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Project report
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(Jamil Saudagar)
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CERTIFICATE
This is to certify that Mr. Javed Abdul Wahab Sayyed, a student of Rizvi Institute of
Management Studies and Research, of MMS bearing Roll No. 42 and specializing in Finance
has successfully completed the project titled
Fundamental Analysis on Indian Steel Sector.
under the guidance of Prof. Jamil Saudagar in partial fulfillment of the requirement of
Masters of Management Studies by University of Mumbai for the academic year 2013
2015.
_______________
Prof. Jamil Saudagar
Project Guide
_______________
_______________
Academic Coordinator
Director
TABLE OF CONTENTS
Particulars
Page
no.
Introduction
Fundamental Analysis
13
14
15
16
17
19
21
22
Company Analysis
23
27
28
29
Resources
30
To study the present scenario of a steel industry which analyze the information
collected on earning per share, market price etc.
Purpose of equity research is to study companies, analyze financials, and look at quantitative
and qualitative aspects mainly for decision: Whether to invest or not.
Fundamental Analysis
Introduction
Steel is an alloy of iron and carbon containing less than 2% carbon and 1% manganese and
small amounts of silicon, phosphorus, sulphur and oxygen. Steel is the world's most
important engineering and construction material. It is used in every aspect of our lives; in cars
and construction products, refrigerators and washing machines, cargo ships and surgical
scalpels.
Types of Steel:
World Steel Association defines, there are over 3,500 different grades of steel, encompassing
unique physical, chemical and environmental properties.
In essence, steel is composed of iron and carbon, although it is the amount of carbon, as well
as the level of impurities and additional alloying elements that determines the properties of
each steel grade.
The carbon content in steel can range from 0.1-1.5%, but the most widely used grades of steel
contain only 0.1-0.25% carbon. Elements such as manganese, phosphorus and sulphur are
found in all grades of steel, but, whereas manganese provides beneficial effects, phosphorus
and sulphur are deleterious to steel's strength and durability.
Different types of steel are produced according to the properties required for their application,
and various grading systems are used to distinguish steels based on these properties.
According to the American Iron and Steel Institute (AISI), steels can be broadly categorized
into four groups based on their chemical compositions:
1.
2.
3.
4.
Carbon Steels
Alloy Steels
Stainless Steels
Tool Steels
1) Carbon Steels:
Carbon steels contain trace amounts of alloying elements and account for 90% of total steel
production. Carbon steels can be further categorized into three groups depending on their
carbon content:
2) Alloy Steels:
Alloy steels contain alloying elements (e.g. manganese, silicon, nickel, titanium, copper,
chromium and aluminum) in varying proportions in order to manipulate the steel's properties,
such as its hardenability, corrosion resistance, strength, formability, weldability or ductility.
Applications for alloys steel include pipelines, auto parts, transformers, power generators and
electric motors.
3) Stainless Steels:
Stainless steels generally contain between 10-20% chromium as the main alloying element
and are valued for high corrosion resistance. With over 11% chromium, steel is about 200
times more resistant to corrosion than mild steel. These steels can be divided into three
groups based on their crystalline structure:
Austenitic: Austenitic steels are non-magnetic and non heat-treatable, and generally
contain 18% chromium, 8% nickel and less than 0.8% carbon. Austenitic steels form the
largest portion of the global stainless steel market and are often used in food processing
equipment, kitchen utensils and piping.
Ferritic: Ferritic steels contain trace amounts of nickel, 12-17% chromium, less than
0.1% carbon, along with other alloying elements, such asmolybdenum, aluminum or
titanium. These magnetic steels cannot be hardened with heat treatment, but can be
strengthened by cold works.
Martensitic: Martensitic steels contain 11-17% chromium, less than 0.4% nickel and
up to 1.2% carbon. These magnetic and heat-treatable steels are used in knives, cutting
tools, as well as dental and surgical equipment.
4) Tool Steels:
Tool steels contain tungsten, molybdenum, cobalt and vanadium in varying quantities to
increase heat resistance and durability, making them ideal for cutting and drilling equipment.
Steel products can also be divided by their shapes and related applications:
Long/Tubular Products include bars and rods, rails, wires, angles, pipes, and shapes
and sections. These products are commonly used in the automotive and construction
sectors.
