Defying the conventional logic of Dalal Street, subsidiaries of Indian corporates are turning in far better performance than their parent companies. Subsidiaries of 361 companies, for which 2009-10 results are available with FE, have posted over 67% rise in their aggregate net profit, as against the 15.7% rise for the overall group.
As one wades through the numbers, the picture becomes clearer. For operational and strategic reasons, Indian companies often float several special purpose vehicles for specific projects, which are left defunct once the purpose is over. Once those subsidiaries are pruned from the list, the results should be even better.
Indian companies?particularly those in manufacturing and real estate?have a penchant for setting up subsidiaries. DR Dogra, managing director, Care Ratings observes that companies sometimes hive off a profitable asset into a separate company. ?The intention is to monetise the asset. In the process, like in the tower business in the telecom sector, the subsidiaries often yield more profit than the holding company.?
Numbers reveal that the subsidiaries have provided returns despite their high gearing. Often, the cost of debt of these companies is high. In 2009-10, their interest cost rose by 52.9% from Rs 3,987 crore to Rs 6,099 crore. The operating profit margins rose 548 bps to 22.07% from 16.59% during 2008-09.
Kishor P Ostwal, CMD, CNI Research, confirms this: ?In many cases, promoters structure their business in such a way that they do not have to dilute their stake in the holding companies. They set up subsidiaries which are performing well and help promoters unlock value.?
Does it improve the ratings of these subsidiaries? So far, these companies never cross the ?AA? rating from credit rating agencies, even if the parent is AAA. This creates a problem for accessing debt from insurance and pension funds, which are the largest source of funds, especially for infrastructure companies. Dogra said there cannot be a general response on this as the finances of the subsidiary has to be studied. The top five companies according to subsidiaries? sales in 2009-10 were Aditya Birla Nuvo, Adani Enterprise, Grasim Industries, Sterlite Industries and Reliance Industries. Aditya Birla Nuvo subsidiaries, numbering 35, registered the highest growth in sales. Mention may be made of Madura Garments, MG Lifestyle Cloth and PSI Data Systems. The Birla subsidiaries increased sales by 65.7% to Rs 14,680 crore during 2009-10 from the level of 8,858 crore during 2008-09. Operating profit margins (OPM) increased 299 basis points to 5.90% during 2009-10 from 2.81% during 2008-09. On the other hand, the top five companies in terms of subsidiaries? net profit were Sterlite Industries, Reliance Communications, Jindal Steel, Grasim Industries and TCS.
The highest growth in subsidiaries? net profit is in the case of Reliance Communications, which incidentally has 109 subsidiaries. Mention may be made of Anupam Global Soft, Flag Pacific, Matrix Innovations and Reliance Big TV. The subsidiaries? net profit of Reliance Communications has increased 196.8% to Rs 4,295 crore during 2009-10. The company?s OPM increased 4,118 basis points to 72.86% from 31.68% during the period of the study.