Every countries economic condition depends upon the performance of its Industry. How the investors are interested in it as it will help in the increment in the flow of foreign exchange. A sound and well performing industry will always attract investors as it will give them a return in a less time period. But it is not easy for a layman to understand or to properly analyze the performance of the company. To understand the performance of any company we have to do financial statement analysis. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables.
Ratio analysis helps in inter-firm comparison by providing necessary data. An interfirm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line.
In my study I have tried to make out a clear picture of Bhushan steel ltd. performance in the steel industry with the help of Ratio analysis and Comparative Balance sheet. While doing my interpretation through Ratio analysis I have focused on 5 main areas:
With the help of ratio analysis we measures relationship between resources and financial flows. It show ways in which firm’s situation deviates from
➢ Its own past.
➢ Other firms
➢ The industry
➢ All firms…
There are some other tools through which the investors try to bring out the clear picture of the company so that the investor can easily understand that on which company they should invest their money and the tools are: • Cash flow statement
• Comparative income statement
• Fund flow statement
Table of content
a. Organization information.
2) Literature review
a. Global steel industry.
b. Indian steel industry
3) Research methodology
a. Aims and objective of the study
4) Data analysis and interpretation
a. Ratio analysis.
b. Comparative Balance Sheet
List of table
1. Production capacity17
2. Consumption capacity18
3. EBIDTA / Turnover28
4. Profit before Tax / Turnover29
5. Return on Average Capital Employed.29
6. Return on Average Net Worth31
7. Asset Turnover Ratio32
8. Average Inventory to Turnover33
9. Average Debtor to Turnover34
10. Gross Block to Net Block36
11. Debt to Equity37
12. Current Ratio38
13. Interest Coverage Ratio39
14. Earnings per Share41
15. Dividend payout Ratio42
16. Comparative Balance Sheet43
List of Figure
1. Steel production15
2. Steel capacity16
3. Indian steel capacity19
4. Indian steel production20
5. Indian steel consumption21
6. Return on Average Capital Employed.30
7. Average Inventory to Turnover33
8. Average Debtor to Turnover35
9. Gross Block to Net Block36
10. Debt to Equity37
11. Current Ratio38
12. Interest Coverage Ratio40
a) Organization information
The Bhushan group, owned by the New Delhi-based Singal family was split, following a family dispute. The two Singal brothers, Sanjay Singal and Neeraj Singal have decided to part ways with Neeraj joining hands with their father and chairman of the group Brij Bhushan Singal.
Neeraj and father BB Singal would control Bhushan Steel & Stripes (BSSL), a BSE-listed company, while elder brother Sanjay would get the unlisted group company Bhushan Power and Steel (BPSL).
The split was basically between the father and the elder son, with younger son, Neeraj sided with his father. Sanjay is now the chairman and managing director of BPSL, according to the updated website. The two companies are run independently by separate managements. There is no cross-holding between BPSL and BSSL and there isn`t any sharing of business or assets.
BB Singal, the founder of the group, was initially into the melting business and had units running in Punjab`s Gobindgarh region. Later, he bought small units in Chandigarh, and in early 1970s, set up units to manufacture wire rods in Chandigarh.
Industry insiders say once elder son Sanjay joined his father, the businesses grew faster. The company upgraded its operations in Chandigarh and even stepped out of its home turf to expand business and started plants at Sahibabad, an industrial area near Delhi, Kolkata, Nepal and Khopoli in Maharashtra.
Though the family agreed to the split, the bone of contention was on the valuation. Bhushan Power and Steel (BPSL) constituted just about 25% of the group`s turnover till a couple of years ago. But the split was supposed to divide the business equally between the two brothers. Therefore, the elder son is unhappy. Plants of the listed company BSSL, including in Sahibabad and Khopoli, are much bigger than BPSL`s units in Chandigarh, Kolkata and Nepal. The scenario has, however, changed in the recent past. Though its turnover is not in the public domain, BPSL has been growing faster than the mother company. Sanjay Singal has been the hands-on professional in the family. So it’s natural that BPSL is growing fast. The first phase of BPSL`s project in Orissa is generating cash flow and the entire project was commissioned in the year 2007. On the other hand, BSSL`s project will come up only by 2009.
