Tata Steel's (Tisco) management has proposed to adjust the miscellaneous expenditure account to the extent not written off as on December 31, 2002 of upto Rs 15 bn of the net worth (to make it simpler) of the company as on March 31, 2002. We analyse the possible effect of such a restructuring.
According to the company, this move will enable the shareholders to know the exact status of the company and will give a clearer picture on the future earnings of the company. To put it in simpler terms, miscellaneous expenditure here includes the like of amortisation of VRS expenses, which the company was writing off against profit before tax till now. As a result, earnings tend to remain subdued.
Just to put things in perspective, in FY02, Tisco had provided for Rs 2.3 bn as employee separation compensation, which ate into the company's profit before tax of Rs 4.6 bn. After this adjustment, the earnings per share (EPS) worked out to Rs 5.6. However, if the company had not provided for the employee separation compensation, then the company's EPS works out to Rs 10.3. This is an increase of over 85% in EPS. And consequently, the P/E of the company would also come down.
Profit before tax (incld. Extraordinary items)
Less: Extraordinary items
Profit before tax (excld. Extraordinary items)
Assuming that the company goes in for the adjustment of the miscellaneous expenditure, it would also have a positive impact on the Return on Equity (RoE) of the company. RoE, mathematically, is the profits after tax (PAT) generated by the company divided by the equity of the company. Here, reserves also form a part of the equity. In FY02, the equity of the company (including reserves) stood at Rs 34.5 bn and the net profit at Rs 2.1 bn. RoE, based on these numbers, works out to 6%. However, if one were to write-off miscellaneous expenses (Rs 9.9 bn) against reserves, the equity of the company comes down to Rs 24.6 bn. This would improve the RoE of the company on a similar PAT to 8.5%.
The stock currently trades at Rs 155 implying a P/E multiple of 9.3x FY03E earnings (without adjusting for miscellaneous expenses).
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