Bhuswan Steel Case Study

To,

The Director

Memo on potential acquisition

This report will compare JSW Steel and Bhushan Steel, both listed on Bombay Stock Exchange, India. Comparison is done by paying close attention to selected ratios, risk analysis and working capital of the companies.

Both companies have been manufacturing steel in India for over 30 years. JSW produces and markets steel, and it is one of the leading exporters of coated products with a presence in over 100 countries. The company’s six steel plants have a combined installed capacity of 14.3 million tonnes per annum (MTPA). JSW Steel markets its products across India through 400 retail outlets and exports its products to more than 140 countries in the globe. The company along with its subsidiaries

Ratios Bhushan Steel JSW Steel FY2013 FY2012 FY2013 FY2012

1 INVENTORY PERIOD 243.2 186.7 49.3 48.8

2 CREDITORS PERIOD 165.4 61.1 136.6 149.8

3 DEBTORS PERIOD 92.5 78.7 17.7 18.9

4 CASH CONVERSION CYCLE 170.3 204.3 (69.6) (82.2)

The cash conversion cycle (CCC) measures the number of days a company's cash is tied up in the production and sales process of its operations and the benefit it gets from payment terms from its creditors. The shorter this cycle, the more liquid the company's working capital position is. (Investopedia, 2014)

JSW has a better cash conversion cycle of nearly 70days compared to 170 days for BSL. JSW’s CCC indicate a more effectively managed operation, the money is not tied up for long in inventory or accounts receivable.

Table below illustrates the cash flow activity:

Cash Flow Analysis

Financial Year ending 31st March

No. Cash Flow Bhushan Steel JSW Steel FY2013 FY2013

1 CF From OPERATING ACTIVITIES 2,311 5,274

2 CF From INVESTING ACTIVITIES (5,031) (4,738)

3 CF From FINANCING ACTIVITIES 2,649

During the FY2013, BSL has borrowed from Banks and other means to fund its Investments. On the other hand, JSW has a negative Cash flow from Financing Activity, which indicates that company has used Operating activity to pay off its Borrowing and fund for its investments.

In addition to external financing, BSL has used up its Cash from previous year which has reduced its Cash balance to only INR83 crores. With such low cash reserves, it will be difficult for the company to pay its current liabilities.

Comparing both the companies, JSW Steel has a better cash flow management, where its Cash Flow from Operating Activity is able to fund both Investment and Financing Activities, while increasing the cash balance.

Debt Management

Gearing ratio shows the extent to which shareholders equity can fulfil a company's obligations to creditors in the event of liquidation. As illustrated in the Debt Management ratio analysis table below, JSW Steel has a better Gearing ratio of 102% compared to BSL’s