Flat Products include plates, sheets, coils and strips. These materials are mainly used
in automotive parts, appliances, packaging, shipbuilding, and construction.
Other Products include valves, fittings, and flanges and are mainly used as piping
materials.
2.
The integrated route uses raw materials (that is, iron ore, limestone and coke) and scrap to
create steel. The EAF method uses scrap as its principal input.
The EAF method is much easier and faster since it only requires scrap steel. Recycled steel is
introduced into a furnace and re-melted along with some other additions to produce the end
product.
Steel can be produced by other methods such as open hearth. However, the amount of steel
produced by these methods decreases every year.
Fundamental Analysis
Fundamental analysis is a technique that attempts to determine a securitys value by focusing
on underlying factors that affect a companys actual business and its future prospects.
Fundamental analysts attempt to study everything that can affect the securitys value,
including macroeconomic factors (like the overall economy and industry conditions) and
company- specific factors (like financial condition and management).
Fundamental analysis of a business involves analyzing its financial statements and health, its
management and competitive advantages and its competitors and markets. Fundamental
analysis is performed on historical and present data but with the goal of making financial
forecasts. A fundamental analyst believes that analyzing strategy, management, product,
financial stats and many other readily and not-so-readily quantifiable numbers will help
choose stocks that will outperform the market.
There are several possible objectives:
To conduct a company stock valuation and predict its probable price evolution,
To make a projection on its business performance,
To evaluate its management and make internal business decisions,
To calculate its credit risk.
Quantitative Factors
Qualitative Factors
The various fundamental factors can be grouped into two categories: quantitative and
qualitative.
Each industry has differences in terms of its customer base, market share among firms,
industry-wide growth, competition, regulation and business cycles. Learning about how the
industry works will give an investor a deeper understanding of a companys financial health.
Customers
Some companies serve only a handful of customers, while others serve millions. In
general, its negative if a business relies on a small number of customers for a large
portion of its sales because the loss of each customer could dramatically affect revenues.
For example, think of a military supplier who has 100% of its sales with the Indian
government. One change in government policy could potentially wipe out all of its sales.
For this reason, companies will always disclose in their annual report if any one customer
accounts for a majority of revenues.
Market Share
Understanding a companys present market share can tell volumes about the
companys business. The fact that a company possesses an 85% market share tells you
that it is the largest player in its market by far. Furthermore, this could also suggest
that the company possesses some sort of economic moat in other words, a
competitive barrier serving to protect its current and further earnings, along with its
market share. Market share is important because of economies of scale. When the firm
is bigger than the rest of its rivals, it is in a better position to absorb the high fixed
costs of a capital -intensive industry.
Industry Growth
One way of examining a companys growth potential is to first examine whether the
amount of customers in the overall market will grow. This is crucial because without
new customers, a company has to steal market in order to grow. In some markets,
there is zero or negative growth, a factor demanding careful consideration. For
example, a manufacturing company dedicated solely to creating audio compact
cassettes might have been very successful in the 70s, 80s and early 90s. However
that same company would probably have a rough time now due to the advent of newer
technologies, such as CDs and MP3s. The current market for audio compact cassettes
is only a fraction of what it was during the peak of its popularity.
Competition
Simply looking at the number of competitors goes a long way in understanding the
competitive landscape of a company. Industries that have limited barriers to entry and
a large number of competing firms create a difficult operating environment for firms.
One of the biggest risk in a highly competitive industry is pricing power. This refers
to the ability of supplier to increase prices and pass those costs on to customers.
Companies operating in industries with few alternatives have the ability to pass on
costs to customers. A great example of this is Wal-Mart. They are so dominant in the
retailing business, that Wal-Mart practically sets the price for any of the suppliers
wanting to do business with them. If you want to sell to Wal-Mart, you have little, if
any, pricing power.
Business Model
One of the most important questions that should be asked is what exactly does the company
do? This is referred to as a companys business model. Its how a company makes money?
You can get a good overview of a companys business model by checking out its website or
annual report.
Competitive Advantage
Another business consideration for investors is competitive advantage. A companys longterm success is driven largely by its ability to maintain a competitive advantage and keep it.
Powerful competitive advantages, such as Reliances brand name and Microsofts domination
of the personal computer operating system, create a moat around a business allowing it to
keep competitors at bay and enjoy growth and profits. When a company can achieve
competitive advantage, its shareholders can be well rewarded for decades.
