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Financial Report on Tata Steel

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

An assessment of the current status will show where the company stands at present. The starting point in analysis is to look at the past record. Our approach to financial analysis followed a comprehensive framework of looking at various parameters of company performance and use different ratio’s to substantiate the analysis. Needless to mention comparisons are essentially intended to throw light on how well a company is achieving its objectives. we need first to consider what a business is all about? What its objectives are. Therefore they are interested in predicting the earning power and debt paying ability of the company. To a large extent. the expectations of investors and creditors about future performance are shaped by their evaluation of past performance and current position.Financial Analysis of Tata Steel Ltd. In order to decide the types of comparisons that are useful. Investors and creditors try to balance expected risks and return. 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. implicit to this statement is the assumption is that value creation can be measured. Effective decision making requires evaluation of the past performance of the companies and assessment of the future prospects. 2011-12 Introduction: An attempt has been made to analyze Tata Steel’s overall performance and assess its current financial standing. Creditors expect the company to pay interest and repay the principal in accordance with the terms of lending. . The purpose of this analysis is to assess company’s financial health and performance. Investors and creditors use information about past to assess the prospects of a company. Information about past performance is useful in judging future performance. A generalization that the overall objective of a business is to create value for its shareholders while maintaining a sound financial position. Investors expect an adequate return from the company in the form of the dividends and market price appreciation.

the comparison is called a longitudinal. First as an analysis one has to look at the firm’s 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. Agrico products. In absolute terms it has achieved a top line of Rs 34819. . Welded steel tubes and other various products and Other operating income. Top line Growth From the Profit and Loss Account we observe that TATA STEEL has registered a top line growth of 16. Both the components have grown at different rates as could be seen from the Table below. Sales and Other Operating Income comprise of Sale of Finished steel.Here ratios and other qualitative aspects have been considered in a sequence intended to facilitate an understanding of the total business.71 crores in the previous period. If the values of the ratios used in this analysis are compared with their values for other time periods. Each analyst tend to have a set of favourite ratios selected from those described below and probably from some which has not been described. Top line of TATA STEEL comprises of Sales and Other Operating Income and Other Income. Although here many frequently used ratios have been described. Table -2 below shows how all these components of sales and other operating income has increased or decreased compared to last year.89 crores in 2011-12 compared to Rs 29924. or trend analysis. Dozens of ratios can be computed from a single set of financial statements.35 per cent in 2011-2 compared to 2010-11. 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. Table 1: Top line Growth of Tata Steel Ltd.

other products including tubular steel structures. byproducts. 9. metallurgical machinery. 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. 1. and raw materials like scraps. 28. 9.78 percent respectively in the year 2011-12 in comparison to its previous year. 25. Consequently. the quality of its management. Care should be taken in this regard. bearings. and unfinished saleable steel. charge chrome.84. and by extension.25. Ferro manganese. Earnings can be distributed to shareholders or reinvested in the company.47. welded steel tubes.8. Semi-finished steel and scrap. The income statement reveals the sources of earnings and the components of revenue and expenses.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. 5.72.18. other raw materials. Profitability ref1ects a company's competitive position to the market. 13.9. Reinvested earnings' enhance solvency and provide a cushion against short-term problems. has 19. . Finished saleable steel. many equity analysts would consider profitability to be a key focus of their analytical efforts.

16 6865.70 1146.25% in 2011-12 compared to 14.44 12934.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 9776.21 1151.33 0.42 1151.79% in 2010-11.90 22.23 0. .35 1925.19 12658.84 0.62 7.42 9857. 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.68 0.30% in 2011-12 as compared to 22.36 0.85 0.94% in 2010-2011.38 2011-12 12. The return on assets (ROA) of TATA STEEL has decreased to 14.69 2011-12 9857.70 0.34 From the Analysis we can see that: The Net Profit Margin of TATA STEEL CO.85 1735.44 11782. has increased to 28.42 Table 4: Profitability and DuPont Analysis ROE (%) ROA (%) Leverage Profit Margin (%) Asset Turnover Tax Burden Interest Burden EBIT Margin 2010-11 14.82 19.93 6696. The ROE of the company has also declined from 14.77 1925.55 1735.62% in 2010-11 to 12.85 2911.94 0.96 1.70 9776.74 1146.35 3160.67 1.72 6.19 11512.72% in 2011-12.

