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Steel: Liquidity analysis
Dec 15, 2008

The global credit crisis has cut a bleak future for almost all the sectors across the globe. Corporates all over the world are finding it difficult to get funds at affordable rates owing to the liquidity crunch. This in turn is affecting the working capital management and capex plans of companies. In this article, we have analyzed the liquidity position of three major steel companies in the Indian markets viz. Tata Steel, SAIL and JSW Steel, which together account for more than 40% of the domestic market share.

  Cash and bank
balance (Rs m)
Cash flows from
operations/sales (%)
Current
ratio
Debt to
equity ratio
Interest
coverage ratio
Tata Steel 42,316 29.2 1.9 1.6 8.8
SAIL 139,330 17.8 2.0 0.1 65.6
JSW Steel 4,715 30.7 0.9 1.5 4.8

As we can see from the above table, all the three companies have strong cash and bank balance and are in position to utilize this to fund their working capital requirement without raising any substantial short term borrowings.

The interest coverage ratio (2QFY09) of these companies looks quite healthy with SAIL enjoying coverage ratio as high as 66x because of its nearly debt free position. Tata Steel and JSW Steel on the other hand, have the ratio of around 9x and 5x respectively, which signifies that these companies will be able to comfortably service their debt in the short to medium term.

The current ratio indicates the ability of company to pay off its short-term obligations, which gives comfort to its lenders. Thus if we see from the above table, Tata Steel and SAIL are comfortably placed to meet their short term obligations while JSW Steel might face certain strain given its lower current ratio.

It can be concluded from the above analysis that the above mentioned steel companies are in a comfortable position and have sufficient liquidity to counter the crisis. As far as capex plans are concerned, both Tata Steel and JSW Steel may have to rely on their internal accruals for the same as their leverage ratios are already past what we consider to be a conservative number.

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