PROJECT REPORT

ON

FINANCIAL ANALYSIS

OF

JINDAL STEEL AND POWER LIMITED

BY

ANKIT MANOCHA

ANKITA AGARWAL

ANSHUM KUNDRA

ANUJA SAXENA

ARPIT AGARWAL

EXECUTIVE SUMMARY

As part of the Corporate Finance course, we are submitting the enclosed report on Financial Analysis of JSPL. The purpose of this report is to provide Financial Analysis of JSPL. The report provides the financial status. Additionally, the report describes the importance of reputation management in an organization and how it can be implemented through effective corporate communication.

TABLE OF CONTENTS

COMPANY PROFILE CORPORATE GOVERNANCE STOCK HOLDER ANALYSIS COST OF CAPITAL INVESTMENT RETURN ANAYSIS CAPITAL STRUCTURE DIVIDEND POLICY

COMPANY PROFILE

Jindal Steel and Power Limited (JSPL) is the most valuable private steel producer in India, with an annual turnover of over US $2.1 billion (Rs. 10,000 crore), Jindal Steel & Power Limited (JSPL) forms a part of the US $12 billion (over Rs. 60,000 crore) Jindal Group. JSPL is a leading player in Steel, Power, Mining, Oil & Gas and Infrastructure. Mr. Naveen Jindal, the youngest son of the late Shri. O P Jindal, drives JSPL and its group companies Jindal Power Ltd, Jindal Petroleum Ltd., Jindal Cement Ltd. and Jindal Steel Bolivia. The company professes a belief in the concept of self-sufficiency. The company produces steel and power through backward integration from its own captive coal and iron-ore mines.

However, in terms of tonnage, it is the third largest steel producer in India. The company manufactures and sells sponge iron, mild steel slabs, ferro chrome, iron ore, mild steel, structural, hot rolled plates and coils and coal based sponge iron plant. The company is also involved in power generation.

Jindal Steel and Power is a part of the Jindal Group, founded by O. P. Jindal (1930–2005). In 1969, he started Pipe Unit Jindal India Limited, one of the earlier incarnations of his business empire. After Jindal's death in 2005, much of his assets were transferred to his wife, Savitri Jindal. Jindal Group's management was then split among his four sons with Naveen Jindal as the Managing Director of Jindal Steel and Power Limited. His elder brother, Sajjan Jindal, is currently the head of ASSOCHAM, an influential body of the chambers of commerce, and the head of JSW Group, part of O.P. Jindal Group.

On June 3, 2006, Bolivia granted development rights for one of the world's largest iron ore reserves in the El Mutún region to Jindal Steel. With an initial investment of US$ 1.5 billion, the company plans to invest an additional US$ 2.1 billion over the next eight years in the South American country.

CORPORATE GOVERNANCE

JSPL’s corporate governance philosophy is based on the principles of equity, fairness, transparency, spirit of law and honest communication. The Company believes that sound corporate governance is necessary to retain stakeholders’ trust and ensures efficient working and proper conduct of the business of the company with integrity. Development of Corporate Governance guidelines is a continuous process, which evolves over a period of time and undergoes changes to suit the changing times and needs of the business, society and the nation.

Board of Directors

The Board of Directors is at the core of corporate governance practice and oversees how the Management serves and protects the long-term interests of all stakeholders. The Board members are experienced, knowledgeable and professionally competent and represent various fields of business activities, such as management, commerce, finance, banking, technical, legal etc.

Committees

The Board of Directors has formed various committees such as Audit Committee, Shareholders’/ investors’ Grievance Committee, Sub Committee of Directors, Compensation Committee and Committee of Directors (Limited Review) and necessary powers have been delegated to these committees for efficiently managing the affairs of the Company.

Communication

Information like financial results (quarterly, half-yearly or annual) and press releases on significant developments in the Company that has been available from time to time, to the press is hosted on the Company’s website and also submitted to the stock exchanges to enable them to put them on their websites and communicate to their members. The financial results are published in various English and vernacular newspapers.  Details of management discussion and analysis are printed in the annual report. The company electronically files specific documents and statements on the corpfiling website.

Codes of Conduct

The code of conduct has been laid down by the Board with a view to promote good corporate governance and exemplary personal conduct. It is applicable to all directors and senior managerial personnel of the company. The Board of Directors has also approved a Code of internal procedures and conduct for prevention of insider trading in the shares of the company and Code of corporate disclosure practices for prevention of insider trading. These are available on the Company’s website. As a part of its commitment to follow best practices and good corporate governance, JSPL abides by rules and guidelines as laid down by the Security and Exchange Board of India (SEBI). Conforming to these guidelines, and enthused by its own urge to be looked upon as a free, fair and trustworthy organisation, the Company always ensures that all its business and social accomplishments are achieved with integrity.

