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Financial Report on Tata Steel

ByAnulika Singh Ishita Banerjee Pamela Roy Poulomy Roy Sheeladitya Ray Himanjan Borah Barnali Medhi

Financial Analysis of Tata Steel Ltd. 2011-12


Introduction:
An attempt has been made to analyze Tata Steels overall performance and assess its current financial standing. The purpose of this analysis is to assess companys financial health and performance. Effective decision making requires evaluation of the past performance of the companies and assessment of the future prospects. The starting point in analysis is to look at the past record. Information about past performance is useful in judging future performance. An assessment of the current status will show where the company stands at present. To a large extent, the expectations of investors and creditors about future performance are shaped by their evaluation of past performance and current position. Investors and creditors use information about past to assess the prospects of a company. Investors expect an adequate return from the company in the form of the dividends and market price appreciation. Creditors expect the company to pay interest and repay the principal in accordance with the terms of lending. Therefore they are interested in predicting the earning power and debt paying ability of the company. Investors and creditors try to balance expected risks and return.

Needless to mention comparisons are essentially intended to throw light on how well a company is achieving its objectives. In order to decide the types of comparisons that are useful, we need first to consider what a business is all about? What its objectives are. A generalization that the overall objective of a business is to create value for its shareholders while maintaining a sound financial position; implicit to this statement is the assumption is that value creation can be measured. Our approach to financial analysis followed a comprehensive framework of looking at various parameters of company performance and use different ratios to substantiate the analysis. The framework of the analysis will be as under: Topline Growth Profit and Profitability Liquidity Analysis Assets Growth Capital Structure Analysis Assets Utilization Ratio Fund Flow Statements Market Perception Any other distinguishing Feature.

Here ratios and other qualitative aspects have been considered in a sequence intended to facilitate an understanding of the total business. First as an analysis one has to look at the firms performance in the broadest terms and then worked down through various levels of detail in order to identify the significant factors that accounted for the overall results. If the values of the ratios used in this analysis are compared with their values for other time periods, the comparison is called a longitudinal, or trend analysis. Dozens of ratios can be computed from a single set of financial statements. Each analyst tend to have a set of favourite ratios selected from those described below and probably from some which has not been described. Although here many frequently used ratios have been described, the best analytical procedure is not to compare all of them mechanically but rather to describe first which ratios might be relevant in the particular type of investigation to expertise the trend and its significance.

Top line Growth


From the Profit and Loss Account we observe that TATA STEEL has registered a top line growth of 16.35 per cent in 2011-2 compared to 2010-11. In absolute terms it has achieved a top line of Rs 34819.89 crores in 2011-12 compared to Rs 29924.71 crores in the previous period. Top line of TATA STEEL comprises of Sales and Other Operating Income and Other Income. Both the components have grown at different rates as could be seen from the Table below.

Table 1: Top line Growth of Tata Steel Ltd.

Sales and Other Operating Income comprise of Sale of Finished steel, Agrico products, Welded steel tubes and other various products and Other operating income. Table -2 below shows how all these components of sales and other operating income has increased or decreased compared to last year.

Table 2: Break up Sales

Table -2 reveals that the sales revenue of almost all the items have increased in 2011-12 compared to 2010-2011 except Agrico products, Semi-finished steel and scrap, Ferro manganese, metallurgical machinery, and unfinished saleable steel. Care should be taken in this regard. Finished saleable steel, welded steel tubes, byproducts, charge chrome, other raw materials, other products including tubular steel structures, bearings, and raw materials like scraps, has 19.72, 9.18, 25.84, 28.9, 9.8, 13.25, 5.47, 1.78 percent respectively in the year 2011-12 in comparison to its previous year.

Profit and Profitability


The ability to generate profit on capital invested is a key determinant of a company's overall value and the value of the securities it issues. Consequently, many equity analysts would consider profitability to be a key focus of their analytical efforts. Profitability ref1ects a company's competitive position to the market, and by extension, the quality of its management. The income statement reveals the sources of earnings and the components of revenue and expenses. Earnings can be distributed to shareholders or reinvested in the company. Reinvested earnings' enhance solvency and provide a cushion against short-term problems.

