MNCs vs Indian cos in 2005-06

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: In 2005-06, while Indian companies in the new economy did brisk business, when it comes to the magnitude of aggregate profitability ratio, multinational companies (MNCs) continue to outperform them. A comparison between 50 major MNCs and 50 major domestic companies among the FE 500, all of which have sales over Rs 350 crore, shows that the profitability ratio of Indian companies (profit before tax to sales) dipped significantly as against a marginal decline for MNCs during 2005-06 from the level of 2004-05. We considered four ratios for the comparison: 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 capital turnover and stock turnover ratios during 2005-06, against that of 2004-05, but in the case of Indian companies, all the ratios showed a decline except one, that is, capital turnover ratio during the same period.

The aggregate sales of the 50 MNCs increased by 21 per cent from Rs 60,688 crore in 2004-05 to Rs 73,428 crore in 2005-06. Their total profit before tax (PBT) increased by 14.6 per cent during the above period, bringing down the profitability ratio (measured as a percentage of the PBT to sales ratio) from 19.66 per cent in 2004-05 to 18.62 per cent in 2005-06.This is significant, for despite higher sales growth, the MNCs have not succeeded in raising their return on sales.

On the other hand, corporate India achieved a 22.9 per cent growth in sales during 2005-06, and the PBT has increased by 6.9 per cent to Rs 1,06,516 crore during 2005-06 from Rs 99,584 crore during 2004-05. So the profitability ratio marginally decreased from 13.91 percent in 2004-05 to 12.11 percent in 2005-06.

Significant increase in profitability ratio was seen in the case of Reliance Energy. The profitability ratio of Reliance Energy increased from 13.75 per cent in 2004-05 to 17.23 percent in 2005-06. In the case of Sterlite Industries too, the profitability ratio increased significantly from 2.24 per cent in 2004-05 to 9.05 per cent in 2005-06.