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Return on equity of Indian manufacturing hits 10-year low; Citi
Industry News- Jul 15,24
RoE, or return on equity, measures net profit as a percentage of net worth, indicating a firm's profitability and efficiency in using shareholder funds.
In a recent report, Citi highlighted that corporate India's return on equity (RoE) is near multi-decade lows, driven by flat earnings and a decline in capacity utilisation and asset turnover ratios.
Despite an improvement in operating profit margins due to easing input prices, the RoE of BSE 500 manufacturing companies remained flat for the second consecutive year, marking a 10-year low in FY16.
A significant reason for this stagnation is the high debt burden these companies carry. Pre-2008, these firms enjoyed high capacity utilisation and profit margins with lower debt-equity ratios. However, post-2008, extensive capacity expansions increased their debt-equity ratios significantly. The subsequent global slowdown further exacerbated the situation, leading to weaker RoEs.
"If we look at these companies over a 10-year period, their RoE has been declining because the focus has been on leveraging rather than capacity utilisation," explained an analyst at Reliance Securities Ltd.
RoE, or return on equity, measures net profit as a percentage of net worth, indicating a firm's profitability and efficiency in using shareholder funds. Higher RoE values are generally better.
Citi's report dated 3 June forecasts an improvement in corporate India's RoEs by around 300 basis points over FY16-18E, driven by a pickup in revenue growth and profit margin expansion. While the pace of improvement is debatable, Citi suggests that RoEs may have bottomed out.
A pickup in private investment and a normal monsoon are crucial for reviving demand and improving RoEs in the coming years.
(Source: Live Mint)
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