This article provides a fundamental analysis of Steel Authority of India Ltd (SAIL), Jubilant Life Sciences Ltd and Satluj Jal Vidyut Nigam (SJVN) Ltd.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Q: Hi, Can you please provide your views on SAIL?
Dr Vijay Malik’s Response
Thanks for writing to me.
Financial Analysis of SAIL:
Steel Authority of India Ltd (SAIL) is a company that has destroyed shareholders’ wealth over the years. In the last decade (2005-2014), it has retained earnings worth INR 41,698 cr. (416.98 billion) whereas its market cap has increased by only INR 8,234 cr. (82.34 billion). Shareholder’s wealth of about INR 33,000 cr. (330.00 billion) has been lost over the last decade. It fails miserably on the test of management highlighted by Warren Buffett that the management should at least produce $1 in market value for $1 of earnings retained. If any company is not able to do this, then it should consider distributing its earnings to shareholders, in form of dividends, rather than keeping it with itself and in turn investing in a suboptimal business.
SAIL’s topline (sales) has been almost stable for the last 7 years (2008-2014). Sales have grown at a meagre 1% to 4% per annum. Operating profitability (OPM) declined from 28% in 2008 to 8% in 2014. Despite the increase in sales, from INR 40,000 cr. in 2008 to INR 47,000 cr. in 2014, the operating profit has decreased from INR 11,200 cr. in 2008 to INR 3,900 cr. 2014. Similarly, Net profitability (NPM) has declined from 19% in 2008 to 6% in 2014, indicating that during 2008-2014, despite an increase in sales, net profit decreased from INR 7,500 cr. (2008) to INR 2,600cr. (2014).
Advised reading: How to do Business Analysis of Steel Companies
When a company does not make sufficient money to fund its capital-intensive business, which itself is very low yielding, then it starts relying on debt financing to fund its cash requirements. The same thing happened in the case of SAIL. Over the last decade, the total debt of SAIL has increased almost five times, from INR 5,700 cr. in 2005 to INR 24,267 cr. in 2014. This huge debt will hurt the company in times of stress, as lenders will keep demanding their interest and principal whether the company is doing good or bad.
Therefore, looking at the past performance of Steel Authority of India Ltd (SAIL), it does not seem an attractive business to invest in. An investor can find many better opportunities in the current markets.
However, you should do your own analysis before you make any investment decision related to SAIL or any other company.
Hope it helps.
Regards,
Analysis of Jubilant Life Sciences Ltd
Q: Hi Mr Vijay, I am holding Jubilant Life Sciences Ltd @ Rs xx/-. It’s PE < 10 in comparison to Industry PE. From the last two/three quarters, the topline & bottom-line figures are not quite impressive. In addition, debt in the company’s book is a worrisome factor. I would request you to throw some light on this counter.
Dr Vijay Malik’s Response
Thanks for writing to me!
I appreciate your analysis of Jubilant Life Sciences Ltd as you have rightly pointed out the problem areas in the company.
Financial Analysis of Jubilant Life Sciences Ltd:
Jubilant Life Sciences Ltd (Jubilant) is another such company that has destroyed shareholders’ wealth over the years. In the last decade (2005-2014), it has retained earnings worth INR 1,786 cr. whereas its market cap has increased by only INR 701 cr. Effectively, shareholders’ wealth of INR 1,085 cr. has been destroyed. It has failed miserably on the test of management highlighted by Warren Buffett that if the management should at least produce $1 in market value for $1 of earnings retained. Ideally, if any company is not able to invest money in its business profitably, then it should consider distributing its earnings to shareholders as dividends, rather than keeping it with itself and in turn investing in a suboptimal business.
Jubilant has been growing its sales but this growth has come at the cost of profitability. Sales have grown from INR 3,524 cr. in 2009 to INR 5,852 cr. in the latest four quarters. However, operating profitability (OPM) has declined from 20% in 2009 to 12% in latest 4 quarters. Despite a 66% increase in sales during these 6 years, the operating profit has remained stable at about INR 690 cr. The performance on net profitability is even worse. Net profitability (NPM) has declined from 16% in 2008 to negative in the latest 4 quarters, indicating that during 2008-2014, despite an increase in sales, net profit decreased from INR 400 cr. (2008) to a loss of INR 2 cr. (latest 4 quarters).
In absence of good operating performance, Jubilant is relying on debt financing to fund its cash requirements. Over the last decade, the total debt of Jubilant Life Sciences has increased almost eight times, from INR 372 cr. in 2005 to INR 2,905 cr. in 2014. The debt has reached almost 4,000 cr. in 2011. This huge debt will hurt the company in times of stress.
Therefore, looking at the past performance of Jubilant Life Sciences Ltd, it does not seem an attractive business to invest in. An investor can find many better opportunities in the current markets.
However, you should do your own analysis before you make any investment decision related to Jubilant Life Sciences or any other company.
Hope it helps.
Regards,
Analysis of Satluj Jal Vidyut Nigam (SJVN) Ltd
Q: Hello can you please also give some light (fundamentally) on SJVN according to me the ratios that you mention are fully satisfied with this stock also. Thanks in advance.
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of Satluj Jal Vidyut Nigam Ltd (SJVN):
The Topline of Satluj Jal Vidyut Nigam Ltd (SJVN) is almost stagnant for the last many years. Though profitability margins are good, debt is low, however, I prefer investing in companies, which have grown their business at good growth rates.
However, as there is no single road to success, you should make your own call.
Regards,
P.S.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