Management
A company relies upon management to steer it towards financial success. Some believe that
management is the most important aspect for investing in a company. It makes sense even
the best business model is doomed if the leaders of the company fail to properly execute the
plan. Every public company has a corporate information section on its website. Usually there
will be a quick biography on each executive with their employment history, educational
background and any applicable achievements. Dont expect to find anything useful here.
Lets be honest: Were looking for dirt, and no company is going to put negative information
on its corporate website.
Instead, here are a few ways for you to get a feel for management:
2. Past Performance
Another good way to get a feel for management capability is to check and see how executives
have done at other companies in the past. You can normally find biographies of top
executives on company websites. Identify the companies they worked at in the past and do a
search on those companies and their performance.
QUANTITATIVE FACTOR
Now as we know the qualitative factor of fundamental analysis, lets proceed to the
quantitative factor of the fundamental analysis. Quantitative factor include analysis of
financial statement of the company.
RATIO ANALYSIS
Financial ratios are tools for interpreting financial statements to provide a basis for valuing
securities and appraising financial and management performance. In general, there are 4
kinds of financial ratios that a financial analyst will use most frequently, these are:
Liquidity ratios
Price/Earnings Ratio
This ratio is calculated to find out the possibility of capital appreciation in future.
Price earnings ratio = Market price per Equity share/ Earning per share.
The Indian steel industry has entered into a new development stage from 2007-08,
riding high on the resurgent economy and rising demand for steel.
Rapid rise in production has resulted in India becoming the 4th largest producer of
crude steel and the largest producer of sponge iron or DRI in the world.
As per the report of the Working Group on Steel for the 12th Plan, there exist many
factors which carry the potential of raising the per capita steel consumption in the country,
currently estimated at 55 kg (provisional). These include among others, an estimated
infrastructure investment of nearly a trillion dollars, a projected growth of manufacturing
from current 8% to 11-12%, increase in urban population to 600 million by 2030 from the
current level of 400 million, emergence of the rural market for steel currently consuming
around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram
Sadak Yojana, Rajiv Gandhi Awaas Yojana among others.
At the time of its release, the National Steel Policy 2005 had envisaged steel
production to reach 110 million tons by 2019-20. However, based on the assessment of the
current ongoing projects, both in Greenfield and Brownfield, the Working Group on Steel
for the 12th Plan has projected that the crude steel capacity in the county is likely to be
140 mt by 2016-17 and has the potential to reach 149 mt if all requirements are adequately
met.
Steel demand has been proportionate with the GDP growth of the country. Housing & real
estate, construction & infrastructure and manufacturing segment are the prime consumers and
drivers of steel demand in India.
Economic growth
Industrial, construction & manufacturing growth
Growth in population
Rising middle class population and per capita steel consumption
Growth in rural steel consumption
Infrastructure Development
(Worldsteel.org)
Market Size
Indias real consumption of total finished steel grew by 0.6 per cent year-on-year in April
March 2013-14 to 73.93 million tons (MT), according to Joint Plant Committee (JPC),
Ministry of Steel. Construction sector accounts for around 60 per cent of the country's total
steel demand while the automobile industry consumes 15 per cent.
India became net steel exporter in 201314 and is likely to maintain the momentum in 201415 as producers are looking to dock more overseas shipment to tide over subdued domestic
consumption. Total steel exports by India during 201314 stood at 5.59 MT, as against
imports of 5.44 MT. During the period, Steel Authority of India (SAIL) clocked a 30 per cent
growth in exports and aims to more than double the shipments to 1 MT in 201415. Rashtriya
Ispat Nigam Ltd (RINL), which exported 1 lakh tone steel last fiscal, aims to treble that in the
current fiscal.
GROWTH
The liberalization of industrial policy and other initiatives taken by the Government have
given a definite impetus for entry, participation and growth of the private sector in the steel
industry. While the existing units are being modernized/expanded, a large number of new
steel plants have also come up in different parts of the country based on modern, cost
effective, state of-the-art technologies. In the last few years, the rapid and stable growth of
the demand side has also prompted domestic entrepreneurs to set up fresh Greenfield projects
in different states of the country.
