There has been a decline in return on equity (RoE) in the corporate sector during 2008-09, indicating a decrease in the efficiency of generating higher shareholder value. It is measured as net profits as percentage of net worth.
A comparative study has been carried out on 516 major companies from 2007-08 to 2008-09. They aggregated a net profit of Rs 50,815 crore in 2008-09 as against Rs 50,800 crore in 2007-08. Total net worth increased by 18.2% to Rs 2.83 lakh crore (Rs 2.40 lakh crore) during 2008-09. The study reveals the ratio of net profit to total net worth, which is used to measure the return on equity, decreased from 21.20% in 2007-08 to 17.94% in 2008-09.
This however remains higher than most of their peers in the Asian economies and also developed nations. The average RoE in the Asian region is around 13% and that of the developed nations is much lower. This was one of the reasons why the companies in India would get a premium over several of their Asian peers. The average price to book value, which is usually used in conjunction with the RoE, is two times higher. It means the share price is twice the net worth per share, thanks to better servicing of the net worth though earnings. An analyst from a rating agency said, ?The return on net worth of major corporates have decreased mainly because of lower level of profits besides increase in net worth during the year. The major reason for the same seems to be less efficient operations, poor demand/supply situation and low realisations.?
The top five companies considering net profit to net worth ratio during 2008-09 are Allied Resins, Lancor Holdings, Hind Unilever, IAG Company and Simplex Realty. The position of Hind Unilever in 2008-09 can be explained from its performance. Net profit of the company increased 29.6% to Rs 2,496 crore, as against Rs 1,925 crore during 2007-08. The net worth of the company also increased 43.2% to Rs 2,061 crore in 2008-09.
A significant increase in return on equity was witnessed by Shree Cement, Coromandel Fertilisers, Dolphin Offshore, ICI (I) and National Peroxide. Shree Cement?a net profit grew 121.9% to Rs 578 crore (Rs 260 crore) and its net worth increased 79.8% during the study period.A significant fall in return on equity was observed in the case of Mangalam Cement,Godrej Consumer, Rallis India and Bharat Bijlee.In sector-wise analysis, significant decline in RoE was seen in aluminium, cement, IT, construction, engineering, entertainment and steel. An opposite trend was seen in fertilisers, food & products, paints, paper & electricity.