FINANCIAL ANALYSIS

Of
TATA STEEL & STEEL AUTHORITY OF INDIA LTD. (SAIL)

Financial analysis refers to an assessment of the viability, stability and profitability of a business,
sub-business or project. Financial analysis is done by comparing financial ratios of the company
taking its past, future and comparative performance into consideration. It is basically done to
assess a business in order to deal with the planning, budgeting, monitoring, forecasting, and
improving of all financial details within an organization.

The companies to be analysed in this assignment are as follows:

1. TATA STEEL
2. SAIL-Steel Authority of India Ltd.

The plan of the assignment is to analyze the annual reports of the selected companies for the year
2006-2007, 2007-2008 and 2008-2009 and derive the following:

i. Provide reasons in financial nature for choosing TATA Steel & SAIL
ii. Examine the following factors for the past three years:
a) Price of the finished goods
b) Volume produced by the company
c) Average Market Price of the product
d) Total Volume produced by the market
iii. Relate the price changes of these two firms with price movement in market for the
last three years.
iv. Relate the volume produced by these firms with the total market volume for the three
years
v. Break even volumes for each of the three years for both the companies
vi. Conclusion capturing the following aspects-
a) Summarising the trend analysis already carried out in point (iii), (iv) & (v)
b) Analysis of the current(relative)positions of these firms in the market in the
context of their past performance.

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REASONS FOR CHOOSING TATA STEEL & SAIL

SAIL and TATA STEEL are one of the leading steel producers of india contributing more than
50% of steel production in the market all together. SAIL is India's largest steel producing company.
With a turnover of Rs. 48,681 crore, the company is among the top five highest profit earning corporates

of the country. SAIL has five integrated steel plants, three special plants, and one subsidiary in different
parts of the country. TATA Steel is among the top ten steel producers in the world with an existing
annual crude steel production capacity of around 30 million tonnes per annum and employee strength
of above 80,000 across five continents. The Group recorded a turnover of Rs.147,329 Crores (US$ 28,962
million) in 2008 - 2009.

SAIL TATA STEEL

Particulars March ‘07 March ‘08 March ‘09 March ‘07 March ‘08 March ‘09

Face Value 10.00 10.00 10.00 10.00 10.00 10.00

Dividend per share 3.10 3.70 2.60 15.50 16.00 16.00

Operating profit per 23.35 27.28 21.65 119.11 112.85 125.60

share(Rs)
Operating profit 28.09 28.19 20.41 39.61 41.94 37.68
margin (%)
Current Ratio 1.52 1.68 1.74 1.69 3.81 0.91

Quick Ratio 1.01 1.23 1.24 1.37 3.52 0.57

Debt equity Ratio 0.24 0.13 0.27 0.69 1.08 1.34

Earnings per share 15.02 18.25 14.95 72.74 63.85 69.70

Book value 41.92 55.84 67.75 240.31 298.78 331.68

Few ratios of the companies showing their financial status have been listed above.

The analysis of the given data states that face value of SAIL’s shares was Rs.10/per share when
issued, has grown to Rs.41.92/per share in 2007 further growing to Rs.55.84/per share in 2008
and Rs.67.75/per share in 2009. This shows a consistent growth in the share value(book value)
of SAIL making it a reasonable option to invest in as it would get safe returns. But in comparison
with TATA STEEL, the growth of its share value has been considerably low. The face value of

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TATA STEEL’s share when issued was Rs.10/per share which leaped to Rs.240.78/per share in
2007 further growing to Rs.298.78/per share in 2008 and Rs.331.68/per share in 2009. This
shows a tremendous growth rate of the share value of TATA in comparison to SAIL, making it a
very good bet to invest in. As the Earning per share is Rs.72.74 in 2007 which dipped to
Rs.63.85 in 2008 due to recession but again picked by 2009 making Rs.69.70. This shows a
consistent growth in their market value. In comparison to this, Earning per share of SAIL was
15.02 in 2007 which grew to 18.25 in 2008 and again went down to Rs.14.95.

The current ratio is a financial ratio that measures whether or not a firm has enough resources
to pay its debts over the next 12 months. It compares a firm's current assets to its current
liabilities. The current ratio is an indication of a firm's market liquidity and ability to meet
creditor's demands. Acceptable current ratios vary from industry to industry. Normally 2:1 is
the ideal current ratio. If a company's current assets exceed current liabilities, then it is
generally considered to have good short-term financial strength. If current liabilities exceed
current assets , then the company may have problems meeting its short-term obligations. If the
current ratio is too high, then the company may not be efficiently using its current assets or its
short-term financing facilities.

