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India Inc: Looking back for future

Apr 9, 2003

India Inc. has grown at a healthy rate over the last decade both in terms of revenues as well as profits. But in this journey there are many concerns that could affect the performance of some companies. In our previous article BSE 30: where do you go? we had mentioned that over the last few years, the BSE-30 group's topline has grown at a healthy 17% CAGR and the bottomline has grown at 16% CAGR between FY95-FY02. But the interesting thing to note here is that there has been a marginal (1%) difference in the CAGR between net profit and operating profit (CAGR 17%). The reason why operating efficiencies could not translate to the bottomline seems to be a result of both a high interest burden, as well as higher depreciation provisioning.

BSE 30 Statistics
(Rs m)FY95FY02% CAGR
Sales 688,164 2,166,939 17.8%
Operating Profits 150,947 447,559 16.8%
Operating Profit Margins21.9%20.7%
Interest 16,772 44,849 13.1%
Depreciation 19,827 80,692 22.2%
PAT 60,361 168,280 15.8%
Net Profit Margin 8.8%7.8%

If one analyses the debt equity (D/E) ratio of BSE 30 scrips, the said ratio has consistently gone down from 1.2x in FY92, to 0.9x in FY98 to 0.6x in FY02. This indicates that as years have gone by, a chunk of the BSE 30 has kept on reducing its debt levels. The current soft interest regime has also helped in the companies restructuring of their debt. At a time the interest expenses were growing at 20% CAGR (FY94-FY98), but in recent years has grown at a mere 7% CAGR (FY98-FY02), indicating both the affects of lower interest rates as well as the falling D/E ratio.

Increased depreciation signifies the confidence of India Inc. in the country's growth prospects. Infact, a large part of the higher depreciation provisioning would have come from capital-intensive industries. The fact that the current BSE 30 group includes over 10 companies that are from capital intensive industries (4 cement, 1 steel, 1 aluminum, 2 energy and 2 power sector related stocks) did not bog down the overall performance of the BSE 30 is encouraging.

India is in a much better situation as compared to the start of economic reforms in 1991. We have a much better sense of direction, and the problems faced in the last decade have been a learning experience for both the policy makers as well as the domestic companies. Initially wary of foreign competition, one can currently see India Inc. coming to terms with the global reality and most business houses have successfully restructured themselves to have a long-term staying power in their respective sectors. Of course, one has also seen the mushrooming of new players, particularly in the new economy sectors like telecom and software services, some of whom have stolen the established group's thunder.

All this gives us hope that India Inc. will outperform its last 10 years performance in the coming decade. This is a welcome thought and very much achievable in light of our infrastructure development endeavors. Consequently, the Sensex trading at a P/E of 12x at twelve months trailing earnings looks attractive.

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