Home / Market / Mark-to-market /  Return on equity of Indian manufacturers at 10-year low in FY16

Easing input prices aided many manufacturing companies across sectors to see better operating profit margins in the March quarter. Data for the last five fiscal years shows that fiscal year 2016 was the best for BSE 500 manufacturing companies since raw material prices as a percentage of net sales was lowest, consequently margins and net profit were highest. Despite this, the return on equity (RoE) of these firms has remained flat for the second consecutive year, remaining at a 10-year low in FY16.

One key reason is high debt.

“If we look at these companies on a 10-year basis, then pre-2008 their capacity utilization and profit margins were high, and debt/equity was lower. However, post-2008, there was a significant capacity expansion shooting their debt-equity up; global slowdown added to the pain, hence RoE was weak. Their RoE has been heading south because the focus is on leveraging and not capacity utilization," explained an analyst at Reliance Securities Ltd.

RoE, which is net profit as a percentage of net worth, is a key parameter indicating how profitable a firm is and how efficiently it is using funds pumped in by its shareholders. The higher the number the better it is.

In a report dated 3 June, Citi said corporate India’s RoEs are near multi-decade lows, driven by flat earnings and decline in capacity utilization/asset turnover ratios. Going forward, it expects RoEs to improve over FY16-18E by around 300 basis points, driven by a pickup in revenue growth and expansion of profit margins. A basis point is 0.01%. “While one can debate the pace of improvement in RoEs, it does look like RoEs have bottomed out," the Citi report added.

A pickup in private investment and a normal monsoon are among factors that are essential for demand revival.

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