In this case TATA STEEL’s current ratios for March 2007, 2008 and 2009 are 1.69, 3.81 and 0.91.
The ratio for the year 2007 is considered satisfactory for the company as the current assets are
more than the current liabilities. In 2008 the current ratio is 3.81, which clearly states that the
current assets are more than the current liabilities. Normally this is considered good for a
company. But in this case the resources of the company have not been fully utilized, which is
not good for the company. In 2009 the ratio is 0.91 which is also not considered for the
company as it states that the company’s current liabilities have exceeded the current assets.

In case of SAIL, the current ratios are 1.52, 1.68 and 1.74 for the year 2007. 2008 and 2009.
These ratios are considered good for the company.

Quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets
to immediately extinguish or retire its current liabilities. Quick assets include those current
assets that presumably can be quickly converted to cash at close to their book values.
Generally, the quick ratio should be 1:1 or better, however this varies widely by industry. In
general, the higher the ratio, the greater the company's liquidity.

In this case TATA STEEL’s quick ratios for 2007. 2008 and 2009 are 1.37, 3.52 and 0.57. The
ratio for 2007 i.e. 1.37 is considered good for the company while the ratio for the next two
years are not satisfactory for the company.

On the other hand quick ratios for SAIL for the year 2007, 2008, 2009 are 1.01, 1.23 and 1.24.
Ratios for all the 3 years are considered good for the company as well as investers.

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's assets. Closely related to leveraging,

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the ratio is also known as Risk, Gearing or Leverage. The two components are often taken from
the firm's balance sheet or statement of financial position (so-called book value), but the ratio
may also be calculated using market values for both, if the company's debt and equity are
publicly traded, or using a combination of book value for debt and market value for equity.

In this case TATA STEEL’s debt equity ratios for the year 2007, 2008 and 2009 are 0.69, 1.08
and 1.34 are good for the company as well as investers as for every 1 rupee invested by the the
share holders the debt ratio is Rs.0.24, Rs. 0.69 and Rs 1.08.

Similarly in case of SAIL, the debt equity ratios are 0.24, 0.13 and 0.27 for 3 years. These ratios
are also considered good for the investers as every 1 rupee invested in the company the debt
ratios are Rs. 0.24, Rs. 0.13 and Rs. 0.27, which considered very safe from investers’ point of
view.

EXAMINE THE FOLLOWING FACTORS FOR THE PAST THREE YEARS

a) PRICE OF THE FINISHED GOODS:

Price of the finished goods is derived by dividing the total sales of the company with the total
quantity sold.

Price of finished goods = Sales / Sales quantity

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LIST OF PRICES OF FINISHED GOODS OF TATA STEEL & SAIL:

SAIL TATA STEEL

Particulars 2006-07 2007-08 2008-09 2006-2007 2007-08 2008-09

Sales(Rs.
Millions)
346266.90 407701.90 438842.20 145110.30 160101.00 193134.20
Sales
Quantity(P
er Metric 11444618 11871956 10990050 4509482 4475886 4760572
Tonne)
Price of
finished
goods(Rs 30255.87 34341.60 39930.86 32178.93 35769.68 40569.54
per Metric
Tonne)

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 b) VOLUME PRODUCED BY THE COMPANY:

The volume of the total steel in METRIC TONNE produced by the companies are:

Year SAIL TATA STEEL

March 2007 1,2126,799 49,28,548

March 2008 1,25,31293 48,58,401

March 2009 1,20,51827 53,749,39

c) AVERAGE MARKET PRICE OF THE PRODUCT

The average market price of a product can be derived by taking into consideration the product
prices of four companies and dividing it by 4.

Average market price of the product

= Price of 1st company+2nd company+3rd company+4rth company / 4

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Price of steel of 5 companies $ average market price PER METRIC TONNE is as follows:

Companies 2006-2007 2007-2008 2008-2009

TATA STEEL 32,178.93 35,769.68 40,569.54

SAIL 30,255.87 34,341.60 39,930.86

JSW STEEL 29,766.69 32,362.61 38,505.66

MONNET ISPAT LTD 27,150.02 30,126.45 35,384.26

AVERAGE MARKET 29,837.88 33,150.08 38,597.58

PRICE

d) VOLUME PRODUCED BY THE MARKET

The volume produced by the market is derived by adding up the total production of the top ten
manufacturers in the market.

