Financial Accounting Project

Report

TATA Steel Ltd. JSW Steel Ltd.

Group Number : 16
Section : B
Bhagyashree Pani 1811120
Smriti Aggarwal 1811081
Rahul Mayank 1811113
Sanju Priya 1811142

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 Table of Contents
S Table of Contents Page No
No
Industry Overview
Tata Steel
Company Background
Profitability
Profit Margin
Return on Assets
Return on Equity
Liquidity
Current Ratio and Liquid Ratio
Solvency
Quarterly Results-TATA
Cash Flow Statement
JSW Steel
Profitability
Return on Equity
Revenue from operations
Cost of Goods sold
Exceptional items
Loans and advances
Liquidity
Current ratio and quick ratio
Solvency
Cash flow statement
Quarterly results – JSW
Comparative analysis
Closing Remarks

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Industry Overview
Steel contributes to 2% of India’s GDP. With the rapid growth in infrastructure projects in India
in highways, railways, metro, etc. and a healthy demand for steel augurs well for the industry. The
global steel market has undergone a revival in the last few years. The National Steel Policy 2017
of government envisions 300MT crude steel production by 2030 and become self-sufficient.
Global steel prices remained buoyant in 2017 due to falling exports from China as it continues to
reduce excess capacities, firm iron ore prices and improving demand from China following the
upswing in the infrastructure and construction sectors. Global steel demand improved by
approximately 2% as compared from 2016 to 2017. China trimmed its capacities by eliminating
Basic Oxygen Steelmaking (BOF) – Electric Arc Furnace (EAF) of 55 million tonnes in 2017 and
closed 140 million tonnes of inefficient induction furnace capacity.

Figure 1: Increasing trend of global overcapacity due to increased demand worldwide

Challenges to the industry include sharp increase in crude oil prices ($41 per barrel in 2016 to $54
per barrel in 2017), appreciation of US dollar, increasing protectionism like trade barriers and
escalating global debt and rising interest rates. However, landmark tax reforms in the US, reducing
tax rates from 35% to 21% will bolster investment and employment. The US imposed a 25% duty
on steel imports. As India’s domestic demand is robust, the Indian steel industry should be
watchful of any surge in import of steel into India from these countries.

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TSL Limited (TSL)

Company Background

TSL Limited which is the second largest manufacturer of Steel in India, is a subsidiary of Tata
Group. It is 111-year-old company which is a diversified steel producer having a current turnover
of ₹60,519 crores and profit of ₹4170 crores. As of FY18, with its operations spread across 26
countries and commercial presence across 50 countries, the steel production capacity of TSL group
is 27.5MTPA and TSL India is 13MTPA. The pursuing financing strategy of the company is both
organic in expansion of Kalinganagar plant as well as inorganic in acquisition of Bhushan steel
Limited growth prospects. The major risk in future is regarding its mining leases and statutory
compliances for which it created a provision of above ₹3000 crores in FY18.

Profitability

Profit Margin

The profit margin improved from 2.2% to 6.4% from 2015-16 to 2016-17 and remained consistent
in 2017-18 to 6.88%.

The Sales and Expenses both increased over the years but the proportion of increase in revenue is
more than the expenses. Increase in revenue is mainly due to additional capacity and growth in
steel prices from 2015 to 2018.

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2016-17

● TSL recorded a PAT of ₹3,445 crores compared to ₹956 crores in 2016-17 due to improved
prices, diversification of product portfolio (more production of premium steel) and
commencement of operations at Kalinganagar plant. The basic and diluted earnings per share
have touched ₹31.74 (previous year: ₹8.05).
● The disproportionate increase in profit (compared to sales) is due to reduction in exceptional
items which is due to restructuring of employee pension and separation schemes and decrease
in provisions for statutory claims and demands (compared to previous years).
● The revenue and expenses have increased from 2015-16 to 2016-17 due to addition of extra
capacity of 3MTPA in Kalinganagar, Odisha.
● Higher finance cost at Tata Steel India as previous year is due to higher interest capitalisation
of Kalinganagar.
2017-18

● There is a huge increase in exceptional items due to write offs of provisions and claims
relating to statutory claims in mining and environmental matters, provision for advances given
for repurchase of equity shares in Tata Teleservices Limited from NTT DoCoMo Inc. and
provision for diminution in value of investment held in subsidiaries and joint ventures.
● The increase in other income is due to sale of investments at fair value.
● Lower purchases of steel wire rods and imported rebars for resale led to decrease in purchase
of finished and semi-finished materials decreased as compared to the previous year.
Steelmaking requires finished and semi-finished steel which is now being supplied through
internal production.
● Increased operations at Kalinganagar and higher cost of imported coal increased the
consumption of raw material.
Return on Assets

● Between 2016-17 average assets increased by about 3% but the profits increased by 260%
which is why the return on assets saw a significant increase in the year and continued to
increase in 2017-18 due to moderate increase in profits by 21% with average assets having an
increase of 9%.