Table 3: Profitability Ratios A B C D E F G H I J Profit before tax(PBT) Net Finance Charges Depreciation EBDITA(A+B+C) Less: Depreciation EBIT(D-E) Interest PBT(F-G) Tax PAT(H-I) 2010-11 9776.85 1735.70 1146.19 12658.74 1146.19 11512.55 1735.70 9776.85 2911.16 6865.69 2011-12 9857.35 1925.42 1151.44 12934.21 1151.44 11782.77 1925.42 9857.35 3160.93 6696.42

Table 4: Profitability and DuPont Analysis ROE (%) ROA (%) Leverage Profit Margin (%) Asset Turnover Tax Burden Interest Burden EBIT Margin 2010-11 14.62 7.67 1.90 22.94 0.33 0.70 0.85 0.38 2011-12 12.72 6.96 1.82 19.23 0.36 0.68 0.84 0.34

From the Analysis we can see that: The Net Profit Margin of TATA STEEL CO. has increased to 28.30% in 2011-12 as compared to 22.94% in 2010-2011. The return on assets (ROA) of TATA STEEL has decreased to 14.25% in 2011-12 compared to 14.79% in 2010-11. The ROE of the company has also declined from 14.62% in 2010-11 to 12.72% in 2011-12. These indicate that there is no improvement in the profitability of the company from the angle of investment of total assets as well as from equity shareholders perspective.

The Decomposition of ROE

ROE is obtained as: ROA Leverage. For TATA STEEL the leverage position has remained declined in 2011-12 compared to 2010-11. Hence the increase in ROE is mainly attributable to increase in ROA. Further ROA is given by Profit margin Assets Turnover. The profit margin of TATA STEEL has increased from 22.94% in 2010-11 to 28.30% in 2011-12. Moreover, the Assets Turnover of the company has gone up from 0.32times in 2010-11 to 0.35 times in 2011-12 and both have positively contributed towards the improvement in ROA. In addition to these, it has also been observed that the interest burden of the company has remained low consistently in both the financial years. However, the EBIT margin of TATA STEEL has decreased from 39.1% in 2010-11 to 34.7% in 2011-12

implying thereby that the earning ability of the company has gone down in 2011-12 compared to 2010-11.

Liquidity
Table 5: Current Ratio and Quick Ratio of Tata Steel 2010-11 18113 3954 14159 13095.89 1.38 1.08 5017 2011-12 12864 4859 8005 16903.64 0.76 0.47 (4039.64)

1.Current Assets 2.Inventories 3.Qick Assets(1-2) 4.Current Liabilities 5.Current Ratio(1/4)times 6.Quick Ratio(3/4)times 7.Net Working Capital(1-4)

For TATA STEEL the Current Ratio has decreased to 12864.50 crores in 2011-12 compared to 18113.02 crores in 2010-11. It is difficult to say what the ideal current ratio should be. Current ratios tend to be sector-specific, that is, different business sectors are likely to have different typical current ratios. It is also possible that an apparently healthy current ratio could actually indicate inefficient management of stocks and debtors as these may have been allowed to accumulate. Conversely an apparently low current ratio may be the result of efficient stock and debtor management, as these current assets are being turned over quickly and stock management systems, such as Just in Time (JIT), may be in operation. A more stringent test of liquidity than the current ratio is the acid test ratio or quick ratio. In this case, by subtracting the stock figures from CAs, it is suggested that this ratio gives a more immediate indication of the firms ability to settle its current debts. This is because stock is less liquid compared to other liquid assets like cash or receivables. Usually a quick ratio of 1:1 is considered satisfactory. However, here also it may vary industry wise. For TATA STEEL the quick ratio has decreased to 0.47 in 2011-12 compared to 1.08 in 2010-11. This is an indication of no-improvement in short term liquidity of the company in 2011-12 compared to its previous year. However, the quality of current asset also needs to be examined while commenting on the current assets. Sometimes in the companies balance sheet one observes huge amount of loans and a dvances. These loans advances in a shorter time span cannot be converted to liquidity. This point has to be kept in mind while assessing the liquidity of any company. For TATA STEEL it has been observed that the net working capital of the company has become -4039.64 crores in 2011-12 from 5017.13

