Which is India’s most profitable business sector? The answer, believe it or not, is real estate. For the latest 12-month period, realty companies listed on the stock market had a mind-stretching net profit-to-sales ratio of 36 per cent. The previous 12-month period was even better, with a profit margin of 42 per cent. So if you thought that cash-strapped real estate companies have been slashing prices to off-load inventory, and taking a hit on their bottom lines, think again. For perspective on how stratospheric the profit ratios are, bear in mind that the information technology companies had an average profit ratio for the latest year of 16 per cent, and 20 per cent for the year before. Real estate, it would seem, is twice as profitable as IT. That is not a secret held back from the stock market, where virtually the highest price-to-earnings ratios are enjoyed by (you guessed it) the real estate companies. The realty sector’s P:E is 42, beaten fractionally by health care (at 43) but twice IT’s 21.
And so, on Diwali day, at the end of a roller-coaster year for both the economy as well as the markets, these numbers talk of changing realities. Many newer businesses are struggling in crowded markets that are in desperate need of shake-outs that somehow never materialise. Whether it is airlines, media or retailing, the market has become so crowded, with a seemingly endless supply of new entrants, that profits are elusive for most of the players. Telecom has been a hot sector, but looks like the stuffing has been knocked out of it by bitter competition and regulatory action. The IT companies, the favourites before telecom, talk now of sustainable growth rates of no more than 15 per cent—akin to a commodity business like cement. In consumer softs, giants like Hindustan Unilever find they are losing market share as smaller rivals undercut them. Even in automobiles, where sales are sizzling again, the market leader (Maruti) has a profit margin of just 7 per cent.
That is not to argue that there is no money to be made in the country; far from it. Pepsico, after all, has just reported 50 per cent growth in its Indian business. In a rapidly-growing “emerging” market, building franchise is still the way to go for brand-driven businesses. But it is interesting that massive surpluses are being generated in traditional, capital-intensive industries that are linked to extraction (gas, metals), utility supply (power), and the like—unglamorous sectors tied to government decisions on mining rights and pricing. It could be that extracting a surplus is easier in the sectors where you can influence the government—and real estate fits the theory because it is the government authorities (in a city like Mumbai) that decide how much land is released into the market. It cannot also be an accident that the chief minister of a small, natural resource-rich state is alleged to have siphoned away a scarcely credible Rs 4,000 crore during just two years in office!
If you don’t want to mess with all that, the breakthroughs could come with new technologies—one reason why health care commands a high P:E ratio despite recent hiccups. Then there is General Electric, unfortunately unlisted in India, which is working to reduce the cost of an ECG machine (for checking on your heart) to $1,000! Think of the market for that kind of a device, and the volume game that would result. As one looks ahead at a new trading year, this may be a good time to look for the game-changers.
