Ochrelle Chemicals reports pre-tax profit of Rs 300 crore, of which Rs 90 crore is other income from gains on its treasury portfolio. What are core earnings, and what should each part of the profit be worth?

Core pre-tax profit is Rs 210 crore, Rs 157.5 crore after tax; value that at 20x and add the Rs 900 crore portfolio at its own value, about Rs 4,050 crore or Rs 405 a share. One 20x multiple on all Rs 225 crore of profit gives Rs 4,500 crore, 11% too high, because it capitalises one good year of bond gains as though they were a growing business.

A doctor who also earned interest on a fixed deposit this year would not tell a buyer of the clinic that the practice earns both. Core earnings are what the operating business makes; income from surplus cash is real, but it belongs to the cash, not to the business. Ochrelle's core pre-tax profit is Rs 300 crore less Rs 90 crore of other incomeIncome outside the main business, such as interest, dividends and gains on investments. It sits below operating profit on the income statement., Rs 210 crore, or Rs 157.5 crore after tax. Core EPS is Rs 15.75, not the reported Rs 22.50.

A multiple of 20 pays for twenty years of earnings that are expected to grow. A bond portfolio does not grow like a business and its gains do not repeat: falling rates lifted bond prices this year and rising rates would reverse them. Rs 67.5 crore of after-tax gains at 20x would value the portfolio at Rs 1,350 crore, when it could be sold for about Rs 900 crore. Value the cash and investments at what they are worth, and the operating business on its own earnings.

Three things. Whether core profit also carries one-offs, such as an export incentive or an inventory gain. Whether the Rs 900 crore is truly surplus or is needed as working capital, in which case part of it belongs inside the operating business. And the trend in other income over five years: a company whose treasury income is growing faster than its operating profit is telling you where its earnings growth is really coming from.