FSA Assignment

BHUSHAN STEELS
Submitted to:
Prof. Sudarshan Kuntluru
Prof. Rachappa Shette
GROUP 6
9 May 2015

GROUP 6

Submitted by:
BHAVIN BALAN
JIDDUKRISHNAN
JIJO G JOHN
MUNEER
PADMAKUMAR

IIMK-Kochi Campus

WEB 061
WEB 078
WEB 079
WEB 0XX
WEB 088

Contents

Executive Summary.........................................................................................................................4
Bhushan Steels - Analysis................................................................................................................5
About Bhushan Steels..................................................................................................................5
Analysis Planned..........................................................................................................................5
Cash Flow Analysis.........................................................................................................................6
Trend in Cash Flows for Last 10 Years(from Mar-05 to Mar-14)................................................6
Cash Flow Adequacy Ratio..........................................................................................................6
Sources of Cash Flow for the Last 3 Years (Gross)......................................................................7
Sources and Uses of Cash Flow (Disaggregated Data)................................................................7
Sources......................................................................................................................................7
Uses of Cash (Last 3 Years)......................................................................................................8
Comparative Analysis......................................................................................................................9
Profit & Loss Statement...............................................................................................................9
Balance Sheet.............................................................................................................................11
Common Size Analysis..................................................................................................................13
Comparing to Tata Steel, Jindal Steel, Rashtriya Ispat Nigam Ltd, Vizak Steel........................13
P&L for Bhushan Steel...............................................................................................................13
GP, PBT & PAT..........................................................................................................................15
Common Size for balance sheet.................................................................................................15
Ratio Analysis................................................................................................................................18
Basic Ratios................................................................................................................................18
Profitability Analysis...............................................................................................................18
Liquidity Analysis...................................................................................................................18
Leverage Analysis...................................................................................................................19
Efficiency Analysis.................................................................................................................19
Red Flag Ratios..........................................................................................................................19
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Irrational ratios........................................................................................................................20
Key Ratios for Investing.........................................................................................................20
Additional Red Flags..............................................................................................................20
Beneish Probit Model.................................................................................................................20
Trend Analysis...............................................................................................................................22
Analysis Results.........................................................................................................................22
Qualitative Analysis.......................................................................................................................23
Analysis......................................................................................................................................23
Observations...............................................................................................................................23
Conclusion.....................................................................................................................................25
Further Analysis.........................................................................................................................25
Summary....................................................................................................................................26
References......................................................................................................................................27

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Executive Summary

The report examines financial analysis of Bhushan Steel, one of the largest Steel manufacturers in India. It throws
important light on the various financial parameters of the company to review its performance and financial health.
The main purpose of the study is to determine the underlying problems faced by the company as it was recently in
the media glare for two important reasons, one for its precarious debt situation calling for the restructuring of its debt
by the lending consortium and another, for its involvement in the high profile Syndicate Bank bribery case. The
financial analysis covers the Industry Analysis from a macro view, and then zoomed in on the companys financials
through Common Size of Income and Balance sheet, Comparative Analysis, Ratios such as Liquidity, Solvency,
Capital Structure and Cash Flow analysis and Trend analysis.
The report also covers various other qualitative factors in addition to the quantitative factors to formulate an overall
view of its standing in the market and industry. The fraud angle is covered through Beneish Model and management
discussions are analyzed to close in on the company integrity and values.

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Bhushan Steels - Analysis

About Bhushan Steels
Bhushan Steel Ltd is the largest manufacturer of Auto-grade steel in India. Founded in the year 1987, it is being
listed in the BSE and was also a constituent of the Sensitive Index, Sensex. It is now the third largest secondary steel
producer with an installed capacity of 2 million tons per annum. The company is a source for vivid variety of
products such as Cold Rolled Closed Annealed, Galvanized Coil and Sheet, High Tensile Steel Strapping, Colour
Coated Coils, Galume Sheets and Coils, Hardened & Tempered Steel Strips, Billets, Sponge Iron, Precision Tubes
and HFW/ERW Pipe.
The strong ambition coupled with professional expertise helped the company to leapfrog into the top echelons of the
Indian Steel industry. It has grown incredibly its turnover and production capacity by series of expansions and
improved realizations with manufacturing units. However, was it a case of Ambition thou powerful source of good
or ill, the later trends clearly shows Bhushan Steel over laden with debt with ever increasing capital investments
over the years. Was the management not aware of the fallacies of overheating growth? Or was the management
deliberately trying to scuttle the companys interest by prioritizing their own personal interests?
Bhushan Steel is a good case to analyze to extrapolate certain findings to Steel Industry as a whole, being a
behemoth in itself.
Analysis Planned
The following methods were used to analyze the situation of the company.

Cash Flow Analysis

Comparative Analysis
Common Size Analysis
Ratio Analysis

This was following by

Qualitative Analysis
Fraud Analysis using models like Beneish.

