Lower RoE adds to market concerns

Written by Pradip Kumar Dey | Mumbai, Jun 3 | Updated: Jun 5 2008, 05:09am hrs
All might not be well on the valuation front for India Inc, even as the market takes a beating. The chance of value emerging might actually be far away. Already, foreign institutional investors have been shying away from the market due to various reasons, now the fact that India's earnings quality is deteriorating adds to their flight. The return on networth of major corporates has declined in FY08.

Rupee appreciation, rising inflation, faltering growth, and global uncertainty were the enough to get the FIIs jittery, slowly eroding the profitability of Indian companies is another reason for them to stay away. Already, FIIs have been net sellers to the extent of Rs 16,261.8 crore from January this year and Rs 4,756.9 crore and more is expected.

The RONW is a ratio which examines the relationship between the size of earnings (net profits) and the net worth, which is a good indicator of the way the company services its shareholders funds. A comparative study has been made for 547 companies from FY07 and FY08 indicates that the RONW has declined from 24.18% to 23.57%.

Overall, at the moment, the Indian stock market has a price to book value (P/Bv) of around 4.3 times and this is the second highest amongst peers in the South Asian markets. The high valuation was justified on the basis of a strong RONW, which was at the beginning of the year estimated to be around 25%. However, with this coming down, the market suddenly looks to be one of the most expensive in the South Asian region. This is likely to have caused some concern and the market might correct to make the valuations in line with other peers.

Amongst the companies to register a siginificant decrease are Sterlite Inds, where it decreased from 17.59% to 7.23%. In HDIL 's case , the decrease was from 74.68% to 38.8%. Zuari Industries had a return on net worth of 50.37% in 2006-07, which decreased to 8.69% by 2007-08.

In the sector-wise analysis, the RONW decreased from FY07 to FY08 in the case of 20 industries out of the 28 under study. Prominent among them are automobiles (23.87% to 22.21%), auto ancillaries (25.45% to 20.45%), cement (38.83% to 35.41%), electric equipment ( 28.14% to 23.97%), fertilizers (18.85% to 14.78%), pharmaceuticals (22.25% to 18.43%), steel (30.93% to 27.22%), textiles(14.53% 10.28%) and trading (16.36% to 6.22%).