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JSW Steel Equity Research

HomeCompanyJSW Steel Equity Research

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.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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