A STUDY ON AN ANALYSIS OF PROFITABILITY POSITION OF TATA STEEL LIMITED

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A STUDY ON AN ANALYSIS OF PROFITABILITY POSITION

OF TATA STEEL LIMITED

Mr. R. SATHISH KUMAR,

Assistant Professor,

PG & Research Department of Commerce, MIET Arts & Science College,

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Analysis of profitability is more important to every business organization. Profitability gives an idea of operating efficiency to a firm. Higher profitability shows high performance and lower will indicate the lower performance. The study used only the secondary data to attain the objectives of the study. The data take from 15 financial year annual reports of Tata Steel Limited from 2000-01 to 2014-15. To analyze the profitability statement were Simple Percentage Analysis and Ratios are used in the present study. Profitability of Tata Steel (stand-alone) is at the appreciable level. Even then, if it takes some steps by generating internal sources the profitability position will be increased more than the present level.

KEY WORD

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Profitability is a measure which helps to assess the ability of a firm to earn profit and gives an idea of its operating efficiency. High value of profitability indicates high performance. Low value of profitability indicates poor performance. A management of any concern is naturally eager to measure its operational efficiency. Similarly, the owners invest funds in the expectation of reasonable returns. The operational efficiency of a firm and its ability to ensure adequate returns to its shareholder depends ultimately on the profits earned by it.

REVIEW OF LITERATURE

P. C. Narware (2003) examined the inter-relationship between profitability and working capital with the assistance of ratio analysis. He has also employed correlation analysis between selected ratios relating to working capital management and Return on Investment (ROI). Multiple regression analysis employed to ascertain the impact of working capital ratio and profitability. His analysis revealed that working capital management and profitability disclosed both negative and positive association in respect of ratios and multiple regression analysis.

T.Venkatesan and S.K.Nagarajan (2012) in their article analyzed the profitability of selected steel companies in India and used ANOVA, Correlation, Mean, Standard deviation and Co-efficient of variation. There is positive correlation in relation to net profit of the company namely SAIL and Tata and JSW and Bhushan steel companies correlated in the operating profit. The similar level of maintain operating profit and net profit in respective companies. Tata and SAIL has first better performer in the area of earning power and Bhushan as well as JSW steel companies are second better performer in the area of overall earning power. VISA’s financial position shows a negative result. It is the drawback to get lost position in their analysis.

Suvarun Goswami and Aniruddha Sarkar (2011) in their article analyzed the financial performance of Tata steel limited through ratios. The study mainly focused on the company liquidity, profitability and found that there is linear relationship between liquidity and profitability. The study recommended that the company should improve the net sales to meet out the fixed operating cost to control over the operating risk with their limit. The study suggested that company should use debt content in capital structure so that the amount available to equity shareholders will be more through which equity shareholders could be benefitted. Moreover, the study suggested the company should maintain short-term debt paying capacity else, it may leads to short-term insolvency of the company.

STATEMENT OF THE PROBLEM

The Indian Steel industry need large investment and suffers from paucity of capital. Many of the public sector undertaking units integrated steel plants with the help of foreign aid. The Steel Industry is facing high cost and limited availability of coking coal; low labour productivity; inefficient parameters such as energy consumption; poor infrastructure including transport and electricity supply. Lack of modern technological and capital inputs and weak infrastructural facilities leads to a process of steel making that is more time consuming, expensive and yields inferior variety of goods. Such a situation forces to import better quality steel from abroad.

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Tata Steel is one of the best steel industries and occupies 11th position among the steel companies in the world, having subsidiaries and joint ventures throughout the world. Surely, unique problems of Indian steel industries namely high conversion cost, underutilization of installed capacity, limited availability of coking coal, low productivity may have some influence in Tata Steel and that may be reflected in its profitability and cash flows. In this context, the researcher has taken Tata Steel Limited as a study unit to study the profitability and cash flow analysis.

OBJECTIVE OF THE STUDY

The main objective of the present study is to analyze the profitability of Tata Steel Limited (Stand-alone) in two different way first general profitability and overall profitability of the study unit.