Today BPSLs share in the group`s turnover has increased to almost 40%.
Amongst the various reasons behind BSL’s unprecedented growth and rapid integration on the steel value chain, perhaps, the most important would be its unwavering focus on acquiring the latest technology and know-how. The most important reason behind this focus has been BSL’s commitment to provide its customers with the best quality products. The result, to say the least, has been awe-inspiring growth.
The Khopoli plant, commissioned in 2004 has been playing a remarkable role not only in the growth of exports, but in the production of a much wider variety of value added steel like Colour Coated Sheets, High Tensile Steel Strapping’s, Hardened and Tempered Strips and Precision Tubes. In addition to these, the Khopoli plant has recently launched the Galume value added steel (Aluminum & Zinc Coated Sheet) for the first time in the country.
Operating with the most advanced technology, expressed through a large fleet of latest equipment, machinery and systems, the Khopoli plant has given a tremendous boost of 425000 MT per annum to BSL’s total production capacity Including 240000 MT of galvanized steel, which are further forward integrated into Colour Coated Sheet, Galume and other value added products Giving a tremendous volume-thrust to the production capacity of BSL is its plant at Sahibabad, with a production of 475,000 MT per annum comprising products such as Automotive Grade C R Sheet and Galvanised Sheets.
As a strategic move to optimise the usage of resources and services, as well as to streamline the functioning of all systems and process within the organisation, BSL has recently implemented SAP (the global leader in Enterprise Resource Planning Systems). After all, with sales touching Rs. 3070 crores and installed capacity in the one million tonnes per annum range, BSL is now India’s 3rd largest Secondary Steel Producer after SAIL and TISCO. BSL has the distinction of being the only producer In India of the widest width CR Sheet, besides being a preferred supplier of automotive grade steel sheets for inner and outer panels to all leading 4-wheeler and 2-wheeler manufacturers in the country.
The most brilliant milestone in BSL’s journey of excellence is the setting up of a state-of-the-art Hot Rolling Steel & Power Plant in Orissa. This Integrated Steel and Power Plant will, no doubt, put BSL firmly on the fast track of progress. Bhushan Steel Limited, is an ISO 9002, QS 9000 certified and a company of Rs. 2868 crores ($650 million approx.).
As one of the prime movers of the Technological Revolution in the Indian Cold Rolled Steel Industry, BSL has emerged as the countries largest and the only CR steel plant with an independent line for manufacturing Cold Rolled coils and sheets up to a width of 1700 mm, as well as Galvanized Steel Coils & Sheets up to width of 1350mm.
Bhushan Steel Limited engages in the manufacture and sale of specialized steel for automobile and white goods appliances in India. The company’s products include cold rolled steel coils and sheets, galvanized plane coils and sheets, color coated coils and tiles, drawn tubes of OEM grade, hardened and tempered strips, high tensile steel stripping, wire rods and alloy billets, and sponge iron. It also exports its products to Europe, USA, Canada, Africa, China, and the Middle East. The company, formerly known as Bhushan Steel & Strips Limited, is based in New Delhi, India.
2. Literature Review
A. THE GLOBAL STEEL INDUSTRY
The current global steel industry is in its best position in comparing to last decades. The price has been rising continuously. The demand expectations for steel products are rapidly growing for coming years. The shares of steel industries are also in a high pace. The steel industry is enjoying its 6th consecutive years of growth in supply and demand. And there is many more merger and acquisitions which overall buoyed the industry and showed some good results.
The subprime crisis has lead to the recession in economy of different Countries, which may lead to have a negative effect on whole steel industry in coming years. However steel production and consumption will be supported by continuous economic growth.
CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY
The countries like China, Japan, India and South Korea are in the top of the above in steel production in Asian countries. China accounts for one third of total production i.e. 419m ton, Japan accounts for 9% i.e. 118m ton, India accounts for 53m ton and South Korea is accounted for 49m ton, which all totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole growth. The steel industry has been witnessing robust growth in both domestic as well as international markets. In this article, let us have a look at how has the steel industry performed globally in 2007.
Capacity: The global crude steel production capacity has grown by around 7% to 1.6 bn in 2007 from 1.5 bn tonnes in 2006. The capacity has shown a growth rate of 7% CAGR since 2003. The additions to capacity over last few years have ranged from 36 m tonnes in 2004 to 108 m tonnes in 2007. Asian region accounts for more than 60% of the total production capacity of world, backed mainly by capacity in China, Japan, India, Russia and South Korea. These nations are among the top steel producers in the world.
Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increase of 7.5% as compared to 2006 levels. The global steel production showed a growth of 8% CAGR between 2003 and 2007. China accounts for around 36% of world crude steel production followed by Japan (9%), US (7%), Russia (5%) and India (4%). In 2007, all the top five steel producingcountries have showed an increase in production except US, which showed a decline.
|Rank |Country |Production (mn tonnes) |World share (%) | |1 |China |489 |36.0% | |2 |Japan |120 |9.0% | |3 |US |98 |7.0% | |4 |Russia |72 |5.0% | |5 |India |53 |4.0% | |6 |South Korea |51 |3.5% |
Source: JSW Steel AR FY08 Table-1
Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as compared to 2006 levels. The global finished steel consumption showed a growth of 8% CAGR, in line with the production, between the period 2003 and 2007. The finished steel consumption in China and India grew by 13% and 11% respectively in 2007. The BRIC countries were the major demand drivers for steel consumption, accounting for nearly 80% of incremental steel consumption in 2007.
|Rank |Country |Consumption (mn tonnes) |World share (%) | |1 |China |408 |36.0% | |2 |US |108 |9.0% | |3 |Japan |80 |6.7% | |4 |South Korea |55 |4.6% | |5 |India |51 |4.2% | |6 |Russia |40 |3.3% |
Source: JSW Steel AR FY08 Table-2
Outlook: As per IISI estimates, the finished steel consumption in world is expected to reach a level of 1.75 bn tonnes by 2016, growth of 4% CAGR over the consumption level of 2007. The steel consumption in 2008 and 2009 is estimated to grow above 6%
B. Indian Steel Industry
India, which has emerged among the top five steel producing and consuming countries over the last few years, backed by strong growth in its economy. Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robust growth of 8% CAGR between the period FY04 and FY08. The capacity expansion in the country was primarily through brown field expansions as it requires lower investments than a greenfield expansion.
Production: Steel production has registered a growth of 6% to reach a level of 54 m tonnes in FY8. The production has grown nearly in line with the capacity expansion and registered a growth of 7% CAGR with an average capacity utilization of 92% between the period FY04 and FY08. India is currently the fifth largest producer of steel in the world, contributing almost 4% of the total steel production in world. The top three steel producing companies (SAIL, Tata Steel and JSW Steel) contributed around 45% of the total steel production in FY08.
Consumption: Steel consumption has increased by 10% to 51.5 m tonnes in FY08. Consumption growth has been exceeding production growth since past few years. It grew at a CAGR of 12% between FY04 and FY08. Construction & infrastructure, manufacturing and automobile sectors accounted for 59%, 13% and 11% for the total consumption of steel respectively in FY08. Although steel consumption is rapidly growing in the country, the per capita steel consumption still stands at 48 kgs. Moreover, in the rural areas in the country, it stands at a mere 2 kg. It should be noted that the world’s average per capita steel consumption was 189 kg and while that of China was 309 kg in 2007.
Trade equations: India became net importer of steel in FY08 with estimated net imports of 1.9 m tonnes. In the past few years, its exports have remained at more or less the same levels while on the other hand, imports have increased on the back of robust demand and capacity constraints in the domestic markets. The imports showed a growth of around 48% while exports declined by around 6% in FY08.
Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a rate of 9% and 12% in 2008 and 2009. The medium term outlook for steel consumption remains extremely bullish and is estimated at an average of above 10% in the next few years.
3. Research Methodology
a. Aims and Objective of the Study
➢ Gain an in-depth knowledge about various corporate valuation techniques.
➢ Standardize financial information for comparisons
➢ Evaluate current operations
➢ Study the efficiency of operations
➢ To know the future prospect of business.
➢ To determine if there has been an improvement or deterioration or no change over time.
➢ To get an overview on steel producing company.
➢ To know how ratio analysis helps an analyst to make an informed business or investment decision.
➢ Study the risk of operations
The whole project is carried out under the supervision of Mr. A.paul(AGM finance). In bhushan steel ltd. Sahibabad plant. He has provided us the Annual report of Bhushan steel Ltd. of the two financial year. My project is based on secondary data. And I have collected this data from different websites. All the quantitative work of secondary data collected by me had been carried on MS Excel. Because of the user-friendly and reliability it was good to use.
Classification according to different economic aspects of firm’s operation
In this project on the basis of the following Ratios I have tried my level
best analysis the current financial position of Bhushan steel with its competitors:
1) EBIDTA / Turnover
2) PBT / Turnover
3) Return on Average Capital Employed.
4) Return on Average Net Worth
5) Asset Turnover Ratio
6) Average Inventory to Turnover
7) Average Debtor to Turnover
8) Gross Block to Net Block
9) Debt to Equity
10) Current Ratio
11) Interest Coverage Ratio
12) Net Worth per share
13) Earnings per share
14) Dividend payout Ratio
15) P / E Ratio.
➢ EBIDTA / Turnover
|Year |Bhushan steel |Steelco gujrat |Lloyds steel |Penar steel |Ruchy strips | |2005 |16.50% |7.03% |17.21% |6.59% |3.06% | |2006 |14.72% |6.9% |6.04% |11.4% |2.31% | |2007 |16.83% |5.2% |5.4% |11.18% |2.75% | |2008 |19.54% |5.56% |5.3% |12.27% |3.3% |
Earnings before Interest, Tax, Depreciation and Amortization
EBITDA tells an investor how much money a company would have made if it didn’t have to pay interest on its debt, taxes, or take depreciation and amortization charges. For the last 4 financial years the company is trying to maintain an average of 16.90% percentage however it will not be the best to interpret its efficiency as the result affected are due to the change in certain circumstances. So the average maintained by the competitors is the best option. And the average maintain by them is 9.19% which is too low of what Bhushan steel ltd. is now maintaining. The above ratio is calculated before interest, depreciation, and tax however it is not true as all the company has to pay off all these liability. The ratio indicates the extent of sales revenue available for interest, tax, and dividend payments. As a company like to maintain a high EBIDTA / Turnover ratio. It is good sign of performance to bhushan steel ltd. as it has the highest ratio from its competitor.
➢ Profit before Tax / Turnover
|Year |Bhushan steel |Steelco gujrat |Lloyds steel |Penar steel |Ruchy strips | |2005 |5.82 |1.54 |8.53 |-1.96 |0.95 | |2006 |5.86 |0.49 |-4.13 |7.45 |0.072 | |2007 |9.39
|-2.62 |-3.55 |5.64 |0.16 | |2008 |12.27 |-2.9 |-2.21 |7 |0.28 |
Profit before tax shows a picture of estimated profit that the company will get after paying a considerable amount of tax. Tax is a burden which has to be paid by the company. From the above table it can be ascertained that the profit before tax/turnover earned by the Bhushan steel ltd. is much better than its competitor. Other than the bhushan steel the other two companies are earning in negative and the remaining two are earning a very low amount.
