Fsapm Assignment

8/6/2019 Fsapm Assignment

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FSAPM ASSIGNMENTANALYSIS REPORT ON JINDAL STEEL & POWER LTD.

ANKITA DAS(FINANCE-A)

3/3/2011

SUBMITTED TO

DR. P. JANAKI RAMADDU

REGN. NO.10SBCM0376

ALLIANCE BUSINESS SCHOOL


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ACKNOWLEDGEMENT

Apart from my own effort, the success of this project depends largely on the

encouragement and guidelines of my Professor. I take this opportunity to express

my gratitude to the people who have been instrumental in the successful

completion of this report.

I would like to show my greatest appreciation to DR. P.JANAKI RAMADDU. I cant

say thank you enough for his tremendous support and help. I feel motivated and

encouraged every time I attend his session. Without his encouragement and

guidance this project would not have materialized.


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TABLE OF CONTENT

1. COMPANYS PROFILE2. BRIEF INTRODUCTION OF MANAGEMENT3. COMPANYS OVERVIEW4. ANALYSIS OF ANNUAL REPORT ON THE

BASIS OF:

y DEPRECIATION

y INVENTORY VALUATIONy FOREIGN EXCHANGE

y DEFERRED TAX

5. Z-SCORE RATIO ANALYSIS6. REFERENCES


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BRIEF INTRODUCTION OF MANAGEMENT:

The management team consists of individuals who have significant experience in

the Indian stainless steel industry. Most of the senior management team have

over two decades of experience in their respective industries and have beeninstrumental in JSLs growth. Its management team has the industry knowledge

and skill necessary to provide strategic leadership and direction to explore new

emerging opportunities in the stainless steel sector, improve its current

operations and successfully implement and operate JSLs Orissa Project. JSLs

management team provides the company with a significant competitive edge.

Chairperson: Savitri Jindal

She became non-executive chair of the Jindal Organisation on her late husband O.P. Jindals death in ahelicopter crash in 2005. Today she is the richest women in

India and worlds fourth richest motherwith a net worth of $12.2 billion.

Vice Chairman & Managing Director: Ratan Jindal

He is a commerce graduate and has studied Management from Wharton Business

School, U.S.A. He has been Director of Nalwa Sons Investments Ltd (formerly

Jindal Strips Ltd) from 1979 to 2005. Also he is a Member of Board of the

International Stainless Steel Forum, Chairman of the Economics & Statistics

Committee of ISSF and member of the prestigious US-based Young Presidents

Organization

Directors:

Naveen Jindal

He is a management graduate from University of Texas, Dallas. At a very young

age, Mr. Naveen Jindal has transformed JSPL (as an Executive Vice Chairman &Managing Director), a moderately performing company in the steel sector, into a

world class company, the highest wealth creator in the country. Also he is a

Member of Parliament since 2004 representing the Kurukshetra constituency in

the state of Haryana.


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Suman Jyoti Khaitan

He is an Advocate and the founder of Khaitan & Partners, Advocates & Notaries, a

multi-practice law firm and has more than 20 years experience in the legal field.

T S Bhattacharya

He is M. Sc. in Nuclear Physics; Post M.Sc. from Saha Institute of Nuclear Physics;

and PGDBM in Management Science from Jamnalal Bajaj Institute of

Management, Mumbai. He is also an Associate of Indian Institute of Bankers and

possesses 38 years of rich banking experience.

James Alistair Kirkland Cochrane

He is MBA from Strathclyde Graduate Business School UK. Since 2006, he hasbeen the president of International Chromium Development Association.

Jurgen Hermann Fechter

He is qualified chartered accountant in South Africa. Member of executive board

of VDEH Steel Institute and a member of the board of directors of ISSF.

Director Finance: Arvind Parakh

He is a Chartered Accountant and has 28 years of work experience in corporate

finance and business management. Associated with JSL Stainless for 11 years.