METHODOLOGY AND PERIOD OF THE STUDY

The study used only the secondary data to attain the objectives of the study. The data take from the annual report of the company, which is available in the company website and capital line database. This study has confined to Tata Steel Limited (Stand-alone) only. Subsidiary companies of Tata Steel have been excluded from the present study.

To analyze the profitability statement were Simply Percentage Analysis and Ratios are used in the present study. The study covers 15 financial years from 2000-01 to 2014-15 to make the analysis of profitability is deemed quiet sufficient.

ANALYSIS AND RESULTS

1. GENERAL PROFITABILITY RATIOS OF TATA STEEL LIMITED

These ratios are based on the basic idea that a business unit should earn sufficient profit on each rupee of sales. If adequate profits are not earned on sales, difficulty will be experienced in meeting the operating expenses and no returns will be available to the owners. The operating expenses ratio indicated the proportion that the cost of sales bears to sales. The cost of sales includes the direct cost of goods sold as well as other operating expenses, administration, selling and distribution expenses which have matching relationship with sales and also indicates that the managements’ ability to keep operating expenses properly controlled for level of sales achieved. The lower ratio indicates a favorable condition and higher ratio is less favorable as it would have a smaller margin of operating profit for the payment dividends and the creation of reserves.

The gross profit ratio of the firm indicates the efficiency of the production or trading operations of the company. A high ratio is better than a low ratio as it indicates unfavorable trends in the form of reduction in selling prices not go together with by proportionate decrease in cost of goods or increase cost of production.

This ratio explains per rupee profit generating capacity of sales. Net profit will be high when the cost of sales is low that is, the result of sales efficiency. The concern must try to achieve greater sales efficiency for maximizing the Return on Investment. This ratio is very useful to the proprietors and prospective investors because it reveals the overall profitability of the concern.

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Table - 1

General Profitability Ratios Tata Steel Limited

(Amount in Crores)

Particulars

Total Operating

Cost

Gross

Profit Net Profit

Operating

Profit Sales

Operating Profit Ratio (in per cent)

Operating Ratio (in per cent)

Gross Profit Ratio (in per cent)

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Table 1 exhibit that the total operating costs is increased year by year during the study period. Sales show an increasing trend except in the years 2001-02 and 2009-10. In the year 2001-02, sales decreased by 151.96 crore as compared to the previous year but operating costs increased by 315.89 crores, like that in the year 2009-10 sales is recorded by 85.93 crore as compared to previous year but on the contrary operating cost has increased by 205.19 crore in the same year. The year 2001-02 has more operating ratio which shows a fluctuating trend during the study period.

Gross profit ratio shows a fluctuating trend. Gross profit ratio is highest in the year 2004-05 and lowest in the year 2001-02; Gross profit shows an increasing trend except in the years, 2001-02 and in the year 2014-15. Sales show an increasing trend except in the years 2001-02 and 2009-10. In the year 2001-02, sales are decreasing corresponding to gross profit.

Net profit for the first two years of the study period is less than the 10 percentage. For the remaining study period, net profit ranges from 10 to 22 percentages. Moreover, that net profit ratio highly fluctuating. On the contrary sales show an increasing trend.

Sales, operating profit are fluctuating during the study period that is reflected in operating profit ratios also. It is surprisingly noted that in the year 2014-15 sale is increased by 267.92 crore as compared to the previous year on the contrary, operating profit is decreased by 2876.99 crore. In the year 2012-13 sales is increased by 5311.53 crore as compared to previous year and profit is decreased by 899.47 crore.

2. OVERALL PROFITABILITY OF TATA STEEL LIMITED

Bankers, financial institutions and other creditors look at the profitability ratios as an indicator whether or not the firm earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonable and certain. So, the profitability of the firm can be measured by investments.

Return on Capital Employed (ROCE) is an indicator of the earning capacity of the capital employed in the business showed as a percentage of return and gives an idea about the usage of resources employed in business. It is also termed as Overall Profitability Ratio or Yield on Capital. It is also called master ratio because it indicates overall profitability of the firm and financial position of the company is reflected as sound if a company has sound capital structure. A good capital structure will give good return on capital employed.

