Side-by-Side Comparison: Conventional Metrics vs. Value-Based Management Metrics

 

I. Economic Value Added(EVA)

• 2023 EVA: INR 1,789.24 crores
• 2024 EVA: INR 16,537.47 crores

Interpretation:

1. Significant EVA Growth: The increase in EVA from INR 1,789.24 crores in 2023 to INR 16,537.47 crores in 2024 indicates a substantial improvement in the company's ability to generate profits above its cost of capital. This suggests enhanced operational performance and potentially improved profitability.
2. Higher NOPAT: The jump in NOPAT from INR 8,633.30 crores in 2023 to INR 24,206.00 crores in 2024 highlights effective cost management and increased earnings after taxes. This improvement in net operating profit demonstrates more substantial core business operations.
3. Efficient Use of Capital: Although the weighted average cost of capital (WACC) has risen slightly from 11.09% in 2023 to 11.61% in 2024, the significant increase in NOPAT more than offsets this. This shows that the company uses capital more efficiently, generating returns well above the capital cost.
4. Balanced Capital Structure: The shift in capital structure, with a reduction in the proportion of debt from 63.59% in 2023 to 54.35% in 2024, indicates a strategic move towards leveraging more equity. This may signal reduced financial risk and a more sustainable capital structure in the long term, which can positively impact the company’s stability and investor confidence.
5. Investor Confidence: A rising EVA often reflects an improvement in intrinsic value, which could positively impact investor sentiment. Companies generating higher EVA are considered value-creating entities, attracting investors looking for sustainable returns.

II. Market Value added(MVA)

• 2023 MVA: INR 1,54,171.50 crores
• 2024 MVA: INR 2,39,565.40 crores

Interpretation:

1. Positive MVA Growth: The increase in MVA from INR 1,54,171.50 crores in 2023 to INR 2,39,565.40 crores in 2024 suggests that the company is generating value beyond the capital invested by shareholders and debt holders. This is a strong indicator of effective management and operational success, as the market is willing to pay a premium over the book value of the company's assets.
2. Higher Market Valuation: The rise in both the market price and market value of equity reflects positive market sentiment. Investors value the company’s potential future earnings and growth highly, contributing to an overall increase in MVA.
3. Efficient Use of Capital: The reduction in the book value of debt and the increase in the book value of equity suggests a strategic shift towards less leverage, possibly lowering financial risk while improving capital efficiency.
4. Investment Implications: A rising MVA typically indicates a company with strong prospects for future profitability, making it an attractive option for investors. However, the higher market value implies the company might be trading at a premium, so potential investors should weigh this against the growth outlook.

III. Free Cash Flow(FCF)

• 2023 FCF: INR 3,01,600 crores
• 2024 FCF: INR 3,17,550 crores

Interpretation:

1. Increasing FCF and FGV: The rise in FCF from INR 3,01,600 crores in 2023 to INR 3,17,550 crores in 2024 signals that the company is generating more cash from its core operations, which can be used for various growth initiatives or to improve financial stability. This increased FCF has contributed to the rise in FGV, indicating that each share has a higher fair value based on future cash flows.
2. FGV Implications: The growth in FGV from 908.08 to 955.99 shows a higher valuation per share in 2024. This suggests that the market might expect stronger future performance or stable growth in cash generation. A higher FGV per share can make the stock more attractive to investors as it reflects a growing fair value tied to the company's cash flow prospects.
3. Investment Perspective: The consistent increase in FCF and FGV suggests the company has strong fundamentals and a solid growth trajectory. This growth in fair value per share implies that current and potential investors may view the company as a worthwhile investment, reflecting confidence in sustained or increasing profitability and cash flow generation.

IV. Total Shareholder Return

Interpretation:

1. 2023 Performance:
   • The share price increased from ₹450 to ₹650, a gain of ₹200.
   • Including the ₹2 dividend, the TSR for 2023 is 44.89%.
   • This indicates strong growth, likely due to favorable market conditions or company performance that increased shareholder value.
2. 2024 Performance:
   • The share price rose from ₹650 to ₹920, a gain of ₹270.
   • With a ₹3 dividend, the TSR for 2024 is 42.00%.
   • While the absolute share price increase is higher than in 2023, the percentage TSR is slightly lower, indicating a relatively smaller return than the increased starting share price.

V. Earnings Per Share Growth

Interpretation:

1. 2023 Performance:
   • The company’s net income in 2023 was ₹2,728 million, with 332.13 million outstanding shares.
   • The EPS (calculated as Net Income / Outstanding Shares) is ₹8.21.
   • This indicates relatively modest earnings per share.
2. 2024 Performance:
   • In 2024, the net income significantly increased to ₹34,199 million, with a minor increase in outstanding shares to 332.17 million.
   • The EPS rose dramatically to ₹102.96.
   • This considerable EPS increase suggests a massive improvement in company profitability. It could be attributed to significant revenue growth, cost-cutting, or other operational efficiencies that boost net income.