94% in 2010-11 to 28. Moreover.35 times in 2011-12 and both have positively contributed towards the improvement in ROA. For TATA STEEL the leverage position has remained declined in 2011-12 compared to 2010-11. The profit margin of TATA STEEL has increased from 22.7% in 2011-12 . it has also been observed that the interest burden of the company has remained low consistently in both the financial years. Further ROA is given by Profit margin × Assets Turnover. Hence the increase in ROE is mainly attributable to increase in ROA. However.1% in 2010-11 to 34.32times in 2010-11 to 0. the Assets Turnover of the company has gone up from 0.The Decomposition of ROE ROE is obtained as: ROA ×Leverage.30% in 2011-12. In addition to these. the EBIT margin of TATA STEEL has decreased from 39.

However. For TATA STEEL it has been observed that the net working capital of the company has become -4039. For TATA STEEL the quick ratio has decreased to 0.Current Ratio(1/4)times 6.64 crores in 2011-12 from 5017.47 (4039. 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. may be in operation.Inventories 3. This is because stock is less liquid compared to other liquid assets like cash or receivables. Sometimes in the companies’ balance sheet one observes huge amount of loans and a dvances.64) 1.08 in 2010-11. the quality of current asset also needs to be examined while commenting on the current assets. It is difficult to say what the ‘ideal’ current ratio should be. here also it may vary industry wise.89 1. such as Just in Time (JIT).02 crores in 2010-11. A more stringent test of liquidity than the current ratio is ‘the acid test ratio or quick ratio’. This is an indication of no-improvement in short term liquidity of the company in 2011-12 compared to its previous year. that is.13 . These loans advances in a shorter time span cannot be converted to liquidity. In this case. Conversely an apparently low current ratio may be the result of efficient stock and debtor management. Current ratios tend to be sector-specific.Current Assets 2.Net Working Capital(1-4) For TATA STEEL the Current Ratio has decreased to 12864.08 5017 2011-12 12864 4859 8005 16903.50 crores in 2011-12 compared to 18113. by subtracting the stock figures from CAs. However.47 in 2011-12 compared to 1.64 0. it is suggested that this ratio gives a more immediate indication of the firm’s ability to settle its current debts.38 1.Current Liabilities 5.Qick Assets(1-2) 4.implying thereby that the earning ability of the company has gone down in 2011-12 compared to 2010-11.76 0. as these current assets are being turned over quickly and stock management systems.Quick Ratio(3/4)times 7. This point has to be kept in mind while assessing the liquidity of any company. Liquidity Table 5: Current Ratio and Quick Ratio of Tata Steel 2010-11 18113 3954 14159 13095. Usually a quick ratio of 1:1 is considered satisfactory. different business sectors are likely to have different ‘typical’ current ratios.

A high ratio implies adequate safety for payment of interest even if there were a reduction in earnings of the company.52 times in the previous year.41 9. However. 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. consumer goods) prefer to maintain low debt equity ratio. In contrast firms that face wide fluctuation in demand (e. The ICR of TATA STEEL has reduced to 21. sh. Addition to the current asset indicates . 0.40 times in 2011-12 from just 0. Capital Structure Analysis Table 6: D/E Ratio and Interest Coverage Ratio of Tata Steel 2010-11 Debt Equity Ratio (debt capital/eq.79crores) and the decrease in short term loan and advances in 2011-12 (1828.crores in 2010-11.17crores) compared to its previous year 2010-11(2999. 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.) Interest Coverage Ratio (EBIT/Interest) 7. 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.09 crores) compared to its previous year 2010-11 (6458. This is mainly due to the decrease in current investments in 2011-12 (1204. Hence the financial risk of the company is high. In fact.g. This simply indicates that the company has financed its capital structure almost equally in both debt and equity. Firms that have relatively stable demand for their products (e.572128 times in 2011-12 from 38. Expansion or addition of fixed assets indicates future production capacity there by indicates sustainable top line growth.g.49 cap.94 crores). Interest Coverage Ratio (ICR) is a measure of protection available to creditors for payment of interest charges by the company.8567 times in 2010-11. electricity) tend to have high leverage. debt equity ratios vary from industry to industry. the debt equity ratio of the company has decreases to 0...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 2011-12.76 2011-12 0.