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Cash Flow Analysis

Trend in Cash Flows for Last 10 Years(from Mar-05 to Mar-14)
0

10

12
6000
4000
2000

Cash Flow from

Operating Activities

Cash Flow from Investing

Activity

-2000

Cash Flow from Financing

Activity

-4000

Net Cash Flow

-6000
-8000

As evident from the figure, the trend in cash flows provides an interesting insight. While Net Cash Flows more or
less shows a stable and flat trend, the investment cash flows show a decreasing trend meaning that BSL Ltd has
increased its investment especially in fixed assets from March 2005 to March 2014. The zig-zag movement of
operations and financial cash flows shows that finance strategy follows operational performance to meet the
investment requirements.

It gives an impression that investment plans are independent of the operational

performance, if so that strategy to be further checked particularly on risk management perspective. Both the
operating cash flows and Financing cash flows show a Zig-Zag trend especially towards the end, evidencing an
improper risk management from the management in lieu with the changing business scenario and industry trends.
The increasing leverage with deviating operating cash flows show a company in prospective distress and risky
fundamentalsHigh leverage coupled reducing cash flows is an alarming situations where in the company would be
finding it difficult to meets its interest cost . obligations. It is all the more evident with the Cash Flow Adequacy ratio
showing a miniscule 0.29 which means that only 29% of the Working Capital, Capex and Dividend distribution cash
flow is sourced from Operating Cash Flows.
Cash Flow Adequacy Ratio
CASH FLOW
ADEQUACY RATIO
FOR THE LAST 3
YEARS

(0.29)

Cash flow from Operations is inadequate to meet Investments and dividend payout obligations. This will force the
company to resort to external financing. The external financing mechanism is increasingly resorted to, to meet the

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cash requirements over the years. Its actually a growth strategy but its inorganic high risk strategy, a matured
organization is expected to grow mostly based on its retained earnings, if a company like BSL is not able to do that
some fundamental questions to be asked on the earnings potential
The Gross Sources of Cash Flow over the last 3 years is shown below.
Sources of Cash Flow for the Last 3 Years (Gross)

CASH FLOW SOURCES(GROSS)-LAST 3 YEARS

Net Cash (Used)/Flow in from Operating Activities; 35%

Net Cash Flow from Financing; 65%

As already discussed, the Financing Cash flows account for 65% of the Gross Cash requirement over the last 3 years.
The Debt to Equity of BSL is above 3 and hence this substantiates the reason.
Sources and Uses of Cash Flow (Disaggregated Data)
Sources

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SOURCES OF CASH-LAST 3 YEARS

7% 2% 1%
41%

14%
18%
18%

Proceeds from Other

borrowings

Net Cash (Used)/Flow

in from Operating
Activities

Proceeds from Cash

Credit
(Banks)

Finance Cost

Proceeds from Share/

Share Application
money

Sale of Investment

Others

41% of the sources of Cash seems to be from Other borrowings, while only 18% is from Operating activities.
Another 17% is proceeds from Banks for Working Capital activities, which means the Short and Long Term
borrowing accounts for close to 60% of disaggregated Cash sources and 14% from equity infusuion.
Uses of Cash (Last 3 Years)

USES OF CASH(LAST 3 YEARS)

Others
Dividend Paid
0% 0% 2% 3%
4%
34%

56%

Direct Tax Paid(Net of

refund)
Redemption of
preference shares
Purchase of Investment
Finance Cost
Purchase of Fixed Assets

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The Uses of Cash over last 3 years provides even further insights and interesting findings. 56% of Cash Usage
over last 3 years was in Purchase of fixed assets. Another 34% is expensed as the cost of debt taken by the company
this is not a good situation as the fund generated from operations is only 18% which means operations cash flow is
not adequate to meet the cost of funds. In spite of this BSL is showing a positive bottom line gives an impression
that income is accrued substantially without actually realizing the same.
The Cash Flow analysis throw some very interesting insights on BSL Ltd , ie while the Operating Cash flows show a
varying trend and contributes under one fifth of the total investment it is the financing cash flow that is the major
source of investments. Further, the company seems to be taking new debt to repay the existing debt which could
sound death knellbell. The increasing investments in fixed assets is not necessarily converting into Operating Cash
flows needed to service the debt and reinvest. The debt situation seems to be in a precarious situation, the argument
of which could be further strengthened by Ratio and Comparative Analysis.

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Comparative Analysis
The data from the prior years were taken to plot them and to come to the following conclusions.
Profit & Loss Statement

SALES
12000

10744.27
9941.41
9675.83

10000
8000

6943.81
5621.77
6000
4985.72
3829.64180.23
4000 2674.992793.99

SALES

2000
0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

The Sales which was growing till 2013 was showing the first signs of decline during the year 2014. The PBT figures
shown below are even more drastic with the PBT showing signs of decline as early as 2011. For the year 2014, PBT
declined to levels worse than that of the 2005 years.

