India’s Top 500 Companies 2008
  
   
 

The changing face of Top 500

A Time Series Analysis of Top 500

In the beginning of FY09, India Inc saw the heydays of earlier years give way to moderate demand and credit squeeze. The global recession and credit crunch, rising interest rates, high inflation, bad monsoon and moderation in demand halted growth. Even though the growth momentum in the economy has slowed down of lately, India Inc has responded well to all macroeconomic changes. The roll out of stimulus packages in FY09 helped companies in holding on to their TI growth, but their net profit witnessed a negative y-o-y growth, probably for the first time in a decade. Nonetheless, the economy growth is gaining momentum (Q3 FY10) slowly.

Dun & Bradstreet India has attempted to trace the changes in India’s Top 500 Companies over the last three years. A review of the last three editions of Top 500 (2007, 2008, and the current one) aided us in understanding how India Inc survived a tough economic environment in FY09.

Between the 2007 Edition and the 2009 Edition, the market capitalisation of the Top 500 Companies grew by 17.5% from Rs 29,093 bn in FY07 to Rs 34,190 bn in FY09. In FY08 the equity markets in India surged impressively on the back of record foreign inflows and the valuations hit the upper band as the market-capitalisation to GDP ratio hit the highest level in a decade at 108%. However, post the financial meltdown, which saw economies across the world shrink, concerns over growth in India started to emerge. Further, the moderation in demand and credit squeeze put pressure on the highly-leveraged sectors and companies. In the meanwhile, concerns over growth in Asia-Pacific and the re-rating across asset classes led to crash of the emerging equity markets, including the Indian markets; consequently, the market capitalisation of the BSE listed companies as a per cent of GDP fell to 72% in FY09 as compared to 108% during FY08.

Market capitalisation to GDP falls to 61.3% for the 2009 Edition of Top 500

Despite the 19.2% y-o-y growth in total income of the 2009 Edition of Top 500 Companies, the market capitalisation of the Top 500 Companies as a percent of GDP fell to 61.3%. This was due to the sharp decline in market capitalisation to the Top 500 Companies due to the steep fall in Indian equities. The market capitalisation as a per cent of GDP for the 2008 Edition of Top 500 Companies at 91.8% was probably the highest in more than a decade as compared with 67.9% for the 2007 Edition of Top 500 Companies.

The deleveraging prompted a sell-off of all types of asset classes across the world. The selloff resulted in valuations fall to abysmal levels for equities in comparison with the previous year. The market premium defined as the market capitalisation to total assets also shrank.

PSU growth surpasses that of private and foreign companies

In the 2009 edition, the public sector enterprises raced past the private sector enterprises in the total income contribution of Top 500 Companies. Between 2007 and 2009, the total income of PSUs, which was a tad below the total income contribution of private sector enterprises, finally surpassed the total income of their private sector peers to dominate the total income contribution of the Top 500 Companies in 2009. Although public sector enterprises are less profitable as compared with the private sector and foreign enterprises on account of their social obligations, the net profit growth of PSUs was better than their peers between 2007 and 2009. One reason for their success we have noticed is the fact that they cater to the domestic markets and have lesser exposure to exports as compared with their private sector peers.

Enterprise value or EV is the value used in case of a potential acquisition of a firm and is considered more accurate than market cap, as it takes into account the borrowings on the balance sheet of the firm. The Enterprise value to EBITDA ratio (EV/EBITDA) is used to determine the value of the company and it signifies how many times of EBITDA, the enterprise value (including debt) of the firm is. A low ratio indicates that a company may be undervalued. The EV/EBITDA valuation of PSUs for 2009 was 8.1 times as compared with 10.4 times for the foreign companies and 11 times for the private sector companies. The higher EV/EBITDA for the private sector and foreign companies as compared to the PSUs can be justified to a certain extent because of the social obligation of the PSUs that stands in between the motive of earnings.

Topline grew; but bottomline under considerable strain

In the 2009 Edition of Top 500 Companies, the TI of all 500 companies was Rs 27,538 bn, while the net profit was Rs 2,258 bn. Between the 2007 Edition and the 2009 Edition, the TI and the PAT of companies grew by approximately 42.4% and 19.3%, respectively.

The TI for the 2009 Edition of the Top 500 Companies grew faster than expected at 19.7% on an aggregate level as compared to the 2008 edition. This growth was faster than the y-o-y growth witnessed in the previous edition of Top 500 Companies. However, the profitability took a beating as the y-o-y growth in net profit for the Top 500 Companies dived to witness probably the first de-growth in a decade. A further comparison of the profit margins for the decade suggest that despite de-growth in profits during the year, the profit margins of companies are over 200 basis points above the profit margins witnessed during the previous slowdown in 2001 (dotcom bubble and burst). More than half of the companies in the top 500 edition reported a negative y-o-y growth in net profit.

Of the Top 500 Companies, 51 companies that represented around 10% of the Top 500 Companies suffered a loss during the year as compared to a profit reported in the previous year and this number has been the highest in recent years. Around 8 companies recovered from losses in 2008 and reported profits in 2009.

For the period under consideration 437 companies reported profits for the current and the previous year. These 437 companies also saw a decline of just 1.6% in net profits as compared to the decline of 6.9% for the Top 500 Companies for 2009. The TI for the Top 500 Companies during 2009 grew at a decent 19.7%, which was on par with the growth witnessed during the previous edition. However, the aggregate net profit witnessed a y-o-y decline of 8.2% probably for the first time in more than a decade.