This aspect has already been discussed under the liquidity analysis. Due to decrease in current assets and increase in current liabilities. However. 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. 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. the net working capital of TATA STEEL has reported a reduction in 2011-12 compared to 2010-11.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. We can see from the above table that last year 48.39 days equivalent of sales were . This increase is mainly due to increase in plant and machinery. 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. Non-current Investments of the company has increased in 2011-12 compared to 2010-11.

then earnings per share is simply computed by dividing PAT by number of ordinary shares. The EPS of Tata Steel has decreased compared to previous year. 7.19 days in 2010-11 and in 2011-12 it has increased to 9.63 for 1 rupee fully paid up share which has increased to Rs. or other dilutive securities are included in the capital structure. Market Perception How a company’s performance is viewed by investors is reflected in its (actual and potential) market price of share. For Tata Steel basic earnings per share in 2010-11 were Rs. Average Collection period for TATA STEEL were 5.58 days in 2011-12 which shows better utilization of inventory. IF. however. Certain problems exist when the earnings per share ratio is computed. It shows how quickly receivables or debtors are converted into cash. the debtors’ turnover ratio is a test of the liquidity of the debtors of a firm. That is.blocked in inventory which has gone up to 51. Often earnings per share can be increased simply by reducing the number of shares outstanding through buy back of share by the company. This ratio also measures the liquidity of a firm’s debtors and here this TATA STEEL has reported a major improvement over the last year. convertible securities. Because even-well informed investors attach such importance to earnings per share. all other factors being equal. warrants. In other words. The debtors’ turnover shows the relationship between the sales and debtors of a firm. stock options.84 in 2011-12. earnings per share. (1) earnings per equity and equity equivalent shares and (2) fully diluted earnings per share figures may have to be used.59 days. Earnings per Share The earnings per share figure is one of the most important ratios used by investment analysis. How a company has done is reflected in its earnings per share. yet it is one of the most deceptive. The liquidity of a firm’s receivables can be examined in two ways: (i) Debtors or receivables turnover. 67. and it should not be given more emphasis than it deserves. caution must be exercised. Receivable (Debtors) Turnover Ratio and Average Collection Period. 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. If no dilutive securities are present in the capital structure. (ii) Average collection period. In addition. Allied and closely related to this is the average collection period. the earnings per share figure fail to recognize the probable increasing base of the stockholders’ investment.75. The second major activity ratio is the receivables or debtors turnover ratio. The common problem is that the per-share .

09 crores) to 2011-12 (585. if not explainable by a general decline in stock market prices is a cause for concern.58 crores) to 2011-12 (7059.93.47 crores) compared to 2010-11 (8339 crores).35 crores) compared to 2010-11 (5650.20 crores) and decrement in inter-corporate deposits from 2010-11 (7667. The outflow of cash flow from investing activities has reduced in 2011-12 (-2859. Some companies have high P/E multiples. We see that it has decreased from the previous year. costs volumes. the P/E ratios for virtually all companies decline. This measure involves an estimation not directly controlled by the company: the market price of its ordinary shares. . The P/E ratio for the year 2010-2011 was 8. At times. and a decline in the company’s P/E ratio. Thus the P/E ratio is the best indicator of how investors judge the future performance (We say future performance because.99% in 2011-12 (10256. 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. reflecting differing expectations about the relative rate of growth in earnings in those industries.20 and for the year 2011-2012 were 6. predictions of general economic conditions suggest that corporate profits will decrease and/or interest rates will rise.) Management is of course interested in this market appraisal. The cash flow from financing activities has increased by 34.48% in 2011-12 (7599.99 crores).11 crores). Cash Flow Statement: The cash flow from operating activities has increased by 22. management compares its P/E ratio with those of similar companies to determine the market place’s relative rankings of the firms. It is computed by dividing the market price of the stock by its earnings per share. This is attributed to the increase in purchase of fixed assets from 2010-11 (4118. P/E ratios of industries vary.93 crores). 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.figure draws the investor’s attention away from the enterprise as a whole – which involves differing magnitudes of sales. Also. A steady drop in a company’s price earnings ratio indicates that investors are wary of the firm’s growth potential.11 crores) compared to 2010-11 (-2859. while others ha ve low multiples.