IILM UNIVERSITY, GURUGRAM

MBA Batch: 2023-25

CVP Analysis Report (TATA Steel Ltd.)

Submitted to: Dr. Neha Kamboj

Associate Professor

Submitted by: Utkarsh Vikram Singh Chauhan

URN: 2352176
Section: A

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CONTENTS Page no.

Company Information 1

Report Objective, Duration, and Sources 2

Introduction, Assumptions, and Importance 3

Formulas used 4

Financial Data and its Segregation 5

Profit Volume Ratio Analysis 6

Break Even Point Analysis 7

Margin of Safety Analysis 8

Interpretation and Recommendations 9

Links and References 10

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COMPANY OVERVIEW:
Tata Steel is a global steel manufacturing company and a subsidiary of the Tata
Group, one of India's largest and most renowned conglomerates. Established in
1907, Tata Steel has a rich history of over a century in the steel industry.

GLOBAL PRESENCE:
Tata Steel is a truly global company with a presence in various countries,
including India, the United Kingdom, the Netherlands, Singapore, Thailand, and
many others. The company has established itself as a leading player in the global
steel market.

PRODUCT PORTFOLIO:
Tata Steel produces a wide range of steel products, including flat and long steel
products used in industries such as automotive, construction, aerospace, and
manufacturing. Their product portfolio encompasses everything from raw
materials to finished steel products.

FINANCIAL PERFORMANCE:
Tata Steel's financial performance has been notable. The company's revenue,
profitability, and market presence have shown substantial growth in recent years.

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REPORT OBJECTIVES:
1. To examine Profit-Volume Ratio, Break-even Point, and Margin of Safety for
Tata Steel within the context of Cost-Volume-Profit (CVP) analysis.
2. To study the financial progress of Tata Steel over a five-year period, applying
CVP principles.
3. To evaluate the impact of Marginal Cost and Profitability within the CVP
framework for Tata Steel.

STUDY DURATION:
This study covers a span of five years (2019 to 2023).

DATA SOURCES:
The data for this study has been sourced from Tata Steel's annual reports and their
official website.

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INTRODUCTION:
Cost-Volume-Profit (CVP) analysis is a financial management tool that explores
the relationships between costs, sales volume, and profitability. In this context,
we aim to examine CVP metrics such as Profit-Volume Ratio, Break-even Point,
and Margin of Safety for Tata Steel over the specified five-year period.

ASSUMPTIONS:
1. CVP analysis assumes that costs can be categorized into fixed and variable
components.
2. It presumes that variable costs change proportionally with fluctuations in
production levels.
3. It is assumed that fixed costs remain constant regardless of changes in
production.
4. CVP analysis assumes that market prices (selling prices) remain unchanged
with variations in production or market conditions.
5. Within this framework, only variable costs are considered in the production
cost, with fixed costs covered from contribution (profit and loss).
6. Assumptions include the stability of other factors like materials, labour,
efficiency, wastage, managerial policies, and competition levels.

IMPORTANCE (APPLICATIONS/USES):
1. Simplicity: CVP analysis simplifies cost analysis, focusing on the interplay of
costs, sales volume, and profitability.
2. Profit Planning: It is instrumental in profit planning, allowing organizations to
set clear profit objectives.
3. Cost Control: CVP analysis helps control variable costs, contributing to
overall cost management.
4. Decision Making: Managers use CVP analysis to make informed decisions
about factors such as 'make or buy' choices, foreign orders, and optimal
production levels.
5. In Inflation Time: During inflation, CVP analysis aids in determining the
production levels that maximize profits.
6. In Deflation Time: In deflationary periods, it assists in avoiding losses by
identifying optimal production and sales levels.

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FORMULAS USED:

1. Contribution Margin (C):

C = Sales - Variable Costs

2. Profit Volume Ratio (P/V Ratio):

P.V.R = (Contribution Margin / Sales) x 100

3. Break-even Point (B.E.P) in Units:

B.E.P (in units) = Fixed Costs / Contribution Margin per Unit

4. Break-even Point (B.E.P) in Currency:

B.E.P (in currency) = (Fixed Costs / P/V Ratio)