Crude steel capacity was 89 mt in 2011-12 and India, the 4th largest producer of crude steel
in the world, has to its credit, the capability to produce a variety of grades and that too, of
international quality standards. The country is expected to become the 2nd largest producer of
crude steel in the world by 2015-16, provided all requirements for creation of fresh capacity
are adequately met.
Weaknesses
This are inherent in the quality and availability of some of the essential raw materials
available in India, e.g., high ash content of indigenous coking coal adversely affecting the
productive efficiency of iron-making and is generally imported. Also, Steel is a capital
intensive industry; steel companies in India are charged an interest rate of around 14% on
capital as compared to 2.4% in Japan and 6.4% in USA. In India the advantages of cheap
labour get offset by low labour productivity; e.g., at comparable capacities labour
productivity of SAIL and TISCO is 75 t/man year and 100 t/man years, for POSCO, Korea
and NIPPON, Japan the values are 1345 t/man year and 980 t/man year. High administered
price of essential inputs like electricity puts Indian steel industry at a disadvantage; about
45% of the input costs can be attributed to the administered costs of coal, fuel and electricity.
The major Weaknesses can be summarized as:
Opportunities
The biggest opportunity before Indian steel sector is that there is enormous scope for
increasing consumption of steel in almost all sectors in India. The Indian rural sector remains
fairly unexposed to their Multi-faceted use of steel. The usage of steel in cost Effective
manner is possible in the area of housing, fencing, structures and other possible applications
where steel can substitute other materials which not only could bring about Advantages to
users but is also desirable for conservation of forest resources. Excellent potential exist for
enhancing steel consumption in other sectors such as automobiles, packaging, engineering
industries, irrigation and water supply in India. The key areas of Opportunities can be
summarized as:
Threats
The linkage between the economic growth of a country and the growth of its steel industry is
strong. The growth of the domestic steel industry between 1970 and 1990 was similar to the
growth of the economy, which as a whole was sluggish. This strong relation in todays
environment where the growth of the industry has become stagnant owing to the overall
slowdown has resulted in enhanced rivalry among existing firms. As the industry is not
growing the only other way to grow is by increasing ones market share. The Indian steel
industry has witnessed spurts of price wars and heavy trade discounts, which has impacted
the Indian Steel Industry.
Mandatory pre inspection certificate by a reputed international agency for every import
consignment of seconds and defectives.
In the union Budget the import duty on seconds and defective has been further reduced from
20% to 10%
Advance Licensing Scheme allows duty free import of raw materials for exports.
Duty Entitlement Pass Book Scheme (DEPB) was introduced to facilitate exports. Under
this scheme exporters on the basis of notified entitlement rates, are granted due credits
which would entitle them to import duty free goods. The DEPB benefit on export of
various categories of steel items scheme is currently applicable for steel exports.
Last five years export of total finished steel (alloy + non alloy) is given below:Indian steel industry : Exports (in million tonnes)
Category
200708
200809
200910
5.08
4.44
3.25
2010-11 2011-12*
3.64
Iron & steel are freely importable as per the extant policy.
4.04
Last five years import of total finished steel (alloy + non alloy) is given
below:Indian steel industry : Imports (in million tonnes)
Category
200708
200809
200910
201011
201112*
7.03
5.84
7.38
6.66
6.83
Political factors include government policies relating to the industry, tax policies, laws
and regulations, trade restrictions and tariffs etc.
Economic factors relate to changes in the wider economy such as economic growth,
interest rates, exchange rates and inflation rate, etc.
Social factors often look at the cultural aspects and include health consciousness,
population growth rate, age distribution, changes in tastes and buying patterns, etc.
Technological factors relate to the application of new inventions and ideas such as
R&D activity, automation, technology incentives and the rate of technological change.
Key Points
Supply
With trade barriers having been lowered over the years, imports play an
important role in the domestic markets. Currently India is net importer
of steel.
Demand
Barriers to entry
Bargaining power Low for fully integrated players who have their own mines for raw
of suppliers
materials. High, for non integrated players who have to depend on
outside suppliers for sourcing raw materials.
Bargaining power High, presence of a large number of suppliers and access to global
of customers
markets.