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● From 2015-16 to 2016-17, there is a significant increase in PPE which is in line with the
decrease in Capital work-in-progress due to capitalization of the Kalinganagar Steel plant of
TSL which was a greenfield project. The ₹22,000 crores decrease in work-in-progress has
shifted to the head of plant and machinery, which has increased by ₹22,000 crores. Therefore,
this has no significant impact on the total non-current assets.
● There has been a significant increase in intangible assets between 2015 to 2016 due to
acquisition of mines and mine development amounting to ₹462 crores.
● The reduction in non-current investments from 2015 is due to a major disinvestment in Tata
Motors and Titan amounting to over ₹6000 crores.
Return on Equity

With PAT With adjusted PAT

DuPont 2018 2017 2016 2018 2017 2016

ROE 7.21% 6.83% 1.89% 11.70% 7.40% 4.37%

ROA 3.52% 3.18% 0.91% 5.73% 3.45% 2.10%

ATO 0.51 0.49 0.41 0.51 0.49 0.41

PM 6.89% 6.47% 2.24% 11.19% 7.01% 5.18%

Leverage 2.04 2.15 2.08 2.04 2.15 2.08

Analyzing Du Pont, the increase in return on equity is mainly due to the increase in return on
assets (which is due to the increase in profit margin).

● This increase in 2016-17 is due to a sharp increase in profits by 260% while between 2017-18
it remained almost constant due to a similar increase in other equity by 24% while profit
increased by 21%.
Liquidity

Liquidity position has improved significantly from 2016-17 to 2017-18. TSL is increasing its funds
in line with the management vision of raising its capacity through organic and inorganic expansion.

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Current Ratio and Liquid Ratio

Ratios 2017-18 2016-17 2015-16

Current Ratio 1.35 0.87 0.72

Quick Ratio 0.83 0.36 0.31

2016-17

● Current Assets increased by 34.49% but current liabilities increased by 11.21%

● The increase in current assets is driven by the increase in trade receivables and inventories.
Increase in inventory was primarily due to commencement of Kalinganagar mine and
increase in coal cost. increase in Trade receivables is on account of higher realizations.
● The increase in current liabilities is mainly due to the increase in trade payables which is
offset by the repayment of short term borrowings.
2017-18

● Current assets have increased drastically (72.27%) in 2017-18 which is due to the increase in
investments and cash which form a major part of the current assets. There has been a
significant increase (175.72%) in current investments in financial assets year on year due to
increased investments in Mutual Funds by TSL.
● The rise in cash and cash equivalents (406.94%) in 2017-18 is due to the ₹9000 crores rights
issue of equity capital.12
● Current liabilities have also decreased but by lower proportion (11.06%) compared to Current
Assets. The increase in other liabilities is due to increase in statutory dues related to payables
for GST, excise duty, service tax, sales tax, VAT, tax deducted at source and royalties.
Solvency

Ratios 2017-18 2016-17 2015-16

Debt Equity 0.39 0.54 0.61

Liability Equity 0.96 1.15 1.15

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● The debt equity has reduced due to increase in equity which in turn is driven by an increase
in other equity by 24% and issue of right shares. Debt has reduced due to the reduction in
short term borrowings.
● Liability equity has reduced in 2017-18 due to increase in total equity. Debt also increased
but only by 3.01% most of the increase in trade payables and financial liabilities is offset by
reduction in short term borrowings.
Quarterly Results- TATA

The sales in first quarter generally decreases as compared to the last quarter since the company
generally increases its sales in the last quarter to improve its financial performance (March Rush).
The revenue decreased in June 2016 quarter since domestic prices were lower due to subdued
demand, increasing supply side pressures and continued imports from pre Minimum Import Price
contracts. Shrinking global steel demand, overcapacity & increasing low priced exports by China
continued to pose a threat to domestic prices. Revenue decreased in June 2017 quarter since there
was a marginal decline in global steel prices due to decrease in demand coupled with volatile raw
material prices.

