FACG PROJECT
Analyze the financials of the top 10 companies in the Iron and Steel Sector and
comment on the quality of their numbers for value investing and corporate
valuation regarding Bankruptcy status by Altman Z Score
SECTION B
16P191 | ARIHANT JAIN
16P128 | ANIKET SHIWALE
16P130 | ANURAG AGARWAL
16P152 | NIKITA SURYAVANSHI
16P143 | HONEY VASHISHTHA
About Altman Z-Score:
The Altman Z-score is the output of a credit-strength test that gauges a publicly traded
manufacturing company’s likelihood of bankruptcy. The Altman Z-score is based on five financial
ratios. It uses profitability, leverage, liquidity, solvency and activity to predict whether a company
has a high degree of probability of being insolvent.
It can be calculated as Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Here, X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = EBIT / Total Assets
X4 = Market Value of Equity / Total Liabilities
X5 = Sales / Total Assets
The Interpretation of Altman Z-Score:
• Z-SCORE ABOVE 3.0 – The company is considered ‘Safe‘ based on the financial figures only.
• Z-SCORE BETWEEN 2.7 and 2.99 – ‘On Alert’. This zone is an area where one should ‘Exercise
Caution’.
• Z-SCORE BETWEEN 1.8 and 2.7 – Good chance of the company going bankrupt within 2 years
of operations from the date of financial figures given.
• Z-SCORE BELOW 1.80 -Probability of Financial Catastrophe / Financial Embarrassment is Very
High.
If the Altman Z-Score is close to or below 3, then it would be better to do some serious due diligence
by the company before even considering investing.
We have analysed the following 10 companies in Iron and Steel Sector to check their bankruptcy
status:
1. Tata Steel
2. JSW Steel
3. NMDC Ltd
4. Steel Authority of India Limited
5. WELSPUN CORP LTD
6. Tinplate Co. of India Limited
7. Jindal Steel & Power Limited
8. Prakash Industries Limited
9. Tata Metaliks Limited
10. Indian Metals & Ferro Alloy
1. Tata Steel
Tata Steel Limited (formerly Tata Iron and Steel Company Limited (TISCO)) is an Indian multinational
steel-making company headquartered in Mumbai, Maharashtra, India, and a subsidiary of the Tata
Group. It is one of the top steel producing companies globally with annual crude steel deliveries of
23.88 million tonnes (in FY17), and the second largest steel company in India (measured by domestic
production) with an annual capacity of 13 million tonnes after SAIL.
Below is a snapshot of the financials of the company for the last 3 fiscal years:
a) As can be seen from above, sales have increased by only 24% in FY17 as compared to the
previous year, but the net income has increased by more than 260 percent. This is due to
substantial stock adjustments in FY17 of 1329 crore which has led to increase in net income.
b) The quality of earnings increased from 75% to 771% in FY16 but reduced to 323% in FY17.
This is due to the fact that though the net income has increased substantially over the years
but the cash flow from operations has not increased at the same rate.
c) Though the value of Altman Z Score has improved over the last 3 years, it is less than the
lowest benchmark of 1.8. This indicates that there is a high probability of financial
catastrophe for the firm. Two major factors that have led to a low Z score value for the firm
are working capital and operating income.
d) Working capital of the firm has stayed negative for the last 3 years and has decreased
consistently over the period. This is a matter of concern and needs to be addressed.
e) Operating income as a multiple of total assets has consistently stayed low for the firm. This
indicates a low operating efficiency and is a prime contributor to a low Z score for the firm.
Company Name
2014-15 2015-16 2016-17
Sales
46,577.26 42,697.44 53,260.96
Change in sales –8.33% 24.74%
EBIT 10,484.84
3,391.39 8,045.48
Change in EBIT –67.65% 137.23%
Net Income 6,439.12 955.65 3,444.55
Change in Net Income –85.16% 260.44%
Operating Cash Flow 4,851.89 7,371.80 11,131.26
Change in Operating Cash Flow 51.94% 51.00%
Altman Z Score(1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5) 1.39 1.14 1.58
DACit 0.068 (0.068) (0.012)
Quality of earnings 75% 771% 323%
TATA STEEL LTD
2. JSW Steel
The flagship company of over $11 billion JSW Group, JSW Steel is one of India’s leading integrated
steel manufacturers with a capacity of 18 MTPA. It is one of the fastest growing companies in India
with a footprint in over 140 countries. JSW Steel is an Indian steel company owned by the JSW
Group based in Mumbai, Maharashtra, India. JSW Steel, after merger of ISPAT steel, has become
India’s second largest private sector steel company. The current installed capacity is 18 MTPA.
Below is a snapshot of the financials of the company for the last 3 fiscal years:
Company Name
2014-15 2015-16 2016-17
Sales
50,393.31 40,858.96 56,913.25
Change in sales -18.92% 39.29%
EBIT
6,157.61 -2,020.54 8,774.07
Change in EBIT -132.81% 534.24%
Net Income
2,166.48 -3,529.67 3,576.54
JSW STEEL LTD