PBT
1600

1421.431365.23

1400

1214

1200

1064.5

1000
800
532.89

600
400
200

PBT

758.92
351.38
167.78 167.24

95.33

0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

The profit margin and the interest coverage ratio are also showing signs very similar. Even though the actual
problems in the company may be visible only during the later years, the actual causes can be identified from years as
early as 2010. The effect of leverage (presence of fixed expenses in the cost system) is very evident because when
sales dropped by 10% (ie from 10744 to 9675) PBT dropped by 92% (ie. From 1214 to 95.33) this shows the

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10

financial strategy is quiet risky because of the presence of too much fixed cost funds, for funding BSL should have
resorted to equity more. The growing high interest cost is substantiated by the below graph

INTEREST
1800
1600
1400
1200
1000
800
600
400
200
0

1663.3
1287.44
1046.27

79.39 75.38 85.82 107.8 117.27

2005

2006

2007

2008

2009

210.01

2010

INTEREST

354.38

2011

2012

2013

2014

PROFIT MARGIN
25.00

18.94 20.47

20.00
15.00
10.00

6.27

5.99

9.18

12.75

15.22

13.73

PROFIT MARGIN

11.30

5.00

0.99

0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

The profit margins are nose-diving as evident from the above chart, but still we dont notice any solid response of the
management on this matter in the Boards report for the year 2013-14

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11

INTEREST COVERAGE RATIO

7.00

6.47

6.00

4.94

5.00

4.09

4.00
3.00

5.07
4.01

INTEREST COVERAGE RATIO

2.11 2.22

2.00

1.30

1.00

0.94
0.06

0.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Interest coverage ratio is constantly coming down from 2009 onwards though the position was good till 2011 its not
comforting thereafter, this should be related to the additional effort company is taking to raise debt, because financial
institutions cannot get a comfort from this figures in normal prudence but still BSL was able to raise money is
something which need to further looked into.
Balance Sheet
Looking at the balance sheet items, we can see the Secured & Unsecured loans really growing exponentially
potentially creating the debt related issues the company was going to get into.

SECURED + UNSECURED LOANS

35000

31839.17

30000

26897.08

25000
19816.56
16592.63

20000
15000
10000
5000

1317.47

2036.18 3241.98

5718.13

11404.11
8066.25

0
2005

2006

2007

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2008

2009

2010

2011

2012

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2013

2014

12

EQUITY
46

45.3

45

43.89

44
43
42
41

42.47

42.47

42.47

42.47

42.47

42.47

2007

2008

2009

2010

2011

2012

41.27
40.47

40
39
38
2005

2006

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2013

2014

13

Another observation was the decline in the working capital during the year 2014. The cash position of the company
was really going down creating liquidity issues in the company even for one month of operation.

WORKING CAPITAL
6000
4779.95

5000
4000
3000
1837.08

2000
1000

596.36 594.98

2251.8

2463.91

2178.54

1100.92
820.06 958.01

0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

The reduction in working capital (current asset-current liabilities) is a hint that, the company is not properly repaying
its creditors, to get more insights we need to look into the current ratio, for the FY 2014 the ratio has drastically
come to down to .81 from 1.06 in FY 2013 a proper comparison of current assets and current liabilities for 2013 and
reflects this facts. Though current assets are increasing from 2013 to 2014 the corresponding increase in current
liabilities is more this substantiates our assumption this points that the company is in debt trap

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14

Common Size Analysis

Comparing to Tata Steel, Jindal Steel, RashtriyaIspat Nigam Ltd, Vizak Steel
The Common Size analysis is done for Bhushan Steel and the same is compared with the other companies in the
same segment.
1.
2.
3.
4.

Tata Steel
Jindal Steel
RashtriyaIspat Nigam Ltd
Vizak Steel

P&L for Bhushan Steel

Year
INCOME :
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
EXPENDITURE :
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing
Expenses
Selling and Administration
Expenses
Miscellaneous Expenses
Less: Pre-operative
Expenses Capitalised
Total Expenditure
Operating Profit
Interest
Gross Profit
Depreciation
Profit Before Tax
Tax
Fringe Benefit tax
Deferred Tax
Reported Net Profit
Extraordinary Items
Adjusted Net Profit
Adjst. below Net Profit
P & L Balance brought
forward
Statutory Appropriations
Appropriations
P & L Balance carried

GROUP 6

Mar
14(12)

Mar
13(12)

108.99%
9.51%
99.48%
0.30%
0.22%

108.58%
9.71%
98.87%
0.16%
0.97%

100.00%
0.00%
53.76%
9.28%
2.99%

Mar
12(12)

Mar
11(12)

Mar
10(12)

