MNCs fare better in profitability in ’00-01

Pradip Kumar Dey, FE Research Bureau

Most of the Indian companies in the new economy are doing good business, but when it comes to the aggregate profitability, multinational companies (MNCs) continue to outperform them. A comparison between 50 major MNCs operating in the country and 50 major domestic companies, all with sales over Rs 100 crore, shows MNCs performed better in terms of profitability during 2000-01. We considered four ratios for the comparison.

They are: profitability = (profit before tax/sales) * 100; capital turnover = sales/total funds; working capital turnover = sales/net current assets; stock turnover = sales/inventories.

In the case of MNCs, all the selected ratios at the aggregate level showed a decline except profitability during 2000-01, against that of 1999-00, but in the case of Indian companies, all the ratios showed an increase except one, that is, profitability during the same period. The aggregate sales of the 50 MNCs have increased by 4.6 per cent from Rs 40,776 crore in 1999-00 to Rs 42,664 crore in 2000-01.

Their total profit before tax (PBT) has increased by 12.4 per cent during the period, raising the profitability ratio measured as a percentage of the PBT to sales ratio from 12.06 per cent in 1999-00 to 12.96 per cent in 2000-01. This is significant, for despite lower sales growth, the MNCs have succeeded in raising their return on sales.

Corporate India, in contrast, appeared less concerned about profitability. It has achieved an 18.7 per cent growth in sales during 2000-01, but the PBT has increased by 8.7 per cent to Rs 11,126 crore during 2000-01 from Rs 10,237 crore during 1999-00. So the profitability ratio declined from 10.63 per cent in 1999-00 to 9.73 per cent in 2000-01.

Significant fall in profitability was seen in the case of Bajaj Auto. The profitability ratio of Bajaj Auto declined from 21.97 per cent in 1999-00 to 10.14 per cent in 2000-01. According to the directors report, the changed market scenario and the composition of sales — result of the unprecedented slump in geared scooters — have adversely affected the profitability of Bajaj Auto. In the concluded fiscal, Bajaj Auto incurred an extraordinary item of expenditure on account of a voluntary retirement scheme that involved an outflow of Rs 79.9 crore. The expense on this head was absorbed in 2000-01 resulting in a further reduction in profits.

In Tata Tea also, the profitability ratio declined significantly from 18.09 per cent in 1999-00 to 15.51 per cent in 2000-01. Profitability of Tata Tea was mainly impacted by the general oversupply of tea in the market putting pressure on prices. Profitability of the company also declined as a consequence of lower sales of value-added products and the lower realisation on sales of teas in the auction during the year in an environment where costs of inputs continued to increase.

Among the MNCs, Alfa Laval showed a significant improvement in the profitability ratio. The PBT to sales ratio rose from 12.55 per cent in 1999-00 to 21.06 per cent in 2000-01. The company fared well on the export front during the year 2000-01. While there was a significant increase in the offtake of separators and decanters by the principals, exports to Asian and African markets also improved.
Exports of the company during the current year was at Rs 49.74 crore as against Rs 34.05 crore in the previous year. Stepping up exports by exploration and searching for new international market helped the company improve its profitability.

Similarly in the case of ITC, the profitability ratio improved from 15.45 per cent to 18.44 per cent during 2000-01. According to the directors’ report, this improvement was achieved through continuing focus on management of costs, productivity improvements, continuous value addition to products and services and quality upgradation.

Slightly more than 50 per cent of the MNCs showed a rise in the profitability ratio during 2000-01, while only 40 per cent of the domestic companies showed an increase in the profitability ratio during the same period.

In the capital turnover ratio ((2.76 in 1999-00 to 2.53 in 2000-01), working capital turnover ratio (8.55 to 7.97) and stock turnover ratio (7.43 to 7.34), MNCs showed a decline during 2000-01.

On the other hand, Indian companies showed an increase in capital turnover ratio (0.83 to 0.92), working capital turnover ratio (3.62 to 3.76) and stock turnover ratio (7.28 to 7.41) during 2000-01.

Out of 50 MNCs, only BASF showed an increase in all the four ratios during 2000-01. According to the directors’ report, the vastly improved performance of BASF has been achieved through various cost control measures together with the significant reduction in the interest costs. Out of the 50 Indian companies, six, namely, EI Hotels, GNFC, Nicholas Piramal, Tisco, Titan Industries and Tube Investments showed an increase in all the ratios during 2000-01 from the level of 1999-00.

Occupancy levels and average room rates have improved in EI Hotels during 2000-01. This helped the company improve its ratios during the study period. Similarly, according to Tube Investment’s directors’ report, the rapid pace of new product introduction, production facility realignment, various quality and process initiatives, starting of a new location to serve markets faster and more effectively, continuous focus on reduction in in-house rejections, higher equipment effectiveness and improved customer service helped the company increase its ratios during 2000-01.