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Bulking Up On Raw Material
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Considering JSPL's adjusted price, the stock has grown 282.22 times in the 2002-11 period. It underperformed the BSE twice (in 2002 and 2011) in terms of the annual average of absolute returns of BSE 500 companies. Among the steel makers on the Sensex, JSPL's market value of Rs 52,000 crore (on 1 November 2011) beats larger players such as Tata Steel, SAIL and JSW Steel (controlled by Naveen's brother Sajjan).
JSPL's earnings per share (EPS) and price to equity (PE) ratio have also grown, except during the global financial downturn, when the adjusted PE sank to half. Though the promoters have held majority stake since December 2002, about 40 per cent equity is held by the public.
The stock also split 1:5 in January 2008, and five bonus shares were issued for each share in 2009. With this, the equity base expanded. The company has increased the dividend — from 70 paise for a share of Re 1 face value to Rs 5.50 in 2008-09. However, the next two financial years saw the lowest dividends (Rs 1.25 in 2009-10 and Rs 1.50 in 2010-11).
Jindal, chairman and managing director of JSPL, says, "With well-thought out expansions, the company has maintained growth in the past 10 years, and that has increased investor confidence." Market analysts agree. Sanjay Jain, senior vice-president at Motilal Oswal Securities, says JSPL realised the importance of owning raw material resources much earlier. "When others were busy building capacities, JSPL backward integrated its operations, entering coal and iron ore mining. They reaped the benefit when commodity prices spiralled," says Jain. This is also why the company has the highest margins in the sector.
It was also an early bird in the merchant power business. In a year-and-a-half, it recovered the cost incurred in building power plants, says Ravindra Deshpande, research analyst at Elara Securities. Sushil Maroo, director and group chief financial officer of JSPL, says they have sufficient supplies of thermal coal and iron ore. Apart from the large iron ore acquisition in Bolivia, JSPL plans to invest nearly $37 billion by 2020 to increase capacities. And, the capital for these projects? In 2010-11, the company had a consolidated net profit of Rs 5,115 crore on a turnover of Rs 13,111 crore; operating margin was an impressive 49 per cent. Its borrowings stood at Rs 14,556 crore at the end of the June quarter. "We are looking at a 60:40 debt-equity ratio to fund these projects," says Maroo. The current debt-equity ratio is 0.76.
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(This story was published in Businessworld Issue Dated 14-11-2011)