100.46%
7.64%
92.82%
0.92%
6.26%

98.69%
5.99%
92.69%
2.43%
4.88%

100.00%
0.00%
54.10%
7.87%
2.54%

107.56%
8.48%
99.08%
0.27%
0.65%
100.00
%
0.00%
55.28%
7.02%
2.71%

100.00%
0.00%
56.71%
6.92%
2.95%

100.00%
0.00%
63.83%
3.55%
2.30%

3.37%

3.11%

2.43%

3.32%

3.35%

8.01%
0.35%

7.43%
0.10%

8.27%
1.08%

7.88%
0.78%

6.21%
0.35%

5.76%
72.01%
27.99%
17.10%
10.89%
9.91%
0.98%
0.01%
0.00%
0.33%
0.64%
0.00%
0.64%
0.00%

5.81%
69.34%
30.66%
11.85%
18.82%
7.65%
11.17%
0.01%
0.00%
2.80%
8.36%
0.01%
8.35%
0.00%

7.00%
69.79%
30.21%
10.43%
19.78%
6.18%
13.61%
0.01%
0.00%
3.39%
10.20%
0.08%
10.12%
-0.12%

6.40%
72.16%
27.84%
5.92%
21.92%
3.68%
18.24%
0.02%
0.00%
4.89%
13.33%
0.02%
13.31%
0.00%

5.54%
74.06%
25.94%
3.47%
22.47%
3.45%
19.02%
3.67%
0.00%
1.37%
13.97%
0.02%
13.96%
0.00%

0.22%
0.00%
0.75%
0.11%

0.08%
0.00%
8.25%
0.20%

0.04%
0.00%
10.02%
0.09%

0.96%
0.00%
14.23%
0.05%

1.21%
0.00%
13.99%
1.19%

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15

down
Dividend
Preference Dividend
Equity Dividend %
Earnings Per Share-Unit
Curr
Earnings Per Share(Adj)Unit Curr
Book Value-Unit Curr

0.12%
0.10%
0.26%

0.10%
0.08%
0.23%

0.11%
0.08%
0.25%

0.14%
0.05%
0.33%

0.18%
0.00%
0.41%

0.02%

0.38%

0.48%

0.62%

3.28%

0.00%
4.11%

0.00%
3.75%

0.00%
3.43%

0.00%
3.64%

0.00%
15.38%

On analyzing the last 5 years P&L, the Total expenses were high in 2014. There was a considerable increase in the
fuel cost in 2014. The gross profit is reduced to 9.91, which was due to the extremely high interest expenses
compared to other years. On analyzing the industry trends, we compared the same P&L with companies in the same
industries, we found the below facts.
Total Expenditure
Year
Bhushan Steel Ltd
Tata Steel
Jindal Stainless Ltd
RashtriyaIspat Nigam
Ltd ( Govt )

Mar
14(12)
72.01%
68.44%
95.71%

Mar
13(12)
69.3%
71.3%
95.40%

Mar
12(12)
69.8%
63.6%
90.82%

Mar
11(12)
72.2%
58.8%
83.42%

Mar
10(12)
74.1%
61.1%
77.85%

90.59%

91.66%

87.83%

87.77%

84.20%

Mar
14(12)
27.99%
31.56%
4.29%

Mar
13(12)
30.7%
28.7%
4.60%

Mar
12(12)
30.2%
36.4%
9.18%

Mar
11(12)
27.8%
41.2%
16.58%

Mar
10(12)
25.9%
38.9%
22.15%

9.41%

8.34%

12.17%

12.23%

18.77%

Operating Profit
Year
Bhushan Steel Ltd
Tata Steel
Jindal Stainless Ltd
RashtriyaIspat Nigam
Ltd ( Govt )

While comparing the total expenditure and operating profit, Bhushan is in par with any company in the industry.

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16

GP, PBT & PAT

Gross Profit
Year
Bhushan Steel Ltd
Tata Steel
Jindal Stainless Ltd
RashtriyaIspat Nigam Ltd ( Govt )

Mar
14(12)
10.89%
27.29%
-6.11%
6.66%

Mar
13(12)
18.8%
24.0%
-4.66%
5.54%

Mar
12(12)
19.8%
31.0%
3.03%
10.76%

Mar
11(12)
21.9%
35.5%
11.17%
10.79%

Mar
10(12)
22.5%
31.8%
15.00%
15.01%

Mar
14(12)
0.98%
22.77%
11.91%
4.46%

Mar
13(12)
11.2%
19.8%
11.22%
4.09%

Mar
12(12)
13.6%
27.7%

Mar
11(12)
18.2%
31.8%

Mar
10(12)
19.0%
27.7%

-1.83%
8.21%

6.22%
8.49%

9.40%
12.28%

Mar
14(12)
0.64%
15.03%
11.71%
2.97%

Mar
13(12)
8.4%
12.8%

Mar
12(12)
10.2%
18.8%

Mar
11(12)
13.3%
22.3%

Mar
10(12)
14.0%
19.4%

-7.68%
2.74%

-1.24%
5.56%

4.43%
5.69%

6.24%
7.84%

Profit Before Tax

Year
Bhushan Steel Ltd
Tata Steel
Jindal Stainless Ltd
RashtriyaIspat Nigam Ltd ( Govt )
Reported Net Profit
Year
Bhushan Steel Ltd
Tata Steel
Jindal Stainless Ltd
RashtriyaIspat Nigam Ltd ( Govt )