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COMPANYS OVERVIEW:

JSL Stainless (JSLS) is India's largest SS (stainless steel) manufacturer in terms of

production volume and net sales with total installed capacity of 0.72 mtpa (100%

capacity utilisation) having manufacturing facilities at three locations - Hisar,Vizag and Orissa.

It has 40% share in domestic SS market (more than 70% market share in

organized SS sector) and manufactures different ranges of flat steel products

serving domestic as well as international markets.

Investment Rationale

Largest Organised SS Player in India: JSLS is well poised to be the top cost

competitive SS producer in India. It has around 40% share in domestic SS market

& for high end applications the market share is about 75%. High level of

integration from mining to manufacturing with captive thermal power, flexibility

to produce all grades, service all major markets and ability to produce specialty

products such as precision strips, coin blanks. Hence JSLS is rightly positioned to

en-cash on expanding domestic high growth stainless steel market.

Robust SS Industry Growth in India: In year 2009 the global stainless steel

production was 24.6 mtpa which is expected to grow by 15% to around 28.5 mtpa

in year 2010. In first half of year 2010 crude SS production has reached 15.5

million tons. The growth of Indian stainless steel industry is driven mainly by

increase in per capita income, infrastructure / end use industry growth, higher

Indian GDP and new application development. The consumption pattern of

stainless steel will see drastic change and sectors like transportation, tubes, and

construction to boost demand in coming years.


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Proactive Debt Restructuring: JSLS approached CDR to ensure long term viability

and use available cash for its expansion projects. The company can also

competently raise more cash/debt for its expansion plans. JSLS has successfully

managed to reduce around 1% in senior & subordinate debt and also interest of `

839 crore on loan of above `3000 crore is converted as term loan for which the

repayment to start after 1st April, 2012. Further, JSLS targeting to reduce its

interest from 9.5% to around 8.5% by March 2011.

Fully Integrated Capacity Addition: Worlds largest integrated SS greenfield

project of one mtpa in Orissa Phase II will lead JSLS to 13th

place in world for SS

production. New fully integrated capacity will benefit JSLS to reduce its

dependence on raw materials, increased product range and also spend lower on

logistic costs being closer to port. Besides the mining linkages, the companywould also benefit from assured supply of key inputs. Commissioning of new 500

MW captive power plant would further reduce the manufacturing costand will

help improve margins going ahead.


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ANALYSIS OF ANNUAL REPORT ON THE BASIS OF:

DEPRECIATION

INVENTORY VALUATION

FOREIGN EXCHANGE

DEFERRED TAX

EXPLANATION :

DEPRECIATION:

According to AS-6, Depreciationis a measure of the wearing out, consumption or

other loss of value of a depreciable asset arising from use, effluxion of time or

obsolescence through technology & market changes.

Depreciation is allocated so as to charge a fair proportion of the depreciable

amount in each accounting period during the expected useful life of the

asset. Depreciation includes amortisation of assets whose useful life is

predetermined.

PURPOSE OF DEPRECIATION:

1. Depreciation has a significant effect in determining and presenting the

financial position and results of operations of an enterprise. Depreciation is

charged in each accounting period by reference to the extent of the

depreciable amount, irrespective of an increase in the market value of the

assets.

2. Historical cost of a depreciable asset represents its money outlay or its

equivalent in connection with its acquisition, installation and

commissioning as well as for additions to or improvement thereof. The

historical cost of a depreciable asset may undergo subsequent changes

arising as a result of increase or decrease in long term liability on account


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exchange fluctuations, price adjustments, changes in duties or similar

factors.

3. The method of depreciation is applied consistently to provide

comparability of the results of the operations of the enterprise from period

to period.

ANALYSIS OF JINDALS DEPRECIATION EFFECT:

Depreciation on fixed assets is provided on straight-line method (SLM) at the

rates and in the manner specified in Schedule XIV to the Companies Act, 1956.