Cash Flow Statement

TSL has good cash flow from operating activities of ₹11,791 crores with a profit of ₹10,004 crores.
Therefore, their earnings quality is good. It used most of its cash to invest in its subsidiaries and

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current investments. It repaid huge amounts of short term borrowings. Their interest payment is
also very high (₹2,769 crores). It also sold its investments in Tata Motors (₹3,778 crore) and raised
a huge amount through rights issue which shows that TSL is trying to increase its cash to expand.

JSW Steel

JSW is the second largest private sector steel company with a capacity of 18 MTPA, growing from
1.6 MTPA capacity in 2002. It has facilities at Vijayanagar, Salem, Dolvi, Vasind, Tarapur and
Kalmeshwar. The Company has announced cumulative capex projects ₹44,415 crores to expand
the Company’s steel-making capacity from 18 MTPA to 24.7 MTPA by FY21 with downstream
facilities and cost savings projects. With rising iron ore and coking coal prices, it has strengthened
its backward integration strategy, acquiring five iron ore mines in Karnataka, of which one became
operational in first quarter of 2018. Its on track to touch 40 MTPA in the next decade.

JSW Steel’s core strengths comprise of superior technology, agile operations, rich product mix,,
excellence in project execution, sustainable sourcing, and consistent focus on employee
engagement. It is a market leader (58% share) in India of value added and special product such as
galvanized steel, color coated steel, etc. It has a global footprint in over 100 countries with presence
across USA, South America and Africa.

Profitability

Profit has increased disproportionately from 2016 to 2017 since the company made a loss in 2016
due to presence of huge exceptional expense.

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Return on Equity

With PAT With Adjusted PAT

DuPont 2017-18 2016-17 2015-16 2017-18 2016-17 2015-16

ROE 17.79% 16.07% -15.64% 17.87% 14.93% 8.92%

ROA 5.56% 4.63% -4.71% 5.58% 4.30% 2.68%

ATO 0.80 0.74 0.54 0.80 0.74 0.54

PM 6.98% 6.29% -8.64% 7.01% 5.84% 4.93%

Leverage 3.20 3.47 3.32 3.20 3.47 3.32

ROE has improved over the years. It increased drastically from 2015 to 2016. If we look at the
adjusted PAT that is excluding exceptional items and other income, the increase in ROE is majorly
due to the increase in ROA. ROA has increased both due to turnover and Profit Margin. Asset
Turnover increased due to increase in both revenue and assets. However, the increase in revenue
is proportionately higher. The reasons for increase in Profit Margin are explained below:

Revenue from Operations

2015-16 to 2016-17

● Revenue from operations has increased 39.29% from 2016 to 2017 in which export revenue
has increased 295%.
● The revenue in 2015-16 was low as China, Japan and Korea had excess production. There was
surplus steel in the market which led to fall in the steel prices. The imports in India also
increased.
● The revenue increased in 2016-17 due to government intervention. Trade measures introduced
by government in 2016 such anti-dumping duties on China, USA, etc. and a floor price for
imports (MIP) was imposed on some steel imports. A normal monsoon after el-nino years,
improving economy leading to demand for automobiles, increased FDI from domestic reforms
stabilized the economy.

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● Demonetization of ₹1000 and ₹500 currency notes led to domestic slowdown which the
company strategically offset by increasing its export sales.
2016-17 to 2017-18

● The revenue increased from 2016-17 to 2017-18 since Global steel prices remained buoyant in
2017 because of falling exports from China as the Chinese government is taking measures to
reduce excess capacities such as closing of inefficient production units and pollution induced
curtailments and increasing investment in infrastructure and construction sectors. The steel
spread, calculated by subtracting iron ore and coking coal prices from the benchmark price
improved throughout the year. This improved steel spread coupled with higher volumes
enabled the steel industry to deliver improved results.
● India’s steel demand growth also improved in the last two quarters of the year post the gradual
normalization of the effects of demonetization and GST. The Indian steel consumption grew
at a healthy 7.9% on the back of government’s push for infrastructure spending and
strengthening consumer demand.
● JSW steel also commenced mining at one of its mines that was acquired as part of mining
auction in Karnataka.
● Operating revenue grew by ₹519 crores y-o-y. The growth in other operating revenue was
primarily due to higher incentive benefits due to exports recognized attributed to upward
revision in incentive rates and increase in regional sales and realizations.
● From 2016 to 2017, the dividend declaration rate also increased from 75% to 225% owing to
better financial performance.
Cost of Goods Sold