While comparing gross profit, PBT and Net Profit, Bhushan steel got low values, due to high interest payments in
2014.
Common Size for balance sheet
Year
SOURCES OF FUNDS :
Share Capital
Reserves Total
Equity Share Warrants
Equity Application Money
Total Shareholders Funds
Secured Loans
Unsecured Loans
Total Debt
Other Liabilities
Total Liabilities
APPLICATION OF FUNDS :
Gross Block
Less : Accumulated Depreciation
Less: Impairment of Assets

GROUP 6

Mar 14

Mar 13

Mar 12

Mar 11

Mar 10

0.32%
19.35%
0.00%
0.00%
19.67%
75.31%
0.37%
75.69%
4.64%
100.00
%

0.37%
22.40%
0.00%
0.00%
22.76%
68.18%
3.57%
71.76%
5.48%
100.00
%

0.42%
23.61%
0.00%
1.24%
25.27%
60.55%
9.29%
69.84%
4.89%
100.00
%

0.48%
25.04%
0.00%
0.00%
25.52%
48.67%
23.00%
71.68%
2.80%
100.00
%

100.0%

56.11%
9.12%
0.00%

53.93%
8.29%
0.00%

59.13%
8.02%
0.00%

62.43%
8.04%
0.00%

23.94
%
10.44%
0.00%

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0.5%
25.4%
0.0%
0.0%
25.9%
54.1%
20.0%
74.1%
0.0%

17

Net Block
Lease Adjustment

47.00%
0.00%

45.64%
0.00%

51.11%
0.00%

54.39%
0.00%

Capital Work in Progress

Investments
Current Assets, Loans & Advances
Inventories
Sundry Debtors
Cash and Bank
Loans and Advances

35.06%
1.34%

31.69%
1.07%

29.46%
1.07%

23.05%
0.77%

13.92%
5.30%
0.18%
3.06%

13.99%
5.89%
0.39%
3.83%

10.76%
3.96%
1.09%
1.97%

13.71%
2.09%
0.15%
2.79%

Total Current Assets

Less : Current Liabilities and
Provisions
Current Liabilities
Provisions
Total Current Liabilities
Net Current Assets
Miscellaneous Expenses not written
off
Deferred Tax Assets
Deferred Tax Liability
Net Deferred Tax
Other Assets

22.46%

24.10%

17.78%

18.74%

12.75%
4.77%
0.78%
6.19%
24.49
%

6.67%
0.09%
6.76%
15.70%

5.26%
0.19%
5.45%
18.64%

5.10%
0.18%
5.28%
12.50%

6.07%
0.21%
6.28%
12.46%

10.18%
0.24%
10.42%
14.07%

0.00%
0.02%
2.98%
-2.95%
3.85%
100.00
%
10.48%

0.00%
0.02%
3.40%
-3.38%
6.33%
100.00
%
3.64%

0.00%
0.02%
3.40%
-3.37%
9.24%
100.00
%
3.18%

0.00%
0.03%
3.05%
-3.02%
12.36%
100.00
%
5.20%

0.00%
0.03%
2.17%
-2.14%
0.00%
100.00
%
5.91%

Total Assets
Contingent Liabilities

13.51%
0.00%
72.16
%
2.40%

The company is highly debt financed. 765 is from long term debts and still they keep a reserve of 20% for future
requirement.
On comparing the same with few other companies in the same industry,
Total Shareholders Funds
Year
Bhushan Steel Ltd
Tata Steel Ltd
RashtriyaIspat Nigam Ltd
Reserves Total
Year

Mar 14
19.67%
64.89%
67.7%

Mar 14

Bhushan Steel Ltd

Tata Steel Ltd
RashtriyaIspat Nigam Ltd
Total Debt
Year

19.35%
63.86%
35.7%

Mar 14

Bhushan Steel Ltd

Tata Steel Ltd
RashtriyaIspat Nigam Ltd

GROUP 6

75.69%
29.63%
28.4%

Mar 13

Mar 12

22.76%
63.11%
68.9%

Mar 13

25.27%
63.05%
81.3%

Mar 12

22.40%
62.00%
33.8%

Mar 13

23.61%
61.88%
35.3%

Mar 12

71.76%
31.44%
28.3%

69.84%
31.60%
15.3%

Mar 11
25.52%
59.18%
88.2%

Mar 11
25.04%
57.75%
36.0%

Mar 11
71.68%
35.68%
7.6%

IIMK-Kochi Campus

Mar 10
25.9%
58.33%
91.3%

Mar 10
25.4%
56.93%
35.8%

Mar 10
74.1%
39.83%
8.7%

18

Net Block
Year

Mar 14

Bhushan Steel Ltd

Tata Steel Ltd
RashtriyaIspat Nigam Ltd
Capital Work in Progress
Year
Bhushan Steel Ltd
Tata Steel Ltd
RashtriyaIspat Nigam Ltd
Net Current Assets
Year
Bhushan Steel Ltd
Tata Steel Ltd
RashtriyaIspat Nigam Ltd