Leasehold Land and Aircraft are being amortised over the period of lease. In the

case of assets where impairment loss is recognised, the revised carrying amount is

depreciated over the remaining estimated useful life of the asset.

Certain Plant and Machinery have been considered as continuous process planton the basis of technical assessment and depreciation on the same is provided for

accordingly. Intangible Assets are amortised over the expected duration of

benefits not exceeding ten years.

EXPLANATION:

There is no change in depreciation method adopted by the company & it has

remain consistent with straight line method since years. Depreciation during the

year includes Rs. 5.48 crs (previous year Rs. 1.28 cr) transferred to pre-operative

expenses.

y Assets taken on lease like Land & Aircraft are amortised by Rs. 1.80 crs &

Rs. 16.26 crs over the period of lease.

y In Jindal, carrying cost of assets is exceeding its recoverable amount , for

which they implemented revised carrying cost which depreciated over

remaining economic life of assets.

y Depciation of Rs. 444.60 crs is charged on continous process from plant &

machinery.

y Intangible assets i.e. software licences ,are amortised for Rs. 1.34 crs.


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INVENTORY VALUATION:

According to AS-2, Valuation of inventory are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in theproduction process or in the rendering of services.

Inventories encompass goods purchased and held for resale, for example,

merchandise purchased by a retailer and held for resale, computer software

held for resale, or land and other property held for resale. Inventories also

encompass finished goods produced, or work in progress being produced, by

the enterprise and include materials, maintenance supplies, consumables

and loose tools awaiting use in the production process. Inventories do not

include machinery spares which can be used only in connection with an itemof fixed asset and whose use is expected to be irregular; such machinery

spares are accounted for in accordance with Accounting Standard (AS) 10,

Accounting for Fixed Assets.

METHODS:

1. Standard : Under the Standard costing method approach, both inventory

and the cost of goods sold are based on the standard fixed cost assigned to

the items within the item manager at the time of reporting.2. First-in, First-out (FIFO) : Under FIFO, the cost of goods sold is based upon

the cost of material bought earliest in the period, while the cost of

inventory is based upon the cost of material bought later in the year. This

results in inventory being valued close to current replacement cost. During

periods of inflation, the use of FIFO will result in the lowest estimate of cost

of goods sold among the three approaches, and the highest net income.

3. Last-in, First-out (LIFO) : Under LIFO, the cost of goods sold is based upon

the cost of material bought towards the end of the period, resulting in costs

that closely approximate current costs. The inventory, however, is valuedon the basis of the cost of materials bought earlier in the year. During

periods of inflation, the use of LIFO will result in the highest estimate of

cost of goods sold among the three approaches, and the lowest net

income.

4. Weighted Average : Under the weighted average approach, both inventory

and the cost of goods sold are based upon the average cost of all units


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currently in stock at the time of reporting. When inventory turns over

rapidly this approach will more closely resemble FIFO than LIFO.

5. Average : Under the average approach, both inventory and the cost of

goods sold are based upon the average cost of all units received in stock.

PURPOSE:

A primary issue in accounting for inventories is the determination of the

value at which inventories are carried in the financial statements until the

related revenues are recognised. This Standard deals with the determination

of such value, including the ascertainment of cost of inventories and any

write-down thereof to net realisable value.

ANALYSIS OF JINDALS VALUATION OF INVENTORIES:

Raw Materials and Stores & Spares are valued at lower of cost, computed on

weighted average basis, and net realizable value. Cost includes the purchase price

as well as incidental expenses. Scrap is valued at estimated realisable value.

Work-in-progress is valued at lower of estimated cost and net realisable value and

finished goods are valued at lower of cost and net realisable value. Cost for this

purpose includes direct cost and appropriate administrative and other overheads.

EXPLANATION:

For the valuation of Inventory company has used weighted average method & net

realizable value method.The profit of the company has went up due to sales & the

company has valued its inventory at lower cost.