STOCK HOLDER ANALYSIS

JSPL has 93.12 crores equity shares of Re. 1 each fully paid up on 31st March 2010. The following is the shareholding pattern:

Category No. of Shares % of HoldingPromoters 54,56,56,592 58.59FIs/ Banks/MF/UTI/ Insurance 2,63,87,951 2.83Corporate Bodies 4,39,90,130 4.72NRIs/OCBs/FII/ Trust 22,96,44,278 24.66Public 8,55,55,131 9.19Total 93,12,34,082 100.00

Shareholding Pattern

Promoters

FIs/ Banks/MF/UTI/ Insurance

Corporate Bodies

NRIs/OCBs/FII/ Trust

Public

1. JSPL plans to raise INR70 Billion through the initial public offering (IPO) of its wholly owned power unit in six months' time (reported on 30 Nov 2010) to fund an ambitious capacity expansion program. 

This will result in increase of capital base of equity shares of the company. But the voting rights of existing shareholders will dilute towards new shareholders drastically.

2. On July 29th 2009, JSPL issued five fully paid bonus shares of Re 1/- each for every one existing equity share of Re 1/- each held by the Shareholders of the Company as on Record Date to be fixed later for this purpose.

Here, the voting rights of the existing shareholders did not get diluted and the equity base of the company increased. But EPS decreased heavily from Rs.194.63 in 2008-09 to Rs.39.04 in 2009-10.

COST OF CAPITAL

The minimum rate of return that a firm must earn in order to satisfy the expectations of its investors is called the cost of capital of the firm. The expected rate of return depends upon the risk characteristics of the firm, risk perception of the investors and a host of other factors.

COST OF DEBT

The cost of debt measures the current cost to the firm of borrowing funds to finance the projects. It is determined by the interest rates, default risk of the firm and tax advantages associated with the debt. Considering these factors, the cost of debt of JSPL is calculated as follows:

DEBT INSTRUMENT

FACE VALUE COUPON RATE COST OF DEBT

(AFTER TAX)

Non Convertible Debentures

Rs.1562 crores 9.80% 6.468%

Non Convertible Debentures

Rs.100 crores 8.50% 5.61%

Non Convertible Debentures

Rs.100 crores 6.75% 4.45%

Banks and Others

Rs.3,300 crores 8.5% 5.61%

1. The debentures are issued and they are redeemable at par value. Their market price is assumed to be par value. Thus cost of debt, here, is affected only by the tax rate.

2. The bank loan is not traded. Thus it is affected by only tax rate.3. The effective tax rate is 33.99%.

COST OF EQUITY

The holders of equity shares are the residual owners of the firm and provide long term funds expecting to be rewarded with an increase in the economic value of the share. This value comprises growing earnings, growing dividends and the market value of the share. Also, the cost of retained earnings (reserves and surpluses) is considered as the opportunity cost of the foregone dividends. Thus the cost of retained earnings is often equal to the cost of share capital, if the latter does not include floatation cost. Cost of Equity of JSPL is as Follows:

Share Capital Rs.93.12 croresReserves and Surplus Rs.6,630.54 croresTotal Rs.6723.66 crores

The growth rate(g) is taken as 15%.

Dividend declared on 31st march2010 (D0) – Rs.1.25 per share

Market Price of each share on 31st March 2010(P0) - Rs.703.10

D1 = D0(1+g)

D1 = 1.25(1+15%) = 1.4375

Ke (cost of equity) = (D1 ÷ P0) + g

Ke = 15.21%

Here, the cost of equity majorly depends upon the growth rate the shareholders expect in their dividends. JSPL has favorable outlook in 2011 and has performed well in its quarterly results. It has shown 15% growth in its net profits. So the growth rate is assumed to be 15%.

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

WACC is the overall cost of capital of the firm. It is the minimum required rate of return on the assets of the firm, based on the relative proportion of different sources in the capital structure of the firm.

Based upon the above assumptions and calculations following is the WACC:

SOURCE AMOUNT (in Rs.) crores

WEIGHT(W) COST(C) W*C

Equity 6723.66 0.57 15.21% 8.67%Non Convertible Debentures

1562 0.1326 9.80% 1.29%

Non Convertible Debentures

100 0.0087 8.50% 0.07%

Non Convertible Debentures

100 0.0087 6.75% 0.058%

Banks and Others

3,300 0.28 8.5% 2.38%

TOTAL 11785.66 1 12.468%

INVESTMENT RETURN ANALYSIS

Risk

Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative. However, general usage tends to focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost ("downside risk") or by failing to attain some benefit ("upside risk"). One way of quantifying risk is to express the expected rate as comprising the riskless rate(IRF) plus the compensation(α) for risk bearing by the investor.

