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In FY13, every rupee of investment yielded only Rs 1.06 worth of revenue for India Inc, down from Rs 1.20 in March 2008 at the height of the economic boom. The bad news doesn’t end only at the steady decline in revenue yield for companies, led by mainly those in construction and infra, realty, metals and mining, telecom and the power sector. The infrastructure and real estate boom proved too costly for Indian companies.
The ability of companies to generate profits has also declined, with return on capital employed declining to 11.2 per cent in 2012-13 from around 18.5 per cent in 2007-08. The same is the story on other financial parameters. Operating margin declined by 430 basis points, while return on net worth nearly halved to 12 per cent in FY13, from 22.7 per cent in FY08. (DOOM IN BOOM?)
The analysis is based on 621 companies that are part of either the BSE 500 index or BSE Midcap or BSE Smallcap. They cover 90 per cent of all non-banking, non-financial companies by market capitalisation. The assets include net worth and borrowings comprising deferred tax liabilities and other non-debt liabilities.
In the past five years, the combined revenues for the sample of companies nearly doubled to Rs 47.9 lakh crore at the end of FY13 from Rs 22.5 lakh crore in FY08, growing at a compounded annual rate (CAGR) of 16.3 per cent. Their assets during the period grew at a CAGR of 18.6 per cent and expanded by 2.3x to Rs 46.4 lakh crore at the end of FY13. The surge was largely funded through borrowings, with net debt (excluding cash & equivalent) growing at a CAGR of 35 per cent during the period and nearly quadrupling during the period.
Companies in infrastructure and related sectors accounted for the bulk of the incremental growth in assets even as their revenue growth lagged. In FY13, companies in these sectors accounted for nearly 45 per cent of all assets, much higher than their 27 per cent revenue share.
The biggest villain in the pack, it appears, have been construction and infrastructure companies, followed by real estate developers, telecom and metal & mining companies. Their revenues failed to keep pace with growth in their balance sheet and this resulted in low capacity utilisation, poor profitability and high indebtedness. For example, in the construction & infra space, every rupee of asset generated Rs 0.5 worth of revenues, down from Rs 0.9 in 2007-08. Real estate developers were even worse. They generate only 20 paise of revenue over every Rs 1 worth of assets down from 0.5 in 2007-08. In telecom and metals & mining, the ratios declined to Rs 0.5 and Rs 0.8 from from Rs 0.6 and Rs 1.3, respectively in 2007-08.
In comparison, companies in sectors such as cement, fast-moving consumer goods, consumer durables (including two-wheelers & passenger cars), oil & gas, pharma, information technology and textile either maintained their revenue to assets ratio or improved it since FY08.
Besides demand slowdown, the yields were affected by big-ticket acquisitions abroad, such as the Bharti Airtel-Zain Africa deal, Tata Steel-Corus and Hindalco-Novelis transactions. These three companies cumulatively spent nearly $29 billion (around Rs 1.73 lakh crore at the current exchange rate) on these buyouts, but returns are yet to come in. This is worsening their balance sheets.
Analysts blame it on the combined impact of aggressive capex expenditure by companies in capital-intensive sectors during the boom and the subsequent slowdown in demand growth. “The capex cycle from 2004 to 2010 was the strongest, biggest and deepest in the post-independence period. But the demand projections went awry when the economy began to slow down after 2010 due to factors like high inflation and global recession,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.
It worsened a shift in the terms of favour of owners of physical assets like land, real estate and gold. “On the one hand, it raised the capex cost for companies, while on the other, it diverted investment and purchasing power from productive to unproductive sectors, reducing the economy’s growth multiplier,” Sinha adds.
Economists blame it on the 2008 Lehman crisis and the subsequent fiscal stimulus by the government. “When there was a sudden shock, such as the 2008 Lehman crisis, demand growth tripped. The government stepped in with a large consumption stimulus, which remained in the system even after the economy rebounded in 2009 and 2010, causing high inflation and subsequent demand destruction,” says Devendra Pant, head economist at India Ratings.
India Inc’s capital efficiency has also been a casualty of delays in project implementation and other policy-related hold-ups. “It raised the project cost, affecting our finances and project economics. Once a project is operational, low pricing power in a cyclical downturn only worsens the capital efficiency,” says Prabal Banerjee, group president (international finance), Essar Group.
Others blame it on individual companies. “The problem is mainly with those companies where promoters are not very strong and those who went for high leverage during the boom time but failed to complete projects in time due to many internal and external factors,” says Sanjeev Bafna, chief financial officer at the Chennai-based Sivasankaran Group.
Bafna seems to be bang on target. Financially conservative companies, even in the capital-intensive sectors like cement, capital goods, power and automobiles, have maintained their yields and remain in good financial health, despite taking a knock on profitability.
