One Basic Lesson in Investing from the Tata-Mistry Spat

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Many media reports have been published around the spat that is currently on between Cyrus Mistry and the Tata Group. Mistry, till he was fired by the board, was the Chairman of the Tata Group of companies.

A report that has made it into the media over and over again, is that of the market capitalisation of the Tata Group of companies, falling by so many thousand crore, after Mistry was fired. Here are the links to a few of these reports.

Cyrus Mistry exit costs Tata Group companies Rs 26,472 cr in market-cap:  http://www.financialexpress.com/markets/indian-markets/cyrus-mistry-exit-costs-tata-group-companies-rs-26472-cr-in-market-cap/432492/

Tata group market cap falls Rs27,500 crore in three days

http://www.livemint.com/Money/orFsoUOMzsJCPTG8WOPSRJ/Tata-group-loses-Conglomerate-lose-Rs55000-crore-in-market.html

Investors in Tata stocks lose Rs 23,300cr in 2 days

http://timesofindia.indiatimes.com/business/india-business/Investors-in-Tata-stocks-lose-Rs-23300cr-in-2-days/articleshow/55080970.cms

Tata Group firms lose Rs 40,000 cr in market cap in three days

http://www.hindustantimes.com/business-news/mistry-vs-tata-top-tata-companies-lose-rs-40-000-cr-in-market-cap/story-tjeNfwkAootsjJZyhzgf8O.html

Group companies say Ta-Ta to Rs 26,000 crore market cap in three days

http://economictimes.indiatimes.com/articleshow/55103207.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Tatas talk up stocks as sell-off hits Rs 55,000 cr

http://www.dnaindia.com/money/report-tatas-talk-up-stocks-as-sell-off-hits-rs-55000-cr-2268100

Tata Firms Lose Rs 21,000 Crore in Market Cap After Mistry Sacking (Press Trust of India)

https://www.thequint.com/business/2016/10/26/tata-firms-lose-rs-21000-cr-in-market-cap-post-mistry-sacking-cyrus-ratan-dorabjee-tcs-consultancy

What is common to all these newsreports? They talk in absolute terms i.e., the market capitalisation fell by so many thousand crore. They don’t talk about the fall in market capitalisation in percentage terms.

This is a huge mistake. Allow me to explain. Let’s say the market capitalisation of a stock was Rs. 100 crore. It has fallen by Rs. 20 crore and is now quoting at Rs. 80 crore. Let’s say the market capitalisation of another stock has also fallen by Rs. 20 crore is now quoting at Rs. 980 crore against the Rs. 1,000 crore earlier.

If we were to follow the formula of the Indian media, we would say that the total fall in market capitalisation of the two stocks has been Rs. 40 crore. But that means nothing, given that the fall in market capitalisation in the first case has been 20 per cent and in the second case has been 2 per cent. By adding the losses, we take this nuance out of the equation. It is important to remember that a fall in the market capitalisation of a stock is always with respect to the market capitalisation prevailing earlier.

Now let’s pay attention on one particular media report here, which said that the total fall in market capitalisation of the Tata Group of Companies between October 24, 2016 and October 27, 2016, was Rs 55,000 crore. Take a look at the following table. It lists out the the fall in market capitalisation of the Tata companies for the period under consideration.

Name of the company Market Capitalisation (in Rs. Crore) Fall in market capitalisation
As on October 24, 2016 As on October 27,2016 (in Rs. Crore)
Tata Motors 1,80,114 1,48,096 32,018
Tata Consultancy Services 4,78,390 4,68,607 9,783
Tata Steel 41,393 37,610 3,783
Indian Hotels 12,836 10,882 1,954
Tata Communications 19,068 17,348 1,720
Tata Power 22,611 21,096 1,515
Tata Chemicals 14,713 13,502 1,211
Tata Global Beverages 9,710 8,814 896
Voltas 13,019 12,519 500
Tata Elxsi 4,151 3,884 267
Titan 33,487 33,270 217
Rallis India 4,592 4,379 213
Trent 6,759 6,580 179
Tata Coffee 2,517 2,364 153
Tata Metaliks 1,068 927 141
Tinplate Company of India 938 867 71
Tata Sponge Iron 982 916 66
Tata Teleservices (Maharashtra) 1,466 1,417 49
TRF 313 301 12
NELCO 217 207 10
Benares Hotels 146 140 6
Tayo Rolls 60 59 1
   
       

Source: Livemint

This table was shared by a senior editor of the Mint newspaper on Twitter. (I have changed it slightly to the extent of rounding off the numbers). The text accompanying the table stated: “#TataSons meltdown Conglomerate loses Rs. 55,000 crore in market cap in 3 days as #CyrusMistry ouster snowballs.”

The market capitalisation of the Tata companies fell by Rs. 54,765 crore between October 24,2016 and October 27, 2016. This has been rounded off to Rs. 55,000 crore. While Rs. 55,000 crore sounds like a huge number, it doesn’t really mean much in this case.

If we were to look at the situation in percentage terms, then the total market capitalisation of the Tata companies fell by 6.5 per cent, over the three-day period. While, this is huge, it doesn’t sound as big as saying that the market capitalisation has fallen by Rs. 55,000 crore. This is what the media has been doing.

Further, if one were to look at the table carefully, it is easy to see that the bulk of the fall in market capitalisation is because of one company and that is Tata Motors. Of the total fall in market capitalisation of Rs. 55,000 crore, Tata Motors is responsible for a fall of close to Rs. 32,000 crore or 58.2 per cent of the total fall.

How does the situation look once we adjust for this anomaly? Suddenly the total fall in market capitalisation is down to around Rs. 23,000 crore (or Rs. 22,747crore to be precise). In percentage terms this fall is around 3.4 per cent.

Now the situation doesn’t look as bad as it did earlier. Or to put it in other terms, if Tata Motors, is taken out of the equation, the media headlines are no longer as sexy (for the lack of a better term) as they originally sounded.

The point being that one Tata group stock i.e., Tata Motors has had to bear the brunt of the spat between the Tata Group and Cyrus Mistry. In fact, between October 24, 2016 and October 27, 2016, the price of the stock fell by 17.8 per cent.

The other big fall has been in the case of Indian Hotels. The market capitalisation of the stock fell by 15.2 per cent between October 24, 2016 and October 27, 2016. If we were to leave this stock out as well, the total fall in market capitalisation of the Tata Group of companies comes down to 3.2 per cent.

The investors in these cases perhaps did not like these stocks anyway, and were looking for an excuse to sell out of them. The Tata Group and Cyrus Mistry spat, just provided them an excuse for it.

The major point here is that we all like to look at absolute numbers. But that doesn’t really mean anything unless we take percentages into account. This is because a rise or a fall is essentially meaningless without taking the previous price or market capitalisation into account.

This is a tendency to concentrate on absolute numbers is visible in real estate investing as well. People tend to fondly remember anecdotal stories about friends, relatives, neighbours and others, who bought a flat for Rs. 10 lakh and sold it for Rs. 60 lakh. They do not factor in the expenses over the years or the time value of money.

And that is one of the reasons that has kept the real estate bubble going.

The column originally appeared in Vivek Kaul’s Diary on November 1, 2016

 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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