India stands fourth in Asia on investment returns

Investors expect Indian companies to earn relatively flat cash flow return on investment over the next five years.

India Inc stood fourth in cash flow return on investment (CFROI) in the Asian region last year, according to a Credit Suisse First Boston (CSFB Holt) report on Asian companies.

The 5-year median CFROI of Indian companies stands at 7 per cent, after China, Korea and Taiwan. The study says that implementation of structural reforms helped increase asset utilisation in recent years.

Except for 2001, asset growth was modest and below the rate of organic growth, indicating that the corporations were strategically concentrating on improving returns instead of rapid expansions. Over the last decade, corporate returns grew from 4.9 per cent to 9.7 per cent.

Out of the eleven Asian markets reviewed by CSFB, China leads with the highest historical CFROI of 8.7 per cent with the most rapid pace of investment. The country is most efficient operationally, with highest margins and low labour costs in the region, the study said.

Korea stands second with 7.7 per cent on the CFROI list with highest capital utilisation rate. However, it is second last on operational efficiency with relatively low EBITA margins.

While Taiwan ranks third on historical CFROIs with 7.3 per cent with balanced combination of margins and asset utilisation. The economy has the second best return improvements over five years and is expected to earn the highest cash returns for 2004 due to the tech cycle, the study said.

Meanwhile, Philippines, Japan and Thailand were the worst performers on corporate returns over last five years. Philippines was the second-worst hit economy by the Asian financial crisis, with 1.6 per cent CFROI and was late in recovering. While Japan's asset growth was slow at 3 per cent.

Meanwhile, investors are pricing falling returns for the majority of markets, the study said. Of the 11 markets, investors forecast falling returns for seven markets by 2008 and is most pessimistic about Taiwan, Korea and China.

Investors expect Indian companies to earn relatively flat CFROIs over the next five years. While Taiwan market is heavily weighted by tech stocks and investors expect a 680 basis points fall in returns. Returns in Korea stocks are likely to fall by 630 bps to 2.3 per cent and Chinese company returns are likely to fall 460 bps to 5.3 per cent.