crores in 2010-11. This is mainly due to the decrease in current investments in 2011-12 (1204.17crores) compared to its previous year 2010-11(2999.79crores) and the decrease in short term loan and advances in 2011-12 (1828.09 crores) compared to its previous year 2010-11 (6458.94 crores).

Capital Structure Analysis


Table 6: D/E Ratio and Interest Coverage Ratio of Tata Steel 2010-11 Debt Equity Ratio (debt capital/eq. sh. 0.49 cap.) Interest Coverage Ratio (EBIT/Interest) 7.76 2011-12 0.41 9.80

The analysis of capital structure of TATA STEEL reveals that the company has used significant amount of borrowed capital in comparison to equity capital in both the financial years 2010-11 and 2011-12. This simply indicates that the company has financed its capital structure almost equally in both debt and equity. Hence the financial risk of the company is high. However, the debt equity ratio of the company has decreases to 0.40 times in 2011-12 from just 0.52 times in the previous year. In fact, debt equity ratios vary from industry to industry. Firms that have relatively stable demand for their products (e.g., electricity) tend to have high leverage. In contrast firms that face wide fluctuation in demand (e.g., consumer goods) prefer to maintain low debt equity ratio.

Interest Coverage Ratio (ICR) is a measure of protection available to creditors for payment of interest charges by the company. A high ratio implies adequate safety for payment of interest even if there were a reduction in earnings of the company. The ICR of TATA STEEL has reduced to 21.572128 times in 2011-12 from 38.8567 times in 2010-11. This reduction in ICR is a matter of concern for the creditors of the company as TATA STEEL is not maintaining a very high ICR in the precious year also.

Assets Growth
Growth in the asset indicates that the companies are making a planned effort to ensure future revenue earning capacity as well as targeting higher profitability. Expansion or addition of fixed assets indicates future production capacity there by indicates sustainable top line growth. In case of addition of balancing equipment it will indicate the company is trying to achieve competitiveness by managing its cost structure and there by enhance its bottom line. Addition to the current asset indicates

inventory and debtors build up in a systematic manner to strengthen cash to cash cycle and making the operating cycle move faster thereby trying to ensure top line growth for the current period. However, there are cases in companies where current asset is growing by default that is the company is not able to push it inventory in the market neither it is able to realize its debtors at a faster rate. For TATA STEEL the assets growth is presented below:

Table 7: Assets Growth of Tata Steel

The above table reveals that the investment in fixed assets has been increased in 2011-12 compared to its previous period. This increase is mainly due to increase in plant and machinery. Non-current Investments of the company has increased in 2011-12 compared to 2010-11. Due to decrease in current assets and increase in current liabilities, the net working capital of TATA STEEL has reported a reduction in 2011-12 compared to 2010-11. This aspect has already been discussed under the liquidity analysis.

Asset Utilization or Turn over Ratios


Table 8: Utilization Ratios of Tata Steel

The inventory turnover ratio for Tata Steel has gone down from 7.44 times in 2010-11 to 6.98 times in 2011-12 indicating higher turnover in 2011-12 with lesser inventory holding. How many days sales equivalent is blocked in the inventory can be calculated by dividing 360 days in a year by inventory turnover ratio. We can see from the above table that last year 48.39 days equivalent of sales were

blocked in inventory which has gone up to 51.58 days in 2011-12 which shows better utilization of inventory.