R = IRF + α

R = 5.5% + 5% = 10.5%

Return

In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. ROI is usually expressed as a percentage rather than a fraction. This is expressed as the % of the profit before interest and taxes (PBIT) to the Total Assets (Loans and Owner’s Fund) in the business.

ROI = PBT\Total Asset

ROI = 1907.50\11785.66 = 16.18%

Beta

In finance, the beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index.

β = covariance(Rj,Rm)/ variance(Rm)

= 0.000142 / 0.000122 = 1.16

CAPITAL STRUCTURE

The two principal sources of finance for a business firm are debt and equity. The key issue is that what should be the proportion of debt and equity in the capital structure.

JSPL plans to go for IPO of Rs.7000 crores in few months. The existing scenario is:

2009-10 figures

EBIT 4922.6INTEREST 192.47EFFECTIVE TAX RATE

28.91%

EPS 39NO. OF SHARES (N) 93.21 crores

EPS = (EBIT – I)(1-t) ÷ N

EPS= 39

If the company goes for IPO the change in EPS will be as follows:

EPS = (4922.6 – 192.47)(1 - 0.2891) ÷ 7093.21

EPS = 0.474

Thus the company needs to increase its EBIT also to increase EPS.

Leverage Ratio/Capital Structure Ratio

The long term creditors are interested in knowing the soundness of the firm on the basis of long term strength measured in the terms of its ability to pay the interest regularly as well as repay the installment of the their principal on due date or in lump-sum at the time of maturity. It can be examined by leverage ratio. There are different types of leverage ratio.

• Debt-Equity Ratio• Interest Coverage Ratio• Capital employed to Net Worth

Debt-Equity Ratio

It shows the relationship between borrowed fund and owner’s equity in measuring long term financial solvency of the firm. It reflects the relative claim of the creditors and shareholder against the asset of the firm.

Alternatively, it also indicates the relative proportion of the debt and equity in the financing the asset of the firm. It has been found that JSPL has increased its debt in debt/equity in financingthe asset of the firm. Due to its good earning capacity JSPL is able to raise its debt compare to equity. D/E Ratio = Debt / Equity

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10Debt Equity Ratio

1.49 1.40 1.03 0.92 1.24

Interest Coverage Ratio

This ratio measures the debt servicing capacity of the firm insofar as fixed interest on long-term long is concerned. As the name suggest, it show how many times the interest charged are covered by EBIT out of which they will be paid.The ratio of 8.20 times is high and hence the company has very sound financial position. It has no tension of paying interests over its loans as it creates much more wealth from the debts than the interest to be paid. It has increased13 .8 % since last year. Interest coverage Ratio= EBIT/Interest

Debt Coverage Ratios Mar '06 Mar '07 Mar '08 Mar '09Interest Cover 8.87 6.97 8.45 10.33Financial Charges Coverage Ratio

9.80 8.35 9.68 10.59

Financial Charges Coverage Ratio Post Tax

8.34 7.00 7.95 8.35

Capital Employed to Net Worth Ratio

There is yet another alternative way of expressing the basic relationship between debt and equity. One may want to now: How much funds are being contributed together by lenders and owners for each rupee of the owners contribution? The ratio of 2.03 times Shows that the total net worth of the company is approximate half of the total investment made by the company’s promoters and hence the company has very sound financial position. We can also derive that the promoters finance around 50% of the total net worth of the company. C\N Ratio = Capital Employed/Net Worth

Mar '06 Mar '07 Mar '08 Mar '09Total Debt to Owners Fund

1.49 1.40 1.03 0.92

DIVIDEND POLICY

The dividend policy of a firm determines what proportion of earnings is paid to shareholders by way of dividends and what proportion is ploughed back in the firm for reinvestment purpose.

PAYOUT RATIO

The company has high retention ratio rather than high payout ratio because it requires more funds for expansionary projects. JSPL is entering into various joint ventures, and taking over companies to expand its presence. It has substantial investment opportunities and it is conserving its resources for growth. Thus it retention ratio has been increasing and payout ratio has been decreasing.

Mar '06 Mar '07 Mar '08 Mar '09Dividend Payout Ratio Net Profit

9.19 9.14 5.86 5.55

Earning Retention Ratio

90.87 90.74 94.79 94.90

STABILITY

The company does not provide fixed dividends due to fluctuations in its earnings. Thus there are fluctuations in the year-to-year dividends. The company is showing decreasing trend in the amount of dividend paid to shareholders.

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10Dividend Per Share

15.00 18.00 4.00 5.501.25

Mar'06 Mar'07 Mar'08 Mar'09 Mar'100

5

10

15

20

DIVIDEND PER SHARE

DIVIDEND PER SHARE