A Study On

Corporate Finance

December 04, 2010

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 Report on
Financial Analysis on JSPL

Submitted By

Submitted to:
Mr. Ashish Garg
LBSIM
New Delhi

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Copyright © LBSIM 2010 All Rights Reserved. No part of this document may be
reproduced without written consent from the author(s).

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 Lal Bahadur Shastri Institute of Management

To December 4, 2010
Mr. Ashish Garg
LBSIM

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.

We hope this report meets with your expectations.

Thanks

Respectfully,

Group : 7

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 Acknowledgement

First and foremost, we would like to thank our supervisor for this project,
Prof.Ashish Garg, for his valuable guidance and advice. He inspired us
greatly and his constant encouragement and cooperation helped in the timely
completion of our project.

Besides, we would like to thank the authorities at LBSIM for providing us

with a good environment and research facilities to complete this project.
Finally, we would like to express our heartfelt thanks to our friends and
classmates for their help and wishes for the successful completion of this
project.

Group 7
Section
A
LBSIM

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 Table of Contents

Introduction to corporate
history…………………………………………………………………

Risk, Return And Beta…

……………………………………………………………..
Cost of Capital of JSPL
……………………………………………………
Leverage
…………………………………………………………

Working Capital
…………………………………………
Important Financial Ratios
Of JSPL vs other Steel Companies
………………………………………………

Conclusion…………………………………………………………….....

References………………………………………………………………..

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 Corporate Profile of JSPL
Perseverance, a passion for excellence and a firm commitment towards all stakeholders
and the community at large, has made us a responsible corporate powerhouse.

With an annual turnover of over US $2.3 billion (Rs. 11,000 crore), Jindal
Steel & Power Limited is a part of about US $ 12 billion diversified O. P.
Jindal Group. It is a leading player in Steel, Power, Mining, Coal to Liquid,
Oil & Gas and Infrastructure, consistently tapping new opportunities by
increasing production capacity, diversifying investments, and leveraging its
core capabilities to venture into new businesses. JSPL’s investment
commitments in steel, power, oil & gas and mining have touched more than
US $ 30 billion today. In the recent past, JSPL has expanded its steel, power
and mining businesses to various parts of the world particularly in Asia,
Africa, South America and Australia.

The company, today, is the largest private sector investor in the state of
Chhattisgarh with an investment commitment of over US$ 6 billion (Rs.
30,000 crore).Mr. Naveen Jindal, the youngest son of the legendry late Shri.
O P Jindal, spearheads Jindal Steel & Power Limited and its group
companies Jindal Power Ltd, Jindal Steel Bolivia, Jindal Petroleum Ltd. and
Jindal Cement with a belief in the concept of self-sufficiency. The company
produces economical and efficient steel and power through backward
integration from its own captive coal and iron-ore mines. An enterprising
spirit and ability to discern future trends have been the driving force behind
the company's remarkable growth. And the recognition it has received only
further lends credence to this. Jindal Steel & Power Limited has recently
been rated as the second highest value creator in the world by Boston
Consulting Group.

The company has also been rated as one of the Best Blue Chip companies
by Dalal Street Journal; One of the Fab 50 Companies by Forbes Asia as
well as the Highest Wealth Creator by the Dalal Street Journal. It has also
won several awards for its efficient operations and commitment to
environment & safety.

The company has scaled new heights with the combined force of innovation,
adaptation of new technology and the collective skills of its 15,000 strong,
committed workforce.

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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.

Savitri Jindal, the widow of O. P. Jindal, is ranked as the 19th richest Indian
person according to Forbes

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 Risk, Return And Beta
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").

Risk = Standard Deviation = √1/N ∑(x-µ)(x-µ)

= 1.8%

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. The amount of money gained or lost may be
referred to as interest, profit/loss, gain/loss, or net income/loss. The money
invested may be referred to as the asset, capital, principal, or the cost basis of
the investment. ROI is usually expressed as a percentage rather than a
fraction.

Return = closing price of today – closing price of previous day

Closing price of previous day
After calculating daily average we multiply it with 240 to annualise
rate of return

Average return on security = 16.942%

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.

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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

Value of β>1 shows that the stock is more sensitive towards market
movement. This is clearly shown in the above chart.

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 Cost Of Capital

The cost of capital is the cost of a company's funds (both debt and equity),
or, from an investor's point of view "the expected return on a portfolio of all
the company's existing securities".[1] It is used to evaluate new projects of a
company as it is the minimum return that investors expect for providing
capital to the company, thus setting a benchmark that a new project has to
meet

Cost of debt

The cost of debt is computed by taking the rate on a risk free bond whose
duration matches the term structure of the corporate debt, then adding a
default premium. This default premium will rise as the amount of debt
increases (since, ceteris paribus,"all other things being equal", the risk rises
as the amount of debt rises). Since in most cases debt expense is a deductible
expense, the cost of debt is computed as an after tax cost to make it
comparable with the cost of equity (earnings are after-tax as well). Thus, for
profitable firms, debt is discounted by the tax rate.