Receivable (Debtors) Turnover Ratio and Average Collection Period. The second major activity ratio is the receivables or debtors turnover ratio. Allied and closely related to this is the average collection period. It shows how quickly receivables or debtors are converted into cash. In other words, the debtors turnover ratio is a test of the liquidity of the debtors of a firm. The liquidity of a firms receivables can be examined in two ways: (i) Debtors or receivables turnover; (ii) Average collection period. The debtors turnover shows the relationship between the sales and debtors of a firm. Average Collection period for TATA STEEL were 5.19 days in 2010-11 and in 2011-12 it has increased to 9.59 days. This ratio also measures the liquidity of a firms debtors and here this TATA STEEL has reported a major improvement over the last year.

7. Market Perception How a companys performance is viewed by investors is reflected in its (actual and potential) market price of share. How a company has done is reflected in its earnings per share.

Earnings per Share The earnings per share figure is one of the most important ratios used by investment analysis, yet it is one of the most deceptive. If no dilutive securities are present in the capital structure, then earnings per share is simply computed by dividing PAT by number of ordinary shares. IF, however,

convertible securities, stock options, warrants, or other dilutive securities are included in the capital structure, (1) earnings per equity and equity equivalent shares and (2) fully diluted earnings per share figures may have to be used. For Tata Steel basic earnings per share in 2010-11 were Rs.75.63 for 1 rupee fully paid up share which has increased to Rs. 67.84 in 2011-12. The EPS of Tata Steel has decreased compared to previous year.

Certain problems exist when the earnings per share ratio is computed. Often earnings per share can be increased simply by reducing the number of shares outstanding through buy back of share by the company. In addition, the earnings per share figure fail to recognize the probable increasing base of the stockholders investment. That is, earnings per share, all other factors being equal, will probably increase year after year if the corporation reinvests earnings in the business because a larger earnings figure is generated without a corresponding increase in the number of shares outstanding. Because even-well informed investors attach such importance to earnings per share, caution must be exercised, and it should not be given more emphasis than it deserves. The common problem is that the per-share

figure draws the investors attention away from the enterprise as a whole which involves differing magnitudes of sales, costs volumes, and invested capital and concentrates too much attention on the single share of stock.

P/E Ratio The price earnings (P/E) ratio is an off-quoted statistic used by analysts in discussing the investment possibility of a given enterprise. It is computed by dividing the market price of the stock by its earnings per share. A steady drop in a companys price earnings ratio indicates that investors are wary of the firms growth potential. Some companies have high P/E multiples, while others ha ve low multiples. This measure involves an estimation not directly controlled by the company: the market price of its ordinary shares. Thus the P/E ratio is the best indicator of how investors judge the future performance (We say future performance because, conceptually the market price indicates shareholders expectations about future returns dividend and share price increases-discounted to a present value at a rate reflecting the riskiness of these returns.) Management is of course interested in this market appraisal, and a decline in the companys P/E ratio, if not explainable by a general decline in stock market prices is a cause for concern. Also, management compares its P/E ratio with those of similar companies to determine the market places relative rankings of the firms. The P/E ratio for the year 2010-2011 was 8.20 and for the year 2011-2012 were 6.93. We see that it has decreased from the previous year.

P/E ratios of industries vary, reflecting differing expectations about the relative rate of growth in earnings in those industries. At times, the P/E ratios for virtually all companies decline, predictions of general economic conditions suggest that corporate profits will decrease and/or interest rates will rise.

Cash Flow Statement:

The cash flow from operating activities has increased by 22.99% in 2011-12 (10256.47 crores) compared to 2010-11 (8339 crores). The outflow of cash flow from investing activities has reduced in 2011-12 (-2859.11 crores) compared to 2010-11 (-2859.11 crores). This is attributed to the increase in purchase of fixed assets from 2010-11 (4118.58 crores) to 2011-12 (7059.20 crores) and decrement in inter-corporate deposits from 2010-11 (7667.09 crores) to 2011-12 (585.93 crores). The cash flow from financing activities has increased by 34.48% in 2011-12 (7599.35 crores) compared to 2010-11 (5650.99 crores).

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