Return on Net Worth (or) Shareholders’ Fund (RONW), it is desired to work out the profitability of the company from shareholders’ point of view, and then it shows the extent to which profitability objectives are being achieved. Higher the ratio, the better return on net worth.

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Table – 2

Overall Profitability Ratios of Tata Steel Limited

(Amount in Crores)

Particulars Capital Employed

Operating Profit

Shareholders' Fund

Equity Holders

Fund

Net Profit

Total Assets

ROCE (in per cent)

RONW (in per

cent)

ROEHF (in per

cent)

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Table 2 shows that return on capital employed ranges from 8.63 per cent to 55.38 per cent. Return on capital employed is more than 30 percentages in the years 2003-04, 2004-05 and 2005-06. For the remaining periods, it is less than 30 percentages. Capital employed in the business is increased year-by-year except in the years 2001-02 and 2002-03. But operating profit has fluctuated during the study period. Usually when the investment is high the return will also be high, but in the study the return is not increased to the extent of increased in capital employed into the business.

Return on net worthy that the return on net worth ranges from 5.95 in 2001-02 to 49.21 in 2004-05. Shareholders’ Fund shows a declining trend for the first three years of the study period and for the remaining years, it shows an increasing trend and net profit remains fluctuating. The net profit available to equity shareholders, equity shareholders’ fund and ratio of return to the equity holders’ fund. Equity holders’ fund increases year by year while the net profit available to equity holders shows a fluctuating trend. Percentage of return on Equity shareholders ranges from 5.89 in 2001-02 to 49.21 in 2004-05.

Return on total assets ratio is ranging from 2.51 per cent in 2001-02 to 35.45 per cent in 2004-05. Return on total assets ratio is in two digits from 2002-03 to 2007-08 and for the remaining periods it is less than 10 per cent. The company has managed the assets efficiently in the years 2004-05 as it is indicated by the Assets turnover ratio which is 35.45 per cent. Total assets of the study period increases year by year except in the years 2001- 2002 and 2002-03. But net profit shows a fluctuating trend.

3. MARKET TEST RATIOS OF TATA STEEL LIMITED

Market test ratios are calculated in respect of those companies whose shares are traded in stock exchanges. Shareholders are not only interest in the profits of the company but also in the appreciation of the value of their shares in the stock market. The value of shares depends upon dividend declared, earning per share, and the payout policy and so on of the companies besides of the factors.

An earnings per Share, earnings per share helps in determining the market price of equity shares of the company and in estimating the company to pay dividend to its equity shareholders. Price Earnings Ratio takes the market price per equity and earnings per equity share. High ratio indicates that the share is overvalued and low ratio shows that share is undervalued.

Payout and Retention Ratio, This ratio indicates as to what proportion of earnings per share has been used for paying dividend and what has been retained for ploughing back. This ratio is very important from shareholders’ point of view as it tells him that if the company has used whole or substantially of its earnings for paying dividend and retained for future growth and expansion purposes, then there will be a very slim chance for capital appreciation in the price of shares of such company. Source: Computed from Secondary data, Annual reports of Tata Steel Limited

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Table – 3

Earnings per Share (EPS)

Particulars

NP-Pref. Dividend (In Crores)

Market Price per Equity

No. of Equity Shares (In Crores)

EPS

Price Earnings

Ratio (in times)

Dividend per Equity

Payout Ratio (in per

cent)

Retention Ratio (in per

cent)

Market Price

Per Share

Dividend Yield Ratio (in per

cent)

2000-2001 553.44 72.10 367.97 15.04 4.79 5.33 35.43 64.57 72.10 7.39

2001-2002 202.83 57.60 367.97 5.51 10.45 4.00 72.53 27.47 57.60 6.94

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62 The table 3 revels that the earnings per share with a fluctuating trend and ranging from 5.51 per share to 72.71 per share. For the first three years of study period, the earnings per share are less than 30 per cent; to the rest of the study period it is more than 50. The company has sufficient earnings to issue either bonus shares or dividend; eventually it can increase the market value of equity shares.Price earning ranges from 2.86 times to 11.22 times of market price per equity. In all the years of the study period, the price earnings ratio is in one digit except for the years 2001-02, 2007-08 and 2009-10. Market price per equity is highly fluctuating and EPS is also fluctuating during the study period.