● The Company’s expenditure on materials increased in both the years due to upswing in the
prices of coal and iron ore and growth in production.
● Manufacturing and other expenses increased due to increase in power and fuel cost and stores
and spares consumed. Power and fuel cost rose on account of additional power purchases for
increase in production volumes and hike in the rate of steam coal prices over the last year.
Stores and spares consumption increased due to increase in prices of refractories and graphite.
● Manufacturing and other expenses increased by 24% in FY 2016-17. Increased crude steel
production led to higher sales volumes, steeper power cost (32% increase y-o-y, ₹1004 crores)

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 and freight costs. Other manufacturing cost increased mainly consumption of stores and spares
and job-work/processing charges due to an increase in the scale of operations.
● Purchases has also increased 518% from March 2016 to March 2017 but it did not have a
significant impact on the expenses as it formed 1.66% of March 2016.
Exceptional items

● A major outlier in the profit and loss statement is exceptional items. It had a humongous
amount of ₹5860 Cr in 2015-16 primarily owing to problems in its US subsidiaries. In 2015,
excess global demand due to overcapacity in China, Japan, Korea and CIS negatively affected
JSW’s US subsidiaries- JSW Steel Holding (USA) Inc. and its subsidiaries viz. JSW Steel
(USA) Inc – Plate and Pipe Mill Operation and Periama Holdings LLC and its subsidiaries –
West Virginia, USA based Coal Mining Operation.
2015-16

Exceptional items comprise provision ~ ₹6000 crores for the loans given to this company created
towards:-

● ₹3,915 crores categorized as doubtful for recovery of loans given to the said subsidiaries and
interest thereon; ₹982 crores of provisions created for ‘other than temporary’ devaluation of
investments relating to above mentioned subsidiaries;
● ₹905 crores recognized as impairment due to an ongoing antitrust lawsuit, JSW Steel USA
Inc. During FY 2015-16, underutilization rates of 21% and 10% of West Virginia units in US
plate and pipe mills happened due to lack of orders for pipes from oil & gas sector.
● ₹407 crores provision was made towards suspensions of mining activities in subsidiary
Inversiones Eurosh. The development of the Daniel and Catalina mining assets was
discontinued in view of the falling international iron-ore prices.
2017-18

In 2016-17, there was no exceptional items. In 2017-18, its subsidiary surrendered one of its iron
ore mine in Chile and recognised an impairment provision of ₹234 crores.

Loans and advances

Loan and advance on overall basis has increased primarily due to loans and advances provided to
certain overseas subsidiaries to repay the borrowings guaranteed by the Company and other

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business needs of the subsidiaries. A major portion of the loans and advances in 2014-15 went to
JSW Steel Holding(USA) Inc. which they wrote off in 2015-16 claiming it as irrecoverable. They
restructured JSW Steel Holding(USA) Inc. and liquidated it and brought all subsidiaries under one
umbrella organization, Periama Holdings and gave huge loans to the company in 2017 and 2018.
Periama Holdings had a amount outstanding of ₹1551 crores (2017) and ₹3988 crores (2018).

Liquidity

Current assets are less than the current liabilities over the years which raises concerns about the
firm's liquidity. However, the liquidity position has improved over years.

Current Ratio and Quick Ratio:

Ratios 2017-18 2016-17 2015-16

Current Ratio 0.76 0.68 0.62

Quick Ratio 0.21 0.20 0.14

2015-16 to 2016-17

● Current Ratio has increased due to increase in both current assets and current liabilities.
However, the proportion of increase in current assets is more than current liabilities.
● Current liabilities have increased majorly due to the increase in Short-term borrowings by
₹2,805 crores. The company borrowed through commercial paper since it increased its scale
of production.
● The increase in current assets is mainly due to increase in trade receivables, inventories and
other financial assets. The inventory value increased due to higher valuation rate of finished
goods inventory and higher cost of coking coal, refractories and graphite. The increase in trade
receivables was primarily due to higher revenue. In other financial assets, derivative assets
increased from ₹242.84 crore to ₹ 419.98 crores. With increasing exports, in order to manage
its exposure to interest rate, commodity price and foreign exchange rate risks, the Company
entered into a variety of derivative financial instruments.