VI. Return on equity & Return on Capital Employed

Interpretation:

ROE (Return on Equity)

1. 2023:
   • ROE is calculated as Net Income / Shareholders' Equity.
   • In 2023, ROE is 12.14%, indicating that the company generated a 12.14% return on the equity invested by shareholders.
   • This level of ROE suggests moderate profitability relative to equity.
2. 2024:
   • ROE jumps to 113.46% in 2024, reflecting a significant improvement.
   • The increase in net income from ₹2,728 crore in 2023 to ₹34,199 crore in 2024 is the primary driver of this change.
   • This sharp rise in ROE indicates the company has become far more efficient at generating profit from shareholder equity, likely due to strong earnings growth and improved operational performance.

ROCE (Return on Capital Employed)

1. 2023:
   • ROCE is calculated as EBIT / Capital Employed.
   • In 2023, ROCE is 21.50%, indicating that the company generated a 21.50% return on the total capital employed.
   • This suggests efficient use of capital, contributing positively to profitability.
2. 2024:
   • ROCE rises to 56.35%, driven by a substantial increase in EBIT from ₹13,282 crore in 2023 to ₹37,240 crore in 2024.
   • The improvement in ROCE demonstrates better capital utilization, as the company is now generating a higher return from its investments.

VII. Price to Earnings & Price to Book Ratios

Interpretation:

P/E Ratio (Price-to-Earnings Ratio)

1. 2023:
   • The P/E ratio is calculated as Market Price per Share / EPS.
   • In 2023, the P/E ratio is 79.14, indicating a high valuation relative to earnings. A high P/E suggests that investors may have substantial growth expectations for the company, or the stock may be overvalued based on earnings.
2. 2024:
   • The P/E ratio drops significantly to 8.94, primarily due to a sharp increase in EPS from ₹8.21 in 2023 to ₹102.96 in 2024.
   • The lower P/E ratio in 2024 suggests that the stock is now priced lower relative to its earnings, potentially indicating either improved earnings or a correction in market expectations. This lower ratio may make the stock more attractive to value investors, implying stronger earnings relative to price.

P/B Ratio (Price-to-Book Ratio)

1. 2023:
   • The P/B ratio is calculated as Market Price per Share / Book Value per Share.
   • In 2023, the P/B ratio is 3.30, indicating that the stock trades 3.3 times its book value. A P/B above 1 implies that the market values the company more than its book value, often reflecting investor confidence in future growth or intangible assets not captured in the book value.
2. 2024:
   • The P/B ratio rises to 4.67 as the market price increases from ₹650 to ₹920, while the book value per share remains constant at ₹196.91.
   • This increase in the P/B ratio may indicate that investors are placing a higher premium on the company's equity, likely due to the substantial improvements in profitability and financial performance seen in other metrics (e.g., EPS and ROE).

VIII. EV/EBITDA

• 2023 EV/EBITDA: 7.88
• 2024 EV/EBITDA: 9.18

Interpretation:

1. Increasing EV/EBITDA Multiple: The EV/EBITDA multiple rose from 7.88 to 9.18. This increase suggests that investors are now willing to pay a higher multiple of EBITDA for the company's overall value, which could indicate improved future growth expectations, stronger market positioning, or better operating conditions.
2. Valuation Consideration: While EBITDA increased, the rise in EV was proportionally more signi, leading to the higher EV/EBITDA multiple. This could imply that the market views the company more favorably, possibly due to strategic initiatives, improved industry conditions, or enhanced competitive positioning.
3. Debt Implications: The rise in debt has contributed to the increase in EVs. Although higher debt can signal growth initiatives, it also adds financial risk, which the company must manage to avoid pressure on future cash flows.
4. Investment Outlook: The upward trend in the EV/EBITDA multiple might make the stock appear more expensive in 2024 compared to 2023. Potential investors should weigh this premium valuation against the company's growth prospects and debt levels to determine if it justifies the increased market price.

Key Takeaways from Traditional Ratios

• EPS, ROE, and ROCE reveal the company's profitability and how good it is at efficiently utilizing resources for maximized earnings. The strong uptrend of EPS, ROE, and ROCE speaks for itself: good handling of resources that fetch better earnings.
• There was a vast improvement in the earnings base, and with that, the P/E Ratio has significantly come down, making the stock much more attractive to a value investor.
• Therefore, TSR remains healthy and is supported by this good mix of share price appreciation and payout through a dividend. However, in percentage terms, TSR fell due to a higher base share price in 2024.

Key Takeaway from VBM Measures :

• EVA and MVA are very significant shareholder value measures. The substantial improvement in both metrics reflects that Tata Motors successfully creates wealth for its investors by making more than its cost of capital (EVA) and more market value than the total capital invested (MVA).
• FCF and FGV are examples of the company's ability to generate sustainable cash flows that would be highly material in reinvesting in the business, paying off debts, and increasing intrinsic value per share for long-term and long-term stability.

Conclusion

These classic measures are EPS, ROE, and P/E. All three indicate a good improvement in profitability and valuation, which indicates how well the company has done and represents an excellent opportunity for the current shareholders. Value-based metrics comprise EVA and MVA. Value-based metrics also involve the elaborate analysis that Tata Motors is positioned to generate more than the cost of capital gains.