Profitabili ty: MNCs pip Indian peers

Written by Pradip Kumar Dey | Updated: May 24 2008, 06:59am hrs
In the year 2006-07, Indian companies in the new economy had done good business, but 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 FE 500, all with sales over Rs 350 crore, shows Indian companies and MNCs profitability ratio (profit before tax to sales) increased during 2006-07 from the level of 2005-06, though, the magnitude of increase of MNCs in profitability ratio was marginally higher.

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 an increase, except the capital turnover ratio during 2006-07, against that of 2005-06.

In the case of Indian companies, all the ratios showed an increase during the same period. The aggregate sales of the 50 MNCs have increased by 20.2% from Rs 73,055 crore in 2005-06 to Rs 87,839 crore in 2006-07.

Their total profit before tax (PBT) has increased by 27.4% during the above period, increasing the profitability ratio, measured as a percentage of the PBT to sales ratio, from 18.55% in 2005-06 to 19.67% in 2006-07.

This is significant, for with higher sales growth, the MNCs have succeeded in raising their return on sales.

On the other hand, corporate India achieved a 28.4% growth in sales during 2006-07, and the PBT has increased by 39.6% to Rs 1,43,535 crore during 2006-07 from Rs 1,02,825 crore during 2005-06. So the profitability ratio increased from 12.23% in 2005-06 to 13.29% in 2006-07.

A significant increase in profitability ratio was seen in the case of Grasim Industries. The profitability ratio of Grasim Industries increased from 18.11% in 2005-06 to 25.77% in 2006-07. In Ambuja Cements, also, the profitability ratio increased significantly from 19.93% in 2005-06 to 30.55% in 2006-07.

Among the MNCs, Bata India showed a significant improvement in the profitability ratio. The PBT to sales ratio rose from 1.77% in 2005-06 to 6.22% in 2006-07. Similarly, in the case of Gillette (I), the profitability ratio improved from 24.83% to 32.41% during 2006-07.

The percentage of MNCs that showed a rise in the profitability ratio during 2006-07 were 52%, while 66% of domestic companies showed an increase in the profitability ratio during the same period.

In the working capital turnover ratio (8.34 in 2005-06 to 8.45 in 2006-07) and stock turnover ratio (7.23 to 7.38), MNCs showed an increase during 2006-07.

The capital turnover ratio decreased from 2.19 in 2005-06 to 2.18 in 2006-07 for MNCs. On the other hand, Indian companies showed an increase in the capital turnover ratio (2.24 to 2.35), working capital turnover ratio (6.29 to 6.55), and stock turnover ratio (8.47 to 9.82). Out of 50 MNCs, four companies, namely, Alstom Projects (I), Bata (I), Cummins (I), and Ingersoll-Rand (I) showed an increase in all the four ratios during 2006-07.

In the case of Indian companies, 12 showed an increase in all the ratios during 2006-07 from the level of 2005-06.