The formula can be written as

(Rf + credit risk rate)(1-T)

T is the corporate tax rate and Rf is the risk free rate.

Kd = Interest(1-Tax Rate)/Debt

=192.47(1-0.339)/8383.26

= 0.01517 or 1.52 %

Cost of Equity

The cost of equity is more challenging to calculate as equity does not pay a
set return to its investors. Similar to the cost of debt, the cost of equity is

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broadly defined as the risk-weighted projected return required by investors,
where the return is largely unknown. The cost of equity is therefore inferred
by comparing the investment to other investments (comparable) with similar
risk profiles to determine the "market" cost of equity.

Once cost of debt and cost of equity have been determined, their blend, the
weighted-average cost of capital (WACC), can be calculated. This WACC
can then be used as a discount rate for a project's projected cashflows.

CAPM:-

The general idea behind CAPM is that investors need to be compensated in

two ways: time value of money and risk. The time value of money is
represented by the risk-free (rf) rate in the formula and compensates the
investors for placing money in any investment over a period of time. The
other half of the formula represents risk and calculates the amount of
compensation the investor needs for taking on additional risk. This is
calculated by taking a risk measure (beta) that compares the returns of the
asset to the market over a period of time and to the market premium (Rm-rf)

= 31.217

CONSTANT DIVIDEND GROWTH MODEL:-

A stock valuation model that deals with dividends and their growth,
discounted to today. D1 is the return of the current year. D0 is the return on
previous year.

Ke = (D1/Po) +g

= (Do(1+g)/Po) +g

Ke = 20.8%

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 Weighted Average Cost Of Capital

The Weighted Average Cost of Capital (WACC) is used in finance to

measure a firm's cost of capital.

The total capital for a firm is the value of its equity (for a firm without
outstanding warrants and options, this is the same as the company's market
capitalization) plus the cost of its debt (the cost of debt should be continually
updated as the cost of debt changes as a result of interest rate changes).
Notice that the "equity" in the debt to equity ratio is the market value of all
equity, not the shareholders' equity on the balance sheet.To calculate the
firm’s weighted cost of capital, we must first calculate the costs of the
individual financing sources: Cost of Debt Cost of Preference Capital Cost of
Equity Capital.

WACC = wd * Kd + we * ke

WACC = 0.5536*1.52 + 0.4464*31.217

= 14.776%

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 LEVERAGE

Operating Leverage

The operating leverage is a measure of how revenue growth translates into

growth in operating income. It is a measure of leverage, and of how risky
(volatile) a company's operating income is.

Summarizes the effect a particular amount of operating leverage has on a

company's earnings before interest and taxes

EBIT (PBIT) = PBDIT - Depreciation

Operating leverage= (% change in EBIT) / (% change in sales)

2008 2009 2010

DOL 1.29 1.23 1.15

Degree of Financial Leverage

Financial leverage tries to estimate the percentage change in net income

for a one percent change in operating income

The product of the two is called Total leverage, and

estimates the percentage change in net income for a one
percent change in revenue

DFL = EBIT/(EBIT-Interest)

2008 2009 2010

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 DFL 1.1 1.07 1.08

Degree of Total Leverage (DTL)

A leverage ratio that summarizes the combined

effect the degree of operating leverage (DOL), and the
degree of financial leverage has on earnings per share (EPS),
given a particular change in sales.

DTL = DOL * DFL

= 1.15 * 1.08

= 1.242

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 Working Capital

A measure of both a company's efficiency and its short-term financial health.

The working capital ratio is calculated as:

If a company's current assets do not exceed its current liabilities, then it may
run into trouble paying back creditors in the short term. The worst-case
scenario is bankruptcy. A declining working capital ratio over a longer time
period could also be a red flag that warrants further analysis. For example, it
could be that the company's sales volumes are decreasing and, as a result, its
accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying

operational efficiency. Money that is tied up in inventory or money that
customers still owe to the company cannot be used to pay off any of the
company's obligations. So, if a company is not operating in the most efficient
manner (slow collection), it will show up as an increase in the working
capital. This can be seen by comparing the working capital from one period
to another; slow collection may signal an underlying problem in the
company's operations.

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Positive working capital means that the company is able to pay off its short-
term liabilities. Negative working capital means that a company currently is
unable to meet its short-term liabilities with its current assets (cash, accounts
receivable and inventory).

CALCULATION OF DIFFERENT RATIOS FOR THE YEAR

ENDING 31/12/2010

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Conclusion

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