Company A earns a profit of Rs 1,500 m. Company B earns a profit of Rs 15 m. Which one is better? Well, quite obviously, one cannot comment without knowing the other data points. Now let's say for instance, these profits are earned with after investing Rs 30 bn in the case of Company A and Rs 500 m in case of company B. As such, Company A earns return on capital of 5% while company B earns a return of 30%. In absolute terms, Company B seems like a dwarf as compared to Company A. However, in terms of using its capital efficiency, it clearly outperforms Company A.
Such a situation is what seems to be the case with Indian players. Imagine Company B as domestic player in their respective fields, and a multinational company (MNC) as Company A, operating in that sector on a global scale.
As per a recent article by the Economic Times, Indian companies do not really match their global peers in terms of size - be it balance sheets, revenues or profits; here, we are talking figures in absolute terms. However, when it comes to profit margins and return ratios, they surely can be comparable. Or for that matter, Indian companies do tend to outperform their global peers in terms of profit margins. This seems to be the case with the largest domestic players across industries.
Some examples given by the business daily include Tata Consultancy Services (TCS) or Infosys versus IBM or Accenture. While the two Indian players earned profit margins of 22% and 23% respectively, IBM and Accenture reported profit margins of 17% and 22% respectively.
One thing must, however, be noted is that compared to the global players, the Indian companies are relatively young. As they look to expand and as competition heats up, such high profitability would be difficult to sustain for longer periods. Nevertheless, there may be companies that would be able to sustain above average margins and return ratios for longer periods, but it all depends on their respective competitive strengths and moats. The stronger and longer the same remain, the better the financial performance will be.
In any case, such factors do explain the rationale behind foreign companies wanting to tap Indian markets. With strong growth potential, coupled with relatively cheap but yet good talent, India is definitely a place to be.
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