Competition
Company Analysis
Top two players in steel industry out of the analysis done
Tata Steel Limited (formerly Tata Iron and Steel Company Limited (TISCO)) is
an Indian multinational steel-making company. It was the 12th largest steel producing
company in the world in 2012, with an annual crude steel capacity of 23.8 million tons, and
the second largest private-sector steel company in India (measured by domestic production)
with an annual capacity of 9.7 million tons after SAIL
Tata Steel has manufacturing operations in 26 countries, including Australia, China, India, the
Netherlands, Singapore, Thailand and the United Kingdom, and employs around 80,500
people. Its largest plant is located in Jamshedpur,Jharkhand. In 2007 Tata Steel acquired the
UK-based steel maker Corus which was the largest international acquisition by an Indian
company till that date. It was ranked 471st in the 2013 Fortune Global 500 ranking of the
world's biggest corporations. It was the seventh most valuable Indian brand of 2013 as
per Brand Finance.
On February 12, 2012 Tata Steel completed 100 years of steel making in India. Tata Steel has
set a target of achieving an annual production capacity of 100 million tons by 2015; it is
planning for capacity expansion to be balanced roughly 50:50 between Greenfield
developments and acquisitions.
On analyzing Tata steel over a year we observe that there is increasing trend of share prices of
Tata steel. At the end of August 2013 this counter was trading around 200s but recently i.e.
after a year it is trading around 600 mark. Which indicate this counter, positive performance.
JSW Steel Ltd is an Indian steel company owned by the JSW Group. JSW Steel, after
merger of ISPAT steel, has become India's largest private sector steel company.JSW Steel is
the largest private sector steel manufacturer in terms of installed capacity. The company
offers the entire gamut of steel products - Hot Rolled, Cold Rolled, Galvanized, Galvalume,
Pre-painted Galvanised, Pre-painted Galvalume, TMT Rebars, Wire Rods & Special Steel
Bars, Rounds & Blooms. They have manufacturing facilities at Toranagallu in Karnataka,
Vasind & Tarapur in Maharashtra and Salem in Tamil Nadu. The company is part of US $15
billion O.P.Jindal Group. JSW Steel Ltd was originally incorporated as Jindal Vijayanagar
Steel Ltd on March 15, 1994. By 2025, JSW Steel is aiming to produce 40 million tons of
steel annually with Greenfield integrated steel plants coming up in West Bengal and
Jharkhand, while adding further capacities at the Vijayanagar and Salem plants
JSW Steel has also formed a joint venture for setting up a steel plant in Georgia. The
Company has also tied up with JFE Steel Corp, Japan for manufacturing the high grade
automotive steel. The Company has also acquired mining assets in Chile and USA.
On short run JSW steel has shown a positive trend on share market. Although other steel
counterparts were trading highly volatile but this company had a consistent positive trend.
Companys P/E ratio is also low as compared to average industry p/e ratio which makes this
counter more desirable to be a part of investors portfolio.
Companys name
Price
P/E
EPS
540.50
14.7
36.77
656.34
Difference
between
target price
and market
price
115.84
1285.05
13.38
96.04
1714.31
429.26
SAIL
96.80
23.90
4.05
72.29
329.95
19.42
16.99
303.27
400.50
146.05
2.74
44.08
Sector P/E
17.85
Target
Price
Here we can see that out of five steel company there are two companies with undervalued
sector P/E ratio like Tata Steel Ltd. and JSW Steel Ltd. And with the calculated target price
we can make out that it is better to purchase shares from companies like Tata Steel Ltd. and
JSW Steel Ltd.
How to calculate the Earnings Per Share (EPS), Sector P/E and Long Term
Price Target (LTPT)?
According to recent developments and its performance an investor should select the
sector to invest.
STOCK
P/E RATIO
14.7
13.38
After analyzing top steel companies, Tata Steel Ltd. and JSW Steel Ltd. emerged the top
performing companies in the list.
The market price of various steel companies was taken along with the P/E Ratio (profit
earnings ratio).Then the EPS (earning per share) was calculated with the help of market price
and P/E ratio and then the sector P/E was calculated. Finally, the target price was calculated
by multiplying the values of sector P/E and EPS.
STOCK
RECOMMENDATION
656.34
1714.31
BUY
BUY
The chosen stocks i.e. Tata Steel Ltd. and JSW Steel Ltd. are going to perform well, with the
huge potential of earnings for equity holders.
Resources