Corporate performance grew twice over since April '99, says CSFB

The Indian corporate performance, measured as aggregate cash flow return on investment (CFROI), has almost doubled to 8.4 per cent in May 2004 from 4.3 per cent in April 1999, according to a report from investment bank Credit Suisse First Boston (CSFB).

The spread between these returns on investment and cost of capital measured as the market implied real discount rate has increased to above 200 basis points which indicates a high level of value creation, the report says.

Meanwhile, the CSFB's sector level analysis reveals that market expectation for consumer staples and materials appear to be low, given strong farm income and ongoing infrastructure development.

Also, market-implied expectation for information technology and healthcare sectors may be high and achievable as players leveraged global opportunities.

Market expectations for refiners, utilities and automobiles manufacturers appear to be challenging, given that input prices are rising.

Again the market implied discount rate (the rate of return that investors demand for making their funds available to the firm) has jumped to 6.2 per cent as on May 2004 after declining by 280 basis points to 4.8 per cent from a high of 7.6 per cent in September 2001. This index had plunged to a low of 1.1 per cent during early 2000 on the back of the new economy stocks.

As per CSFB report, further improvement in corporate performance is largely dependent on political stability, continued economic reforms and another round of good monsoons. This coupled with the global economic environment will also influence the trend in the discount rate.

For the CSFB HOLT size spread, which is a measure of relative attractiveness of large cap versus small cap firms, the India size spread has declined since January 2002. It has remained at zero basis points in April 2004.

Based on this, CSFB analysis also pointed out that the market is unwilling to pay a premium for large cap stocks indicating that the risk acceptance has increased. Market prefers to invest in small-cap companies even at the expense of lower liquidity associated with them.

It is also seen that the market is increasing its preference for low-leveraged companies, anticipating a rise in interest rates.

The CSFB HOLT India leverage spread, which measures the extent of investors' preference for low-leveraged companies versus higher ones, shows that the leverage spread was high at 400 basis points in October 2000.

But with the opening up of financial markets, the low-leveraged companies have started converging with high-leveraged company discount rate, and the leverage spread has dropped to below 200 basis points.