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In order to get the volume of steel produced by the market, five companies amongst the top
steel manufacturers have been taken into consideration, as not all the top ten steel companies
manufacture the same category of steel which has been selected for this assignment.

The Volume Produced by the market in metric tonne is as follows:

Companies 2006-2007 2007-2008 2008-2009

TATA STEEL 4928548 4858401 5374939

SAIL 12126799 12531293 12051827

JSW STEEL 2154568 2717134 2519460

MONNET ISPAT LTD. 4121 83017 80584

ESSAR STEEL 2951578 3368764 3145086

TOTAL VOLUME 22,165,614 23,558,609 23,171,869

PRODUCED

RELATE THE PRICE CHANGES OF THESE TWO FIRMS WITH PRICE MOVEMENT
IN MARKET FOR THE LAST THREE YEARS

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 TATA STEEL’s price change in relation with the market price is:

YEAR AVERAGE MARKET TATA STEEL’s % DIFFERENCE

PRICE(per metric MARKET PRICE(per
tonne) metric tonne)
March 2007 29,837.88 32,178.93 +1.078 %

March 2008 33,150.08 35,769.68 +1.079%

March 2009 38,597.58 40,569.54 +1.051%

SAIL’s price change in relation with the market price is:

YEAR AVERAGE MARKET SAIL’sMARKET % DIFFERENCE

PRICE(per metric PRICE(per metric
tonne) tonne)
March 2007 29,837.88 30,255.87 +1.014 %

March 2008 33,150.08 34,341.60 +1.035%

March 2009 38,597.58 39,930.86 +1.035%

RELATE THE VOLUME PRODUCED BY THESE FIRMS WITH THE TOTAL MARKET
VOLUME FOR THE THREE YEARS

TATA STEEL’s volume in relation with the total market volume produced:

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 YEAR TOTAL PRODUCTION TATA STEEL’s MARKET SHARE (%)
OF MARKET(METRIC PRODUCTION
TONNE)
March 2007 22,165,614 4928548 22.24 %

March 2008 23,558,609 4858401 20.62 %

March 2009 23,171,896 5374939 23.19 %

SAIL’s volume in relation with the total market volume produced:

YEAR TOTAL PRODUCTION SAIL’s PRODUCTION MARKET SHARE (%)

OF MARKET(METRIC
TONNE)
March 2007 22,165,614 12126799 54.71 %

March 2008 23,558,609 12531293 53.19 %

March 2009 23,171,896 12051827 54.71 %

BREAK EVEN VOLUMES FOR EACH OF THE THREE YEARS FOR BOTH THE
COMPANIES

The break-even point (BEP) is the point at which cost or expenses and revenue are equal: there
is no net loss or gain, and one has "broken even". A profit or a loss has not been made,
although opportunity costs have been paid, and capital has received the risk-adjusted, expected
return.

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BREAK EVEN = FIXED COST / CONTRIBUTION (SELLING PRICE – VARIABLE COST)

In order to achieve the break even point, we need to determine the fixed and variable costs
involved in the manufacturing of the product.

In case of SAIL & TATA Steel:

FIXED COST- It will include power & fuel cost, employee cost and selling & administration cost

As these expenses would remain fixed irrespective of volume produced by the company making
them fixed in nature.

VARIABLE COST- It will include cost of raw materials, manufacturing expenses $

miscellaneous expenses.

As these expenses would vary with the volume produced by the company making them variable
in nature.

CONCLUSION

TATA STEEL & SAIL are both one of the leading steel manufacturers of India. These companies
have had a very stable financial grounds inspite of the inflation and recession. The steel prices
hiked in 2008-09 , but it did not affect these companies on a large scale. By analyzing the
financial reports of the selected companies we derive that both TATA STEEL and SAIL contribute
more than 50% of the market share in the steel market all together. Both companies have a
slight price difference for structural steel. The price of TATA STEEL has been 1.05% more than
the average market price of steel in 2009. While on the other hand SAIL’s price is more than
1.03% more than the average market price in 2009. Moreover, the total market share of TATA
has increased significantly over the few years. It contributes around 23.19% of volume to the
total market in 2009. At the same time, the steel king-SAIL which takes up almost 50% of the
market share is currently contributing around 52.01% which is a great amount. From an
investers’ point of view these companies are a safe bet to invest in as their share value, current
ratios, quick ratios and debt equity ratios are very stable and suitable for investers to get a good
return. Thus both the companies play a very vital role in the Indian steel market.

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REFERENCES

www.wikipedia.org
www.moneycontrol.com
capital line

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