It is clear from the above table that in the year 2001-02, 72.5 per cent of the earnings payout by the company is in the form of Dividend and in the remaining years 65 per cent to 88 per cent of the earnings is retained by the company for creating wealth to the Equity Shareholders. For the remaining years Payout ratio ranges from 12.07 per cent to 35.43 per cent. Retention ratio ranges from 64.57 per cent to 87.93 per cent except in the year 2001-02. Divided yield ratio of the company during the study period is fluctuating in nature and less than the 10 per cent in all the study period except in the year 2002-03. Market price per share and dividend per share are fluctuating, which is reflected by Dividend yield ratio.

4. COVERAGE RATIOS OF TATA STEEL LIMITED

These ratios indicate the extent to which the interest of the person entitled to get a fixed return or a scheduled payment as per agreed terms is safe. The higher the coverage, the better is it. Fixed Interest Coverage Ratio, It really measures the ability of the concern to serve the debt. This ratio is very important from the lenders’ point of view and indicates whether the business would earn sufficient profits to pay periodically the interest charges.

Table – 4

Coverage Ratios of Tata Steel Limited

(Amount in Crores) Particulars EBIT Interest

Cost

Interest Coverage Ratio

(in times)

Dividend

Dividend Coverage Ratio

(in times)

2000-2001 979.05 376.61 2.60 196.09 2.82

2001-2002 620.75 369.75 1.68 149.18 1.37

2002-2003 1567.32 304.82 5.14 295.19 3.43

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63 Table shows that the interest coverage ratio is ranging from 1.68 times the EBIT in 2001-02 to 45.24 times the EBIT in the year 2005-06. The interest cost for the first 8 years of the study period is ranging from 118.44 crores in 2005-06 to 878.70 crores in 2007-08 and for the remaining period of the study period, it is ranging from 1152.69 crores in 2008-09 to 1975.95 crores in 2014-15. In all the years the company is in a position of returning the interest cost out of the profit earned during the study period.

Table shows the preference dividend, net profit and the dividend coverage ratios of the study period. Net profit and preference dividend are fluctuating and the dividend coverage ranges from 1.37 times to 8.29 times the net profit. During the study period, the company was in a position to pay preference dividend out of the net profit earned during that period.

CONCLUSION

Tata Steel Limited through its Indian operations is a large manufacturer of Ferro chrome and steel wires in India and a supplier of chrome ore internationally. The Company’s main markets include the Indian construction, automotive and general engineering industries. At the international level and on Overall basis Tata Steel offers their products and services with a lesser cost than others. Profitability of Tata Steel (stand-alone) is at the appreciable level. Even then, if it takes some steps by generating internal sources the profitability position will be increased more than the present level then it can improve its liquidity further.

REFERENCES

1. Annual Reports, Tata Steel Limited, Mumbai, 2000-01 to 2014-15.

http://tatasteel.com/

2. Goswami, Suvarun and Aniruddha Sarkar. “Analyses of Financial Performance of Tata Steel Limited - A Case Study.” International Journal for Multidisciplinary Research 1, no.5 (September 2011): 161-174.

3. Gupta K. Shashi and R. K. Sharma. Management Accounting: Ratio Analysis. New Delhi: Kalyani Publishers, 2011.

4. Khan M. Y. and P. K. Jain, Basic Financial Management: Financial Statement Analysis. New Delhi: Tata McGraw-Hill Publishing Company Limited, 2006.

5. Maheshwari, S. N. Financial Management: Ratio Analysis. New Delhi: S. Chand and & Sons Educational Publishers, 2011.

6. Narware, P. C. “Working Capital and Profitability - An Empirical Analysis of SAIL.” Management Accountant (June 2003): 491- 497.