Investing in equities

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: During the bull-run from 2004 to 2007, companies parked a major part of their surplus money in equities, especially in their subsidiaries. And with markets reviving, companies are finding investing in equities even more profitable now.

An FE Research Bureau analysis of 1,421 companies whose balance sheets were available till October 5, 2009 shows that the share of equity in total investment increased to 50.8% in 2008-09 from 48.60% in 2006-07. On the other hand, the share of debentures and bonds in total investment decreased from 24% in 2006-07 to 17% in 2007-08 and further decreased to 16.96% in 2008-09.

The numbers also show that the growth of total investment of companies decreased to 32% in 2008-09 from 47.8% in 2007-08. On a positive note, the investment to asset ratio increased to 24.84% in the last year from 19.97% in 2006-07.

Says D R Dogra, MD & CEO, Credit Analysis & Research, “Increase in investments to assets ratio in the current year can be partly attributed to reduced capex expenditure in view of the economic downturn.

Also, the increasing investment in equities can be due to corporates being less risk averse and investing in equities, including investment in group companies. The downturn in equity market had offered better valuation and scope for increasing intra group holdings.”

The sample companies invested Rs 2.58 lakh crore during 2008-09 in company equity shares against Rs 1.89 lakh crore in 2007-08. Companies invested Rs 0.86 lakh crore in debentures and bonds and Rs 0.79 crore in mutual funds.

Dogra adds, “Investments in MFs are for a short term because of high risk and also due to internal liquidity drying up. After the Lehman collapse, many economies announced stimulus packages, thereby reducing interest rates, which had peaked by October 2008. These could have acted as a deterrent to invest in debentures, bonds and units during the second half of 2008-09.” The share of mutual fund units in total investment increased from 20.54% in 2006-07 to 25.44% in 2007-08 and decreased thereafter to 15.61% in 2008-09.