Yesterday, Tata Steel announced a fabulous set of numbers for their financial results. They claim to have a six fold jump in their consolidated profits with Corus which was reported to be 6,388 Crore Rs. as against 1,014 Crores in the same period last fiscal.
Here is the report from NDTV: http://www.ndtvprofit.com/homepage/storybusinessnew.asp?id=40315&template=&cache=8/29/2007%201:55:36%20PM
NEWS ITEM STARTS:
NDTV Correspondent
Wednesday, August 29, 2007 (Mumbai):
The acquisition of Corus helped Tata Steel post a six-fold jump in its consolidated profit after tax at Rs 6,388 crore for Q1FY08.
The Indian company, which is now the world's sixth-biggest maker of the alloy, had recorded a consolidated profit after tax of Rs 1,014 crore in the same period last fiscal.
Tata Steel had acquired Corus for $12.1 billion in early 2007. The acquisition catapulted the company to the sixth spot among the world's top steel players with total production capacity of over 23 million tons a year.
Turnover on a consolidated basis also registered five-fold jump to touch Rs 31,155 crore during the period under review as against Rs 5,748 crore during the previous corresponding period.
Consolidated operating profit increased to Rs 4,904 crore during Q1FY08 as against Rs 1,712 crore in the corresponding period of previous year.
The results also include extraordinary item of Rs 4,121 crore primarily representing actuarial gains due to increase in the yield rates on Bonds held by various pension funds of Corus.
The markets took note of the development and the stock at Rs 644 levels firmed up 6.4 per cent or Rs 38 in noon deals on Wednesday. (with PTI inputs)
NEWS ITEM ENDS:
The company has shown excellent growth - the numbers say it all. The takeover of Corus has given it great positive synergy to report a 6 times jump in profits. Excellent news item, but why has the market responded with only a 6.4% increase in the share price? Actually, the above news item was written during mid-day, at the close of market, the stock price had jumped by 9%.
In terms of percentage, the income has grown by 500% or 6 times. In terms of market price of the share, the increase is only 9%. Why is it that such a good news of 6 fold increase in profits did not take the stock price to a very high level? 500% profit translating to only a 9% increase in share price? Does not make sense to me.
The reasons for only a 9% increase are multiple.
Have a look at the orange color text in the news item above. “The result numbers also include extraordinary item of Rs 4,121 crore primarily representing actuarial gains due to increase in the yield rates on Bonds held by various pension funds of Corus.”
What the company is trying to put forth is the UNREALIZED gains it has made on bond holdings of pension fund of the employees. Pension fund is the right of the employee, the company only manages it. The companies in Europe have a legal responsibility to manage the pension fund for employee, though the fund money actually belongs to the employee. Hence, the gains shown in the company profit do not actually belong to it.
Secondly, they are actuarial gains, unrealized profits on bonds held for pension funds. If they can make profits today, can’t they be in loss tomorrow?
Thirdly, what exchange rate has the company considered for Euro to Rupee exchange? No details are mentioned, which again may be a case of doubt. A few basis point here and there make a big difference in the forex amount.
Let’s deduct the 4121 Crore from the reported profit of 6388, all we get is 2267. On the previous fiscal profit of 1014, it is a 123% or a 2.23 times jump, and not the actual reported jump of 6 times.
Another reason that we should note is that this stock has been hammered severely in the last 1 month. Here is a 3 month price graph from Yahoo finance.
It clearly shows that Tata Steel has lost from the highs of 725 to the lows of 540, which is a clear loss of 26%, that too within a month. What this stock has done yesterday is only made up partly for its 1 month long losses and not necessarily made a profit of 9% in one day.
Yesterday, the market has gone up considerably. The news of good earnings, atleast 2.23 times actual profits, also had the market sentiments in it, so that led the rally of 9% surge in share price. If we get into fine details of 2.23 times profit, there is a chance that the actual profits may not even be 2.23 times.
However, market price have been going up, though only to the extent of 9%. Nobody knows when the prices will take a U turn.
This was just a practical demonstration of how balance sheet and financial figures are utilized for showing profits and good results.
Please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.
You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.
1 comment:
In the immediate aftermath of the Corus buyout, when the Tata Steel stock was being hammered, i bought
it at 458 and sold off at 620 at the subsequent rally. All within a 3 month period.
That was my only exposure to Tata Steel.
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