INVENTORY CONTRIBUTION

2010 % 2009 %

STORES &

SPARES 347.28 26.14076 281.08 23.23052

RAW MAT. 300.6 22.62702 297.19 24.56197FINISHED

GOODS 560.43 42.18517 570.32 47.13544

WIP 119.72 9.011667 61.37 5.072068

SCRAP 0.47 0.035378 0 0

TOTAL 1328.5 100 1209.96 100


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If we see the above table then we can see that company is converting its raw-

material into finished goods fastly, which shows better position of the company,

as finished goods is approx 42 % out of total inventory, but previous year it was

47% , which shows that companys spares ,WIP & Scraps proportion has

increased, which should be controlled.

FOREIGN EXCHANGE:

According to AS-11, Foreign exchange is the exchange of one currency for

another, or theconversion of one currency into another currency. Foreign

exchange also refers to the global market where currencies are traded virtually

around-the-clock. The term foreign exchange is usually abbreviated as "forex" and

occasionally as "FX."

PURPOSE:

An enterprise may carry on activities involving foreign exchange in two

ways. It may have transactions in foreign currencies or it may have foreign

operations. In order to include foreign currency transactions and foreign

operations in the financial statements of an enterprise, transactions must

be expressed in the enterprises reporting currency and the financial

statements of foreign operations must be translated into the enterprises

reporting currency.

The principal issues in accounting for foreign currency transactions andforeign operations are to decide which exchange rate to use and how to

recognise in the financial statements the financial effect of changes in

exchange rates.

ANALYSIS OF JINDALS FOREIGN EXCHANGE EFFECT:

Foreign currency transactions are recorded at the rate of exchange prevailing at

the date of the transaction. Monetary foreign currency assets and liabilities are

translated at the year-end exchange rates and resultant gains / losses arerecognised in the profit & loss account for the year, except to the extent that they

relate to new projects till the date of capitalisation which are carried to pre-

operative expenses and those relating to fixed assets which are adjusted to

the carrying cost of the respective assets.


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Difference originated in one period which is capable of reversal

in one or more subsequent periods

PURPOSE:

As per AS-22, a company is liable to provide for deferred tax liability on the first

day it accounts for such income. The basic premise being that revenues and

expenses of an accounting period should meet matching principle and disparity in

computing income for tax and book purposes should be appropriately resolved.

Differences between the two sets of computation of income can be classified into

two categories; permanent and timing differences. Permanent differences arise

with respect to expenditure legitimately incurred but are wholly or partiallydisallowed for tax purposes.

Such expenses do not give rise to deferred tax provision. Temporary differences

are those that arise due to timing reasons. A typical example is provision for

depreciation with varying rates for book purposes and tax purposes. Rates

prescribed for company law are minimum rates, taking into consideration useful

life of the asset.

ANALYSIS OF JINDALS DEFERRED TAX:

In accordance with Accounting Standard (AS-22) Accounting for Taxes on

Income issued by the Institute of Chartered Accountants of India, deferred taxes

resulting from timing differences between book and tax profits are accounted for

at the tax rate substantively enacted by the Balance Sheet date to the extent the

timing differences are expected to be crystallised. Deferred tax assets are

recognised to the extent there is reasonable/virtual certainty of realising such

assets against future taxable income.


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EXPLANATION:

DEFERRED TAX VALUATION

2009 2010

A.DEFERRED TAX ASSETS

Disallowance u/s 43-B of the Income tax act, 1961 -78.07 -87.01Prov. For doubtful debts -1.79 -1.52

TOTAL DEFERRED TAX

ASSETS -79.86 -88.53

B.DEFERRED TAX LIABILITIES

Diff. between book & tax

dep. 678.6 802.5

Misc. exp. Written off 1.03 1.03

TOTAL DEFERRED TAX LIABILITIES 679.63 803.53

NET DEFERRED

TAX 599.77 715

y The Net Deferred tax liability for the current year is less when compared to

the previous year. In the current year, net deferred tax liability is Rs. 803.53

crs whereas in the previous year it was Rs. 679.63 crs. Deferred tax liability

refers to future tax obligation those results from the origination of a

temporary difference that causes pre-tax book income to exceed taxable

income.

