Tata’s
acquisition of Bhushan Steel Ltd. will help in capturing market share by leveraging additional
production capacity.
Banks – On the basis of current and quick ratio, the banks may not be willing to consider us credit
worthy to finance loans. However the interest coverage ratio is higher than the industry average which
means that the company has adequate profit from operations to pay for interest. JSW has close to
ideal debt equity ratio and hence banks may be willing to finance loans on the basis of this leverage
ratio while on the other hand, Tata Steel having a DER higher than industry standard for 2017-18
means that it is vulnerable to global economic slowdown.
Management –Diversified sourcing, optimization of logistics and cost digitalization projects and
effect of these initiatives taken by JSW management will be seen in coming years which will help in
improving operating efficiency and profitability. Leveraging digital technologies to create innovative
products thereby bringing about flexibility and efficiency in production process can help in improving
overall profitability for Tata, while better inventory management along with leasing assets and
liquidating obsolete assets can help us improve asset utilization for both the firms.
Specific Actions – Both the companies are already market leaders in this sector and to stay competitive
JSW must continue its backward integration project to reduce cost of production and must take
maximum benefit of reduced imports in long products, while Tata Steel needs to look out for inorganic
opportunities to ensure it remains leading steel player along with reduction in cost of production and
take maximum benefits of government policies to capture the market.
ANNEXURE:
DuPont Framework Table & Calculation:
TATA STEEL JSW
2015-16 2016- 2017- 2015-16 2016-17 2017-18
17 18
Operating 0.028 0.097 0.127 Operating 0.07 0.14 0.16
Margin Margin
Interest -0.424 0.573 0.677 Interest -0.10 0.57 0.68
Burden Burden
Impact of -2.172 0.364 1.834 Impact of 7.21 1 0.96
Other Other
Income Income
Tax -0.181 -1.68 0.84 Tax 0.194 0.67 0.79
Efficiency Efficiency
Asset 0.59 0.70 0.70 Asset 0.56 0.71 0.77
Turnover Turnover
Leverage 3.98 4.39 3.39 Leverage 4.55 3.93 3.34
Return on 0.01 -0.11 0.29 Return on -0.03 0.15 0.22
Equity Equity

Financial Ratios for Tata Steel:

Financial Ratios - Tata Steel

S.No PARTICULARS 2015-16 2016-17 2017-18
LIQUIDITY RATIOS
1 Current Ratio 0.95 0.95 1.00
2 Quick Ratio 0.82 0.52 0.71
3 Net Working Capital to Total Assets (0.01) 0.00 0.06

PROFITABILITY RATIOS
4 Operating Profit Margin 6.54% 6.16% 19.87%
5 Return on Assets -0.28% -2.40% 8.47%
6 Return on Capital Employed 11% 13% 24%
7 Return on Equity -1% -11% 29%

SOLVENCY RATIOS
8 Debt Equity Ratio 1.46 1.62 1.18
9 Debt Ratio 0.37 0.37 0.35
10 Interest Coverage Ratio 1.65 1.49 4.84
11 Net Working Capital to Current Assets (0.05) 0.02 0.18

EFFICIENCY RATIOS
12 Receivable Turnover Multiple 8.99 10.21 10.79
13 Inventory Turnover Multiple 1.81 1.48 1.39
14 Payable Turnover Multiple 2.19 2.02 2.56
15 Debtors Working Cycle Days 40.59 35.75 33.84
16 Creditors Working Cycle Days 166.82 181.03 142.84
17 Asset Utilisation Ratio 0.07 0.08 0.16

VALUATION RATIOS
18 Earning per Share (6.92) (44.77) 128.00
19 PE Multiple (43.75) (10.27) 4.46
20 Book Value/Share 458.88 382.99 597.17
21 Dividend Payout 3% 2% 2%
Financial Ratios for JSW:

Financial Ratios - JSW Steel

S.No PARTICULARS 2015-16 2016-17 2017-18
LIQUIDITY RATIOS
1 Current Ratio 0.58 0.72 0.80
2 Quick Ratio 0.23 0.33 0.37
3 Net Working Capital to Total Assets (0.13) (0.09) (0.06)

PROFITABILITY RATIOS
4 Operating Profit Margin 2% 15% 17%
5 Return on Assets -0.61% 3.92% 6.60%
6 Return on Capital Employed 2% 16% 19%
7 Return on Equity -3% 15% 22%

SOLVENCY RATIOS
8 Debt Equity Ratio 1.93 1.47 1.19
9 Debt Ratio 0.44 0.37 0.35
10 Interest Coverage Ratio 0.31 2.36 3.06
11 Net Working Capital to Current Assets (0.73) (0.39) (0.25)

EFFICIENCY RATIOS
12 Receivable Turnover Multiple 16.86 13.68 16.15
13 Inventory Turnover Multiple 2.71 2.87 3.25
14 Payable Turnover Multiple 1.77 1.97 2.66
15 Debtors Working Cycle Days 21.65 26.69 22.6
16 Creditors Working Cycle Days 206.53 185.33 136.98
17 Asset Utilisation Ratio 0.56 0.69 0.78

VALUATION RATIOS
18 Earning per Share -1.4 14.66 25.85
19 PE Multiple (89.19) 12.84 11.15
20 Book Value/Share 78.46 93.24 114.53
21 Dividend Payout 0.6% 1.2% 1.1%