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India’s most efficient companies - Views on News from Equitymaster
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  • May 30, 2003

    India’s most efficient companies

    In continuation of our series of articles on evaluating India Inc. on various parameters, we consider India’s most efficient listed companies in FY02 in the current one. For this, we have used the operating margin (OPM) as the metric. This tool is most effective as it shows the true picture (operationally) of the company.

    Operating profit is calculated by subtracting operating expenses from operating revenues (excluding other income). The factors that lead to an improvement in margins varies across sectors. For a commodity company, given the high fixed cost involved, margins tend to improve when there is a recovery in business cycle (steel companies like Tisco are at their peak operating margin currently, as steel demand and prices were robust in FY03). For the software sector however, margins is a function of various factors the kind of software services offered, billing rates and offshore-onsite mix. When billing rates fall, like in FY03, companies including Infosys saw a decline in margins. Given this backdrop, investors should keep in mind that growth drivers vary and so does operating efficiency cycle.

    Hindalco 23.0% 35.9% 13.3% 19.1%
    Infosys 28.2% 33.9% 78.6% 82.3%
    ITC 11.0% 33.3% 11.6% 26.2%
    MTNL 32.2% 27.8% 14.9% 13.1%
    VSNL 31.5% 26.8% 27.4% 25.2%
    ONGC 16.0% 26.0% 18.7% 25.2%
    Wipro 3.6% 23.8% 35.2% 66.9%
    Tata Power 16.6% 16.7% 19.2% 19.3%
    GAIL 8.8% 16.2% 15.2% 23.4%
    HLL 9.7% 14.8% 22.4% 28.4%

    From the table above, it is apparent that Hindalco was the most efficient company in FY02. Over the last 10 years, while revenues have increased at a CAGR 13%, operating profits are higher by 19% reflecting the magnitude of efficiency improvement. This shows that even though the company is facing competitive pressure, the cash cost of manufacturing per tonne of aluminium is among the lowest in the industry. As a result, Hindalco has had an upper hand despite a consistent fall in import duty over the years. Of the top 10 list, five are from the manufacturing sector, which is heartening.

    Software companies are considered as the most efficient but again this is not absolutely true. As is indicative from the table below, Infosys and Wipro have superior margins compared to others. An interesting observation is that the operating profit level of Infosys has grown at an astounding 84% over the last decade and its OPM has improved from 28% in FY93 to 34% in FY02. It is the case with Wipro as well (CAGR of 67%).

      FY93 FY02
    Rs m Net Sales PBDIT Net Sales PBDIT
    Hindalco 7,560 1,736 23,330 8,378
    Infosys 141 40 25,993 8,825
    ITC 18,668 2,052 50,115 16,668
    MTNL 18,310 5,900 64,095 17,809
    VSNL 7,341 2,314 65,042 17,435
    ONGC 49,776 7,984 232,336 60,419
    Wipro 2,270 81 34,229 8,147
    Tata Power 7,503 1,244 36,526 6,103
    GAIL 28,739 2,520 103,089 16,687
    HLL 17,213 1,666 106,375 15,747

    It is not an upward looking sign for all companies in the top 10 list. Telecom companies like VSNL and MTNL have seen a decline in OPM (32% in FY93 to 27% in FY02 for VSNL and 32% to 28% in FY02 for MTNL). The decline in margins is primarily on account of the steep fall in telecom tariffs, be it domestic or international long distance telephony. Apart from fall in tariffs, players like MTNL are saddled with huge workforce, which lowers their competitive advantage.

    Having said that, a heartening thing is that most of the established companies in India Inc. are moving towards improving their efficiency levels further. Excluding five companies i.e. Infosys, Wipro, ITC, MTNL and VSNL, operating margins of all others have shown an improvement in FY03 as well.

    It is important to understand that the sustainability of higher margins depends on the company’s standing in the sector and the agility of the management. In the era of increased competition (not just from domestic peers alone), better efficiency is not a choice but a compulsion. So, this parameter is absolutely important while making an investment decision.



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