A comparative snapshot of high and low growth sectors

In terms of net profit margins only four sectors: sugar, automobile – two wheelers, packaging and allied activities and graphite and electrodes reported an increase in the 2009 Edition of the Top 500 Companies as compared with the previous year. The sugar industry was among the low-growth sectors in the previous edition of Top 500 Companies, but it has managed to report a marginal increase in NPM due to a low-base effect. Incidentally, the automobile - two-wheelers sector, which managed to increase its profitability by 20 basispoints to 7.8%, features among the low-growth sectors of the Top 500 Companies this year on account of its TI growth of 9.6% as against the y-o-y TI growth of 19.2% for the Top 500 Companies. The sectors that have reported a decline in NPMs in excess of 500 basis points include power equipment, pharmaceuticals, real estate, hotels and fertilisers.

Interestingly, India’s domestic consumption story continued to impress throughout FY09. Companies from the domestic consumption-based sectors outperformed other sectors and even dominated the high-growth sectors, which included sectors that clocked a y-o-y income growth of more than 25%. Furthermore, the Indian financial services (barring few equity broking companies) and banking industry remained unaffected by the financial crisis and sustained their growth momentum even in the midst of the global financial turmoil. The financial services sector reported a y-o-y income growth of 29.2%, while the banking sector grew by 27.1%. Most of the high-growth sectors had a negligible exposure to the export market and their growth has been revived by the stimulus packages, the subsequent increase in domestic consumption and greater public spending on infrastructure.

Sectors such as cement, gems and jewellery, real estate and food and agro processing, which dominated the list of high-growth sectors in the 2008 edition, have failed to feature in the list of high-growth sectors this year. Interestingly, the software and ITeS industry, which was expected to bear the brunt of the financial meltdown, managed to post double-digit y-o-y growth of 20.9% in TI during FY09. The growth momentum in infrastructure spending has seen construction and engineering companies consistently being ranked among the highgrowth sectors.

Fertilisers, agro chemicals, oilfield services and construction lead the pack with more than 40% growth y-o-y

Companies from sectors dependent on domestic consumption such as fertilisers, oilfield services, construction, BFSI, retail, gas processing have performed better in terms of growth in total income as compared with their peers from other sectors. These sectors witnessed a y-o-y growth of over 25%, as compared to the average y-o-y growth rate of 19.2% for the Top 500 Companies. However, the NPMs across the sectors have been hit as almost all sectors reported lower margins for the year.

TI of real estate, non-ferrous metals, hotels, automobile companies decline

The low-growth sectors comprise sectors that witnessed a y-o-y total income growth of less than 10%. Few sectors such as the real estate, non-ferrous metals, hotels and automobile industry reported a y-o-y decline in their total income. The contribution to the TI as well as the number of companies representing the said sectors has decreased.

The real estate market was at the epicentre of the slowdown and its total income has witnessed the highest y-o-y negative growth of 32.4% as compared with the previous year. A few real estate companies and equity broking companies that were featured in the previous edition of Top 500, failed to make it to the current edition of Top 500 Companies due to the sharp fall in their income. The real estate companies that made it to the top 500 saw their rankings fall sharply.

The non-ferrous metals, petrochemicals and polymers and automobiles sectors, which witnessed a negative y-o-y growth in total income during 2009, have been underperforming consistently among the Top 500 Companies in terms of their growth in the previous editions as well. The economic slowdown affected the hotel industry as well, which reported a negative y-o-y growth in total income and net profit.

Sectors such as real estate and hotels, which scored well in the previous year, have lost their sheen and have reported a negative growth in TI.

Dividends fall by 1.3%

The total dividends paid out by the Top 500 Companies slipped by around 1.3% to Rs 527 bn; as compared with the dividends paid out by the Top 500 Companies of the previous edition.

The PSUs continued to be generous in dividend payments and dominated the dividend payouts with the 62 PSUs accounting for over 45.3% of the total dividends paid by the Top 500 Companies. The private sector enterprises which dominated the dividend payments with a 44% share in total dividend for the previous edition, have fallen behind PSUs.

As compared with the previous year, the dividends paid by foreign companies fell by 10.9%, whereas the dividends for the private sector enterprises declined by 8.3% on a y-o-y basis. However, for the PSUs, the dividend payment increased by 5.3%.

The dividend payout ratio was the highest for foreign MNCs - the foreign MNCs paid out 29.3% of their net profits as dividend, while the PSUs paid out 26.3% of their net profit as dividends and the private sector companies paid out 20% of their net profit as dividends.

Seven sectors account for more than half of the total dividends paid

In absolute terms, the dividend payments of 140 companies from seven major industries (listed in the table) accounted for 53.2% of the total dividend payments of Top 500 Companies 2009. On an aggregate basis, the dividend payments from the seven industries increased by close to 2% on a y-o-y basis. The software and ITeS and iron and steel industries, which have been among the dividend paymasters of India Inc, witnessed a y-o-y decline of 20% in dividend payments.

In 2009 despite a 6% decline in dividend payments, the FMCG companies were the foremost in terms of dividend payout ratio, as these companies distributed 66.4% of their net profits as dividends on an aggregate basis. The FMCG companies, which comprise mature companies, have benefited