5. Margin of Safety (M/S) in Units and Currency:

M/S = Actual Sales - Break-even Sales

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INCOME STATEMENTS OF TATA STEEL FOR THE YEARS ENDED 31-
3-2019, 31-3-2020, 31-3-2021, 31-3-2022 and 31-3-2023 (Rs. in crore).
2019 2020 2021 2022 2023
Net
₹ ₹ ₹ ₹ ₹
Sales/Income
1,54,691.84 1,39,816.65 1,53,308.39 2,43,959.17 2,41,636.25
from operations
TOTAL UNITS
12692 12322 16664 17623 18216
SOLD
EXPENSES
Cost Of
Materials ₹ 19,840.29 ₹ 17,407.03 ₹ 20,757.04 ₹ 35,256.98 ₹ 54,011.50
Consumed
Purchase Of
₹ 1,807.85 ₹ 1,563.10 ₹ 1,688.84 ₹ 4,089.03 ₹ 7,467.30
Stock-In Trade
Operating And
Direct ₹ 0.00 ₹ 0.00 ₹ 0.00 ₹ 0.00 ₹ 0.00
Expenses
Changes In
Inventories Of
-₹ 554.33 -₹ 564.40 ₹ 2,176.56 -₹ 1,820.87 -₹ 1,142.06
FG,WIP And
Stock-In Trade

Employee
Benefit ₹ 5,131.06 ₹ 5,036.62 ₹ 5,741.94 ₹ 6,365.80 ₹ 6,616.29
Expenses
Finance Costs ₹ 2,823.58 ₹ 3,031.01 ₹ 4,541.02 ₹ 2,792.08 ₹ 3,792.14
Depreciation
And
₹ 3,802.96 ₹ 3,920.12 ₹ 5,469.26 ₹ 5,463.69 ₹ 5,434.61
Amortisation
Expenses
Other
₹ 24,622.60 ₹ 23,803.18 ₹ 27,966.07 ₹ 36,458.65 ₹ 38,870.96
Expenses
TOTAL ₹
₹ 56,674.31 ₹ 52,525.53 ₹ 67,019.49 ₹ 86,147.27
EXPENSES 1,10,531.40

SEGREGATION OF EXPENSES AND CALCULATED CONTRIBUTION

YEARS 2019 2020 2021 2022 2023

VARIABLE
EXPENSES ₹ 21,648.14 ₹ 18,970.13 ₹ 22,445.88 ₹ 39,346.01 ₹ 61,478.80
FIXED
EXPENSES ₹ 36,380.20 ₹ 35,790.93 ₹ 43,718.29 ₹ 51,080.22 ₹ 54,714.00
CONTRIBUTION ₹ ₹
1,18,311.64 ₹ 1,04,025.72 1,09,590.10 ₹ 1,92,878.95 ₹ 1,86,922.25
OPERATING
PROFIT ₹ 81,931.44 ₹ 68,234.79 ₹ 65,871.81 ₹ 1,41,798.73 ₹ 1,32,208.25

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 1. PV RATIO ANALYSIS:

YEARS 2019 2020 2021 2022 2023

PV Ratio (%) 86.01% 86.43% 85.36% 83.87% 74.56%

PV RATIO (%)
88.00% 86.01% 86.43%
85.36%
86.00% 83.87%
84.00%
82.00%
80.00%
78.00%
76.00% 74.56%
74.00%
72.00%
70.00%
68.00%
2019 2020 2021 2022 2023

PV Ratio (%)

1) Trend Analysis: The PV ratio has shown a fluctuating trend over the years,
indicating potential shifts in cost structures, pricing strategies, or market
dynamics that warrant further investigation.

2) Impact on Profitability: The observed decrease in the PV ratio from 2019 to

2021 may have negatively impacted Tata Steel's overall profit, while the
subsequent increase in 2022 suggests a potential positive turnaround.

3) Cost Drivers Identification: Analyzing components contributing to the PV

ratio, especially variable costs, is crucial for identifying key cost drivers. This
insight helps optimize operational efficiency and maintain profitability.

4) Strategic Implications: Trends in the PV ratio have strategic implications for

Tata Steel. A declining ratio may necessitate a review of cost structures,
operational efficiency, or pricing strategies, while an increase could indicate
successful strategic shifts.

This PV Ratio analysis for Tata Steel provides a comprehensive overview of the
trends, their impact on profitability, identification of cost drivers, strategic
implications, sensitivity to external factors, and potential management actions.
This analysis serves as a valuable tool for understanding Tata Steel's financial
dynamics and making informed decisions.

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 2. BREAK-EVEN POINT (BEP) ANALYSIS:

YEARS 2019 2020 2021 2022 2023

BEP(UNITS) 3470.570184 3649.387996 5567.07635 4399.456599 5532.217646
BEP ( IN %) 27.34% 29.62% 33.41% 24.96% 30.37%

BEP ( IN %)
33.41%
35.00% 29.62% 30.37%
30.00% 27.34%
24.96%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2019 2020 2021 2022 2023

BEP ( IN %)

1) BEP Trend Analysis: The fluctuating BEP trend indicates varying cost
efficiency over the years. Notably, the increase in 2021 and subsequent
decrease in 2022 suggest changing dynamics that merit closer examination.