➢ Return on Average Capital Employed.
|Year |Bhushan steel |Steelco gujrat |Lloyds steel |Penar steel |Ruchy strips | |2008 |14.5136822 |9.705657717 |0.27254865 |20.66017732 |17.6097195 |
ROCE: EBIT / Average Capital Employed
As currently defined, the return on capital employed (ROCE) is a measure of efficiency of management in the application or use of the organization’s funds or resources in a given financial period. It is measured by comparing the profits made by the firm with the capital used in making the profit and set as a percentage or fraction. It indicates how much return the company is earning on the resources deployed in the firm. It is a barometer of overall performance of the firm. To judge the adequacy of return on investment, it should be compared with the industry average. And here the average is 12.55%.
The percentage maintained by Bhushan steel is 14.51% which is above of the industry average.
As the ratio maintained by the firm is above of the average maintained by the industry so the investor can easily take the management into confidence. And the prospective investor will not feel shy in investing his/her money in the business.
Return on capital employed ratio is actually the multiple of net profit margin and capital turnover ratio.
Therefore it can be said that bhushan steel can still improve it ROCE by increasing it net profit margin which can be achieved by increasing its selling price or by reducing is cost or by both.
➢ Return on Average Net Worth
|Year |Bhushan steel |
|2007 |72.23 |
|2008 |48.53 |
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as “return on investment”.
ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company’s previous ROA Number or the numbers of a similar company.
The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.
As it is was limitation to get the data of investment income of other company I have to do the analysis of bhushan steel ltd. with its previous year. In the financial year 2007-2008 the ratio in which fixed asset loans and advances has increased is more than the increment in net sale and the income from export has also declined known as other income due to the percentage of return on Asset has declined from 72% to 48%.
➢ Average Inventory to Turnover
|Year |Bhushan steel |Steelco gujrat |Lloyds steel |Penar steel |Ruchy strips | |2008 |20.18% |11.08% |9.90% |9.38% |15.53% |
Inventory turnover ratio throws a light at the degree of efficiency in inventory management. A high inventory turnover ratio is the indicator of sound inventory management. A low inventory turnover ratio implies excessive inventory levels than warranted by volume of operation. It may also result from slow moving and obsolete stock. A high level of idle or obsolete inventory means blockage or loss of capital. This will cause high interest and other carrying cost. The ultimate impact is impairment profitability. So higher inventory turnover ratio is always preferable.
In the above ratio Bhushan steel is standing ahead of the competitors having a strong ratio of 20%.
However, a very high inventory turnover ratio should be examined very cautiously. A high inventory turnover may be maintained due to maintaining an inadequate level of inventory which may cause from stock out and disruption of production and sales. But in this respect also Bhusan steel is standing good as its inventory has got increased by Rs.373.29 cr.
➢ Average Debtor to Turnover
|Year |Bhushan steel |Steelco gujrat |Lloyds steel |Penar steel |Ruchy strips | |2008 |12.37% |9.00% |5.00% |12.48% |16.59% |
When a firm sells goods on credit, book debt is created. The book debt should be realized shortly because as long it is not realise, firm’s fund remains blocked outside the business. The firm is unable to utilize the same in meeting its short term obligations like payment to suppliers, employees etc. so firm’s liquidity i.e. the degree of ability to meet short term obligation is related, among other factors, to quality of debtors.
A higher debtor’s turnover ratio means shorter average collection period. It indicates efficiency in collection of debt. Debtors are not allowed to linger their payment. On the other hand, if the debtor’s turnover ratio is low, it will mean longer average collection period. Longer collection period indicates inefficiency in collection of debt. Apart from impairing the liquidity of firm, it may result in bad debt which will erode profit.
In the above scenario the average debtor turnover of the competitors of bhushan steel is 11.09%. Where bhushan steel is maintaing ratio of 12.37% higher than the standard ratio. But it’s two other competitor Penar steel and Ruchy strips are once again having a better ratio of 12.48% and 16.59%. Other thing which may be result of maintaing the ratio just above the standard is the credit policy of bhushan steel. As the policies vary from company to company depending upon their deals with their respective customer.