Mumbai: Companies in BSE’s Sensex index clocked the worst return on equity (RoE) in at least 13 years in fiscal year 2017-18, indicating the declining ability of companies to generate profits using shareholders’ money.

According to data from Capitaline which dates back to 2005-06, RoE of Sensex companies excluding financial institutions and oil & gas companies slipped to 16.23% in 2017-18, slipping further from the previous year’s already low figure of 16.63%. RoE for the year 2005-06 was 24.94%. Data for previous years is not available.

Analysts said weak sales growth, marginal shrinkage in Ebitda margin, and higher interest rates contributed to depressed ROEs. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.

Nitin Bhasin, head of research at Ambit Capital Pvt. Ltd said, “In the last two-three years, EBIT margins have not seen any uptick due to various reasons including a weak economy. Sales growth in FY18 was anaemic; hence, margins and RoE were impacted. Despite the reduction in effective tax rate, marginal shrinkage in EBITDA margin and higher interest outgo as a proportion to sales led to RoE remaining flat or not increasing."

Amar Ambani, partner and head of research, IIFL Investment Managers says the fall in RoE could have several reasons. “Companies would have raised growth capital but the capex is yet to fully bear fruit. Retained earnings have gone up without matching expansion or in search for inorganic growth, rather than returning money to shareholders. It could also be that debt to equity levels are lower today for some of these companies. Part of the reason may also be that rising input prices have pressurised margins," he said.

Others agree. Rusmik Oza, senior vice-president and head of mid-caps at Kotak Securities, says most non-financial companies have not gone in for any major capex for last two to three years as utilization levels were low. “However, marginal rise in effective taxation could have impacted net profit growth for many companies. Most of the cash flows have gone in for retiring debt. Also, due to lack of capex, the depreciation cost has not risen sharply," he added.

Meanwhile, for smaller stocks, the picture is a little different. According to data, RoE of BSE 500 companies rose to a four-year high of 12.77% in FY18, up slightly from previous year’s 12.33%. (This data too excludes financial institutions and oil and gas firms.)

Oza said for smaller firms, lesser expansion and sweating the same asset (i.e.better capacity utilization) have led to better margins and better RoE.

“Interest as percentage of EBIT has reduced in FY18 from FY16 leading to much sharper growth in PAT. Despite adverse impact of deleveraging to RoE, here higher savings from lower taxation rates and sharpy falling interest costs have boosted RoE," said Bhasin.

In 2017-18, automobiles and healthcare saw a fall in RoE while metal and IT companies saw an increase. In FY18, RoE of companies on the BSE Healthcare index slipped to lowest level in at least 13 years at 12.1% from 15.8% in FY17. For autos, RoE fell to a nine-year low of 14.75% in FY18 from 15.22% in previous year. IT firms’ RoE increased slightly to 24.19% in FY18 while that of BSE FMCG index was 20.85% in FY18 from 20.86% in FY17. RoE for metal companies rose to 6-year high at 14.26% in FY18.

However, analysts expect RoE to recover on sales growth, improvement in utilization and rise in profitability.

“With economy recovering, sales momentum should recover for most of the Sensex and Nifty firms. However, on the other hand, rising inflation can keep EBITDA margin expansion whilst rising yields may restrict the savings from interest costs. We believe there should be some bit improvement in ROE of Sensex and Nifty firms," said Bhasin.

Oza also sees RoE of Sensex to further improving to around 15-16% as utilization levels of companies improve.

Close