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
Investors in Tata stocks lose Rs 23,300cr in 2 days
Tata Group firms lose Rs 40,000 cr in market cap in three days
Group companies say Ta-Ta to Rs 26,000 crore market cap in three days
Tatas talk up stocks as sell-off hits Rs 55,000 cr
Tata Firms Lose Rs 21,000 Crore in Market Cap After Mistry Sacking (Press Trust of India)
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.
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