47.00%
25.75%
25.28%

Mar 14
35.06%
19.64%
59.68%

Mar 14
15.70%
-5.89%
11.58%

Mar 13

Mar 12

45.64%
28.43%
20.92%

Mar 13

51.11%
13.73%
10.64%

Mar 12

31.69%
9.97%
55.12%

Mar 13

29.46%
19.38%
63.17%

Mar 12

18.64%
-1.69%
20.28%

12.50%
-0.49%
22.89%

Mar 11
54.39%
14.88%
10.21%

Mar 11
23.05%
7.08%
63.07%

Mar 11
12.46%
7.34%
22.81%

Mar 10
13.51%
19.19%
10.38%

Mar 10
72.16%
6.07%
53.17%

Mar 10
14.07%
5.12%
37.14%

It is showing the debt is high for Bhushan steel, compared to other companies in the same industry. This is one
reason for high interest outflow. Investment in Fixed asset is high compared to the same in the industry.

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Ratio Analysis
Basic Ratios
The basic ratio analysis and the observations of the analysis are shown in the tables below.
Profitability Analysis
Ratio
Profitability
Analysis

2013-14

201213

201112

Comments

Profit Margin

0.00600
62

0.0840
33

Gross Margin

0.46346
46

0.4634
66

Profit margin has dropped from

0.1014 10% in 2011-12 to 8%
4 in 2012-13 to 0.6% in 2013-14
Unlike the profit margin, the
gross margin is pretty
much uniform over the years
46%. It is some other factors
other than the COGS which is
0.4532 affecting the
45 deteriorating performance

Return on Assets

0.00123
17

0.0234
09

Return on assets have gone

0.0300 really bad during the
33 current year from 2% to 0.1%
Big drop with PAT really down.
Same is the case with
Return on Equity

Earnings Per Share

(EPS)
Liquidity Analysis
Ratio
Liquidity
Analysis

2013-14

0.81653
75

Current Ratio

201213

201112

1.0634
56

0.7301
71

Comments

Super Quick Ratio

0.00663
54

0.0181
28

The Cash position in the

company has really gone
0.0489 down. The firm has no liquidity
52 over the years

Debtor Turnover

2.50054
62

3.7657
47

Debtor turnover coming down

5.4136 each each from
74 5.4 to 3.7 to 2.5 during 2013-14

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Inventory Turnover

0.86496
59

1.3017
5

1.6485
95 Inventory turnover coming down
Looks like there is not much
cash left
for expenses

Days Cash
Leverage Analysis
Ratio

2013-14

201213

201112

Comments

Leverage Analysis

Financial Leverage

Debt to Equity
Ratio

5.1474

4.5993
14

4.56261
72

4.0851
8

Financial Leverage is going up

4.4533 yearly
77 from 4.5 to >5
Debt to Equity ratio just going
up from 3.5 to 4.5
Company is going for a lot of
3.4533 debt. Looks like
77 heavy borrowing happening

Efficiency Analysis
Ratio

2013-14

201213

201112

Comments

Efficiency Analysis

Equity Turnover

1.05558
11

1.2812
21

1.3185 Equity turnover going down

1 dramatically

Days Receivable

90.4048
18

60.430
85

44.611 Days Receivable going up from

72 45 to 90 days

Asset Quality

0.68319
55

0.7187
67

0.6311
83

Red Flag Ratios

The ratios related to Red Flag Analysis are shown below.
Irrational ratios
Ratio

Value

GROUP 6

Comments

Benchmarks

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Irrational
Ratios
Days' Sales in
Receivable
Index

The value of 1.49 is above

manipulator's mean index.
1.496 Possible suspect

Gross Margin
Index

The value seems close to a

1 non-manipulator

Asset Quality
Index

1.126
48 Possible suspect

Sales Growth
Index
Total Accruals to
Total Assets
Index

0.901
81 Not a suspect
0.072 Very low value, could be a
2 suspect

Non Manipulators Mean =

1.031
Manipulators Mean = 1.465
Non Manipulators Mean =
1.014
Manipulators Mean = 1.193
Non Manipulators Mean =
1.039
Manipulators Mean = 1.254
Non Manipulators Mean =
1.134
Manipulators Mean = 1.607
Non Manipulators Mean =
0.018
Manipulators Mean = 0.031

