Date of Research – 19 January 2016
Price – Rs. 993.90
About the Company
JSW Steel Limited (“JSW Steel” or the “Company”), the flagship company of the JSW Group, is an integrated steel manufacturer. It is the largest private sector steel manufacturer in India in terms of installed capacity and one of the lowest cost steel producers in the world. JSW Steel offers an 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. By 2020, the Company aims to produce 34 million tonnes of steel annually with Greenfield integrated steel plants coming up in West Bengal and Jharkhand.
The Company has established a strong presence in the global value-added steel segment with the acquisition of a steel mill in USA. Additionally, JSW Steel has entered into a joint venture for setting up a steel plant in Georgia and has tied up with JFE Steel Corp, Japan for manufacturing high grade automotive steel.
Key Financial Figures
| Consolidated | (Rs. Cr) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| Total Income from Operations | 38,209.65 | 51,219.62 | 52,971.51 | 41,878.88 | 60,536.25 |
| Expenses | 31,705.73 | 42,054.16 | 43,569.22 | 35,805.89 | 48,362.03 |
| Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) | 6,503.92 | 9,165.46 | 9,402.29 | 6,072.99 | 12,174.22 |
| Depreciation | 2,237.48 | 3,182.61 | 3,434.49 | 3,187.92 | 3,429.87 |
| Finance Costs | 1,967.46 | 3,047.86 | 3,493.03 | 3,302.68 | 3,768.12 |
| Other income | 69.73 | 85.81 | 111.44 | 168.21 | 152.13 |
| Exceptional items | 369.37 | 1,712.75 | 47.10 | 2,125.41 | – |
| PBT | 1,999.34 | 1,308.05 | 2,539.11 | (2,374.81) | 5,128.36 |
| Tax | 845.25 | 920.08 | 819.41 | (1,524.05) | 1,674.31 |
| PAT (before Minority Interest and share of Associates) | 1,154.09 | 387.97 | 1,719.70 | (850.76) | 3,454.05 |
| Profit/ (loss) attributable to Minority Interest | (34.34) | (50.44) | (74.77) | (95.03) | – |
| Share of profit / (loss) of Associates | 225.32 | (13.54) | (2.10) | (13.78) | (22.10) |
| Consolidated Profit / (Loss) for the year | 963.11 | 451.95 | 1,796.57 | (741.95) | 3,476.15 |
Profitability Analysis
| Consolidated | (%) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| Operating Profit Margin Ratio | 17.02 | 17.89 | 17.75 | 14.50 | 20.11 |
| Net Profit Margin Ratio | 3.02 | 0.76 | 3.25 | (2.03) | 5.71 |
Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.
Key Balance Sheet Figures
| Sources of Funds / Liabilities | (Rs. Cr) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| Share Capital | 563.18 | 563.18 | 1,067.19 | 1,067.19 | 1,067.19 |
| Money received against warrants | – | – | – | – | – |
| Reserves & Surplus | 16,186.39 | 16,780.55 | 20,871.15 | 21,986.89 | 20,576.71 |
| Net worth (shareholders funds) | 16,749.57 | 17,343.73 | 21,938.34 | 23,054.08 | 21,643.90 |
| Minority Interest | 217.67 | 197.16 | 167.01 | 97.64 | 6.78 |
| Long term borrowings | 12,889.12 | 17,393.16 | 26,702.62 | 33,676.63 | 32,793.22 |
| Current liabilities | 20,824.73 | 18,665.12 | 25,738.90 | 25,254.86 | 25,642.92 |
| Other long term liabilities and provisions | 507.24 | 641.61 | 969.60 | 681.24 | 787.60 |
| Deferred Tax Liabilities | 3,041.19 | 3,487.20 | 2,123.42 | 3,154.71 | 1,420.17 |
| Total Liabilities | 54,229.52 | 57,727.98 | 77,639.89 | 85,919.16 | 82,294.59 |
| Application of Funds / Assets | (Rs. Cr) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| Fixed Assets | 35,399.79 | 39,300.35 | 54,883.83 | 58,856.19 | 59,802.14 |
| Noncurrent Investments | 1,885.60 | 1,606.44 | 594.73 | 598.95 | 618.43 |
| Current assets | 12,766.71 | 11,933.64 | 15,450.27 | 18,817.31 | 15,041.76 |
| Long term advances and other noncurrent assets | 2,617.23 | 3,358.03 | 5,149.20 | 5,796.07 | 5,600.90 |
| Deferred Tax Assets | 316.21 | 215.20 | – | 265.28 | 274.86 |
| Goodwill on consolidation (net) | 1,243.98 | 1,314.32 | 1,561.86 | 1,585.36 | 956.50 |
| Total assets | 54,229.52 | 57,727.98 | 77,639.89 | 85,919.16 | 82,294.59 |
Efficiency Analysis
| Particulars | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| ROCE | 20.44 | 18.62 | 18.78 | 16.55 | 11.15 |
| ROE / RONW | 3.21 | 5.55 | 2.06 | 7.79 | (3.93) |
Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.
Valuation Analysis
| Consolidated | |||||
|---|---|---|---|---|---|
| Particulars | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| Total Income from Operations (Rs. Cr.) | 38,209.65 | 51,219.62 | 52,971.51 | 41,878.88 | 60,536.25 |
| Growth (%) | 11.18 % | 34.05 % | 3.42 % | (20.94 %) | 44.55 % |
| PAT (Rs. Cr.) | 1,154.09 | 387.97 | 1,719.70 | (850.76) | 3,454.05 |
| Growth (%) | (22.71 %) | (66.38 %) | 343.26 % | (149.47 %) | 506.00% |
| Earnings Per Share – Basic (Rs. ) | 41.71 | 17.35 | 72.93 | (32.08) | 14.66 |
| Earning Per Share – Diluted (Rs. ) | 41.71 | 17.35 | 72.93 | (32.08) | 14.58 |
| Price to Earnings | 16.08 | 69.75 | 12.00 | – | 13.52 |
Dividend History
The Company has maintained an average dividend yield of 1.29 % over the last 5 financial years.
Liquidity and Credit Analysis
Current Ratio
Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. JSW Steel’s average current ratio over the last 5 financial years has been 0.64 times which indicates that the Company may face liquidity constraint to pay for its short term obligations.
Long Term Debt to Equity Ratio
Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.
JSW Steel’s average long term debt to equity ratio over the last 5 financial years has been 1.02 times which indicates that the Company operates with high level of debt and can face difficulty to withstand economic slowdowns.
Interest Coverage ratio
Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.
JSW Steel’s average interest coverage ratio over the last 5 financial years has been 3.69 times which indicates that the Company might be able to meet its debt obligations without any difficulty.
Ownership pattern
In its latest stock exchange filing dated 31 March 2017, JSW Steel reported a promoter holding of 41.62 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.
At the same time, institutional holding in the Company stood at 22.34 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.