y Deferred tax liabilities arise where tax relief is provided in advance of an

accounting expense, or income is accrued but not taxed until received.

y It means that the company has earned money and recorded a tax expense

on the income statement, but has not yet paid the cash tax

y Deferred tax assets can arise due to net loss carryovers, which are only

recorded as assets if it is deemed more likely than not that the asset will be

used in future fiscal periods. Here deferred tax assets are increasing from

previous period which shows the company can use its assets in coming

fiscal year.


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Z- SCORE ANALYSIS OF TITAN INDUSTRIES AND JINDAL STEEL &

POWER LTD.

DEFINATION OF Z-SCORE: A company failure or bankruptcy prediction method

developed by Professor Edward Altman of New York University. A company's Zscore is a positive function of five factors:

(net working capital) / (total assets) ,(retained earnings) / (total assets) ,(EBIT) /

(total assets), (market value of common and preferred) / (book value of debt)

,(sales) / (total assets).

Although the weights are not equal, the higher each ratio, the higher the Z score

and the lower the probability of bankruptcy. Also called Zeta.

The original Z-score formula was as follows: Z = 0.012T1 + 0.014T2 + 0.033T3 +

0.006T4 + 0.999T5.

T1 = Working Capital / Total Assets. Measures liquid assets in relation to the size

of the company.

T2 = Retained Earnings / Total Assets. Measures profitability that reflects the

company's age and earning power.

T3 = Earnings Before Interest and Taxes / Total Assets. Measures operating

efficiency apart from tax and leveraging factors. It recognizes operating earnings

as being important to long-term viability.T4 = Market Value of Equity / Book Value of Total Liabilities. Adds market

dimension that can show up security price fluctuation as a possible red flag.

T5 = Sales/ Total Assets. Standard measure for sales turnover (varies greatly from

industry to industry).

Altman found that the ratio profile for the bankrupt group fell at -0.25 avg, and

for the non-bankrupt group at +4.48 avg.


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ALTMAN'S Z-SCORE RATIO

ANALYSIS

RATIO FORMULA WEIGHT FACTOR

WEIGHTED

RATIO

1.RETURN ON ASSETS EBIT/T.A. X.3.3 (4)-0.8

2.SALES TO TOTAL ASSETS SALES/T.A. X.0.999 (4)-0.8

3.EQUITY TO DEBT

M.V. OF

EQUITY/T.L. X.0.6 (4)-0.8

4.WORKING CAPITAL TO TOTAL

ASSETS WORKING CAPITAL/T.A. X.1.2 (4)-0.8

5.RETAINED EARNINGS

RETAINED

EARNINGS/T.A. X.1.4 (4)-0.8

KEY FACTORS:

y Z-score above 2.99--you're in good shape

y Z-score between 2.99 AND 1.81--warning signs

y Z-score below 1.81--big trouble--could be heading toward bankruptcy

Z.SCORE ANALYSIS FOR TITAN & JINDAL

RATIO TITAN JINDAL

1.RETURN ON ASSETS 1.42 0.6

2.SALES TO TOTAL ASSETS 5.82 0.48

3.EQUITY TO DEBT 0.05 3.6^-03

4.WORKING CAPITAL TO TOTAL

ASSETS 1.33 0.12

5.RETAINED EARNINGS 1.18 0.61

Ifwe compare & analyse the above table then we can see that TITAN financial

position is better than JINDAL. For JINDAL, its a red alert as there is a high

chance ofbeing bankrupt than TITAN.


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REFERENCES:

y JINDAL POWER & STEEL LTD. ANNUAL REPORT

y CAPITAL-LINE

y TITAN INDUSTRIES LTD. ANNUAL REPORT

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