2) Efficiency Improvement in 2022: The significant decrease in BEP

percentage in 2022 implies improved operational efficiency. Exploring the
strategies behind this decrease could reveal key insights into cost
management.

3) Risk Assessment with Lower BEP: Lower BEP values in 2022 indicate
enhanced risk resilience. This implies Tata Steel's ability to break even with a
smaller proportion of sales, reducing vulnerability to economic fluctuations.

4) Operational Efficiency Insights: Fluctuations in BEP percentages reflect

changes in operational efficiency. Analyzing initiatives contributing to these
fluctuations can reveal areas of improvement, guiding future operational
strategies.

5) BEP in Strategic Planning: BEP analysis offers insights into cost structures.
Leveraging these insights, Tata Steel can strategically plan for long-term
sustainability, considering factors such as expansion, cost control measures,
or diversification.

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 3. MARGIN OF SAFETY ANALYSIS:
YEARS 2019 2020 2021 2022 2023
MARGIN OF
₹ 1,51,221.27 ₹ 1,36,167.26 ₹ 1,47,741.31 ₹ 2,39,559.71 ₹ 2,36,104.03
SAFETY(Rs)
MARGIN OF
97.76% 97.39% 96.37% 98.20% 97.71%
SAFETY(%)

MARGIN OF SAFETY(%)
98.50% 98.20%
98.00% 97.76% 97.71%
97.39%
97.50%
97.00%
96.37%
96.50%
96.00%
95.50%
95.00%
2019 2020 2021 2022 2023

MARGIN OF SAFETY(%)

1) Margin of Safety Trend Analysis: The Margin of Safety (MOS) in both

rupees and percentages has shown a consistent high trend over the years,
indicating a robust buffer between actual sales and the break-even point. This
suggests a stable financial position for Tata Steel.

2) MOS Impact on Risk Exposure: The consistently high MOS, with

percentages ranging from 96.37% to 98.20%, suggests that Tata Steel has a
substantial cushion against uncertainties in sales. This enhanced financial
resilience reduces the company's risk exposure to unexpected downturns in
the market.

3) MOS in Strategic Decision-Making: Tata Steel's high MOS values imply a

strong financial position. This information is likely crucial in strategic
decision-making, allowing the company flexibility for expansion, investment,
or innovation, knowing that there is a considerable safety margin.

4) Operational Efficiency and MOS: The consistently high MOS indicates

effective cost management and operational efficiency. Tata Steel seems to
maintain a healthy balance between sales and costs, ensuring a comfortable
margin of safety, which is vital for sustained profitability.

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INTERPRETATION:
1) PV Ratio Analysis: The decline in PV ratio over the years signals the need
for investigation into potential cost increases or changes in the product mix at
Tata Steel. The PV ratio reflects the contribution to profit from each rupee of
sales.

2) BEP Analysis: The decrease in BEP percentage in 2022 suggests improved

efficiency or cost control for Tata Steel. BEP analysis shows the units and
percentage of sales required to cover costs.

3) Margin of Safety Analysis: The consistently high Margin of Safety in both

rupees and percentage highlights Tata Steel's substantial cushion against
variations in sales. It indicates a strong financial position and risk resilience.

RECOMMENDATIONS:
1) Pricing Strategy Optimization: Tata Steel should conduct a strategic review
of its pricing strategy to address the decline in PV ratio from 2019 to 2021.
This analysis will help align prices with profitability goals, ensuring a
sustainable contribution margin.

2) Operational Efficiency Enhancement: Building on the positive trend of

decreased BEP percentage in 2022, Tata Steel should continue efforts to
optimize operations. Identify and implement specific operational practices
that contributed to the reduction, aiming for further efficiency improvements.

3) Strategic Resource Allocation Using Margin of Safety: Leveraging the

consistently high Margin of Safety, Tata Steel should strategically allocate
resources. Explore growth opportunities aligned with long-term objectives,
such as market expansion or technological advancements, while maintaining
a robust financial cushion.

4) Sensitivity-Driven Decision-Making: Tata Steel should use the Margin of

Safety data for sensitivity-driven decision-making. Assess the impact of
variations in sales on overall financial stability to guide proactive and
informed decision-making, ensuring the company's resilience to market
fluctuations.

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LINKS AND REFERENCES

• EXCEL WORKBOOK LINK

CVP ANALYSIS_UTKARSH VIKRAM SINGH (1).xlsx

• COMPANY WEBSITE
https://www.tatasteel.com/

• DATA WEBSITES
https://g.co/kgs/8KgZ9G
https://datasetsearch.research.google.com

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