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2016-17 to 2017-18

● Current Ratio also increased due to increase in Current assets and decrease in Current
Liabilities.
● Short term Borrowing decreased due to decrease in Commercial Paper from ₹4316 to ₹1233
crore due to repayment of loans for working capital facilities. Trade payables increased 21%
due to to increase in creditors and material in transit for raw material due to increased crude
steel production and steep rise in raw material prices.
● Inventories increased due to higher cost of coking coal, refractories and graphite and trade
receivables due to increase in steel prices.
Solvency

Ratios 2017-18 2016-17 2015-16

Debt Equity 1.14 1.38 1.58

Liability Equity 2.07 2.36 2.60

Interest Coverage 3.04 2.41 1.19

● Debt Equity and Liability Equity Ratio have reduced majorly due to the increase in Equity
which is due to the increase in Other equity due to profits.
● Interest Coverage Ratio was very low in 2016 but it improved to 2.4 in 2017 majorly due to
increase in profit.
Quarterly Results- JSW

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The sales in first quarter generally decreases as compared to the last quarter since the company
generally increases its sales in the last quarter to improve its financial performance. This is a
general industry phenomenon in steel business. Another reason for the decrease in revenue in the
first quarter of 2016-17 is the flooding from global steel markets from China, Korea and Japan.
Japanese/Korean exports are at sharp discount to their domestic market prices which reduces the
global steel prices. Imposition of trade remedial measures in US drives clampdown of imports and
rising spreads with Asian prices which reduced the steel market prices.

Cash Flow Statements

It is alarming that a company with a turnover of around ₹66,000 crores has a cash of only ₹451
crores. It paid huge dividend of ₹655 crores in the current year. It must be to send positive signals
in the market and increase their market price. The company had huge operating cash inflow of
₹12,174 crores as compared to their profit of ₹4,625 which indicates that their earnings quality is
good. It used most of its cash to pay off its long term borrowings and purchase of property, plant
and equipment. It also borrowed huge amounts and dealt in a lot of current investments.

Comparative Analysis

Figure 2: Steel Industry share prices in India over the years

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● Capacity of JSW is higher by almost 4 million tonnes to TSL. JSW sells more but earns
similar because their raw material expenses are higher than TSL. Their total expenses are
₹19,000 crores more than TSL although their revenue is only ₹6000 crores more. TSL has
a profit margin (EBIT) of 16.53% which is very high compared to JSW (11.04%).
However, TSL is less efficient than JSW because their employee benefit expense is 4 times
compared to JSW although JSW has higher revenue, thus their profit per ₹ of employee
expenses (0.8635) is less than JSW (3.6706).
● TSL Debt Equity Ratio (0.39) is very low compared to JSW (1.1370) which shows that
TSL is mostly internally financed.
● Looking at the share prices of both the companies, we can see that the share prices show a
similar trend and are moving in the same direction as the steel prices. All three decreased
from 2015 to 2016 and then moved in a upward direction.

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Closing Remarks:
● Tata Steel Limited: The strategy of TSL for immediate future is to increase capacity to
become the largest steel maker in India. They are primarily eying inorganic expansion by
acquiring NPAs in steel manufacturing. They have already sealed the deal on Bhushan
Steel and are garnering money through rights issue and mutual investments to be able to
acquire more. They are also trying to diversify their product portfolio by bidding for new
mineral mines like graphite and spending on R&D for developing products from the same.
● JSW Steel Limited: JSW Steel already has a higher capacity of finished good production
compared to its major competitor (i.e. TSL) and but its pain area is its raw material cost
owing to lack of captive mines. Having acquired 5 mines in Karnataka, only 1 out of which
has been operational by now which signals its increasing tendency to secure its raw
material supply through captive mines. On backdrop of low cash funds, it has declared an
even higher dividend payout in FY 2018 of about 900 crores compared to 600 crores in FY
2017. Thus, they are sending signals of their good performance to the market which is in
line with their cost reduction and expansion plans by 2020. Capacity addition of 1.5 million
tonne Monnet Ispat and Energy acquired through award by insolvency tribunal approved
the Aion Capital-JSW Steel at Rs 3,875 crore including Rs 1,000 crore as equity and
working capital. The closer proximity to Chattisgarh and Odisha mineral belts will also
help in backward integration and enhanced crude steel production.

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