Key Ratios for Investing

Ratio

Value

Profit Margin

0.600
62 Red Flag

Top Line Growth

Bottom Line
Growth
Return on
Assets
Return on Equity
Current Ratio

9.818
9
93.55
4
0.123
17
0.634
0.816
54

Comments

Benchmarks

Benchmark 4% to 8%

Negative sales growth

Benchmark 5% to 15%

Big dip in bottom line growth

Benchmark 5% to 15%

Very poor Return on Assets

Red Flag

Benchmark 8% to 12%
Benchmark 9% to 16%

Red Flag

Benchmark 1 to 2

Additional Red Flags

Ratio
Additional Red
Flags

Valu
e

Comments

Benchmarks

Quality of
Earnings

Benchmark < 2

Effective Tax
Rate

Benchmark > 2

Beneish Probit Model

The Beneish Probit model analysis revealed the following facts.
GROUP 6

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XXXX TO BE ADDED BY JIJO

XXXX

GROUP 6

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Trend Analysis
Analysis Results
TO BE DONE

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Qualitative Analysis
Analysis
Sl. No.
1
2
3

4
5

6
7

Observations
Mentioned as satisfactory performance whereas
turnover has come down , though industry demand is
not fallen
Disputed statutory dues 79139 lakhs will have an
effect on profits and cash flow
Debts are raised (debentures, bank loan) mostly by
providing guarantee of the promoter/s, which is not a
healthy corporate practice. The concept of separate
legal entity for company is precisely to transact in its
on capacity, if Bhushan cannot do that, then we
should assume that they dont command a good
respect in fund raising market which is not a good
indicator.
There would be a potential impairment of asset as
Bhushan had refused to pay the call amount of Rs.
1540 lakhs.
Huge investments were made in Bhushan Steel
Australia (2088 lakhs) and Bhushan energy (2400
lakhs) which are companies in which promoter is
interested. There could be potential interest conflicts
The Consolidated entity in Australia is making huge
losses the directors are trying to salvage the same

Annual Report Reference

Page 21 MDA

Earnings per share is 2.61 against 41 in the last year

Page 51 note 41

Page 27
From page 37, notes to
accounts

Page 47 note 32
Page 48 note 35

Page 50 note 37

Some critical Observations and analysis based on last 2013 and 14 annual
reports
Some of the points worth noting come to our observation while analyzing the annual report.
1

We checked the audit report for last 10 years, the same audit firm is continuing not even the signing partner is
rotated this is not a good governance practice and will not give much comfort to the stake holders. Because
there is always a possibility of joining hands, if we notice on an average 20% growth is there in the
remuneration of auditors even if companys revenue is decreasing in 2013-14 and profits are touching all time
low

Sitting fees are paid to directors for attending the Board Meeting and there is a significant difference between
sitting fee to chairman and other directors, the logic of the same is questionable, because sitting fee is not an
effort based thing, and there is no discretion between the Directors. Even if assume that it is based on the
directors performance even if that is the case how how we can anticipate the performanceinput (input in

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board meeting is the performance of the director) of a directors in a board meeting because sitting fee is not
decided after the board its decided upfront for a period as the sitting fee is predetermined.

Mr. BB Singal chairman is sitting in the remuneration committee Remuneration committee is the committee
which evaluates the performance of the whole time and executive directors and fix their salary. The major
salary goes to Mr. Neeraj Singal Vice chairman and Managing Director who is the son of Mr. BB Singal
Chairman. Father evaluating sons performance is a clear interest conflict, that may be one of the reason why
nominee director of LIC is also brought in as a member of the Committee in 2013-14

There is a mention that certain buildings in the possession of the company are not registered in the name of
the company, so there is a possibility that the same may be brought from the directors or their relatives
though specific mention is not there in the referred annual report as the transactions mentioned are bit older

Solid investments are made in associates. Associates are not subsidiaries (subsidiaries are companies in
which BSSBSL have majority holdings) but associates are organizations in which the company has some
connections. Invariably in majority of these companies the directors will have some interest. Theres are not
small investments directors are interested the value of unquoted investments is more than Rs. 38238 lakhs.
There can be potential misuse and interest conflicts and the investors in BSSBSL are not investing in the
company for downstream investment, this need to be further examined

o For example, Huge investments were made in Bhushan Steel Australia (2088 lakhs) and Bhushan
energy (2400 lakhs) which are companies in which promoter is interested. There could be potential
interest conflicts
o As an example of reckless investments consolidated entity in Australia is making huge losses and BSL
is trying to salvage the same

Corporate Guarantees were also given to these associate companies which also can have impact in the
financial if those companies failed to meet its obligations.

The reason for revenue loss in 2013-14 is not explained properly its mentioned as satisfactory performance,
interestingly industry is growing.

If we notice there is a board committee on borrowings, investments and loans none of the committee
members are independent, the three member committee consists of BB Singal (chairman) Neeraj Sigal (MD)
and Nittin Johri. Which means the major investments going to associates are not independently evaluated,
and the committee itself is looking for the funding sources also, there is fundamental conflict on the terms of
reference of the committee and same in the case of its constitution

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Debts are raised (debentures, bank loan) mostly by providing guarantee of the promoter/s, which is not a
healthy corporate practice. The concept of separate legal entity for company is precisely to transact in its on
capacity, if Bhushan cannot do that, then we should assume that they dont command a good respect in fund
raising market which is not a good indicator.

In the auditors report its mentioned that claims in statutory notices are not considered in the financial
statements, so the impact is that the moment it becomes an actual liability to that extent the current profits are
boosted up

There would be a potential impairment of asset as Bhushan had refused to pay the call amount of Rs. 1540
lakhs

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Conclusion
Further Analysis
Looking more closely at the company again showed us even more facts listed below.
Findings

Analysis

Return on Invested Capital

The company is getting squeezed with the margins and as a

result is providing low returns to investors.

Return on Capital down to 7.36%

for the last year compared to
10.94% average for the last 3 years
Return on Equity
Very low ROE of 0.69% for the
last year, as on March 2014.
Refer foot note in Page no 38
Term Loans to the tune of Rs 3385
Crores will mature in one year
while Rs 5695 Cr in 2-3 years Rs
17841 beyond 3 years
Promoters have pledged almost
70% of their holding in the
company against loans.

Company could find difficulty raising equity funding and

considering the present precarious debt situation, the only
means is through internal fund generation or through
promoter infusion of funds. However, the promoter stake is
also seen decreased which raises alarm on their confidence
over future prospects of the company.
Company will have to improve the operational parameters
drastically to meet the maturing debt considering the
EBITDA standing at Rs 2722 Crores only for 2013-14.

While the companys Price Earnings is seen at a decent 22

which could be attributed to the low earnings more than
higher Price discovery in 2014, the Price to Book Value is
at 0.17 signaling low market prospect by the participants.
This could be a sounding alarm bell its creditors who are
secured against the shares and in the event of default a high
distress and a systemic crises could be seen across the
financiers.
Effective promoter holding is only 19 % ie 30% of 63 %.

Note 46
The company has not entered into
any derivative contract to hedge its
foreign currency exposures.
Statutory dues to the tune of Rs
800 Cr is outstanding.

GROUP 6

Un-hedged Forex exposures pose a threat to the company

in times of currency volatility especially when Rupee
depreciates as most of the foreign currency transactions are
import transactions. Forex loans consist of 33% of total
loan portfolio
Considering the low profitability, the big dues outstanding
could become a huge setback if the dispute is awarded
against the company

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Summary
XXXX
From the above various analysis both qualitative, the indications are not positive. There is a lack of transparency and
poor governance is felt, the annual reports the company is not properly giving the true picture, the disclosures are
inadequate, its only telling rosy picture like a marketing document and trying to be in compliance with the legal
requirement for annual report nothing beyond that. Despite a thorough scrutiny of the Annual Reports, supposed to
be the comprehensive document for the use of all stake holders, many fundamental question like the following are
still unanswered

Why the revenue of BSL is coming down in 2014 despite of growth in industry and the same is not explained
anywhere, profits dropped to unprecedented levels, cash flows are not enough to repay loans, company is still
borrowing heavily, these are deduced from the data, none of this things are explained not only that the

language of the report gives an indication that company is performing well how?
We observed many potential interest conflicts how the same is addressed
o Same auditor since the beginning how his independency is ensured
o Father (chairman) evaluating sons (MDs) performance and deciding on salary
o Son reporting to father, other relatives are also there, there reporting structure is not disclosed but
from the designation it can be understood that they report to MD, in this structure how a issue will
come to notice of others

Governance Issues
o Though the company is not performing well and highly leveraged more mored funds are borrowed
and significant investments are made in unquoted companies as decided by Investment committee
which is also the borrowing committee, which does not have any independent directors
o Are independent directors are really independent if so why this unhealthy governess practices are not
curtailed
o The role of the audit committee questionably, are they doing their function properly no mentioning of
their observations though company is in serious debt trap
o No mentioning of risk management, its functions and critical observations.

Essentially what we notice is poor disclosure and lack of transparency the documents is not giving adequate
comfort for giant like BSL. The comfort lies when facts and figures communicate in the similar direction and
coincides with the explanation, which is lacking here. We think to address these issues the statue should
prescribe more meat into the repots for the benefit of stake holders.

Thank You

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References
Web References
Ref 1: https://www.studyblue.com/notes/note/n/chapter-2-notes/deck/192096
Ref 2: https://blogs.oracle.com/eppm/entry/five_globalization_risks_and_how
Ref 3: https://www.boundless.com/management/textbooks/boundless-management-textbook/introduction-to-management-1/currentchallenges-in-management-21/the-challenge-of-globalization-133-10568/

Book References
International Business Oxford Higher Education Rakesh Mohan Joshi
International Business Pearson - Ricky W Griffin, Michael W Pustay
Globalization and Its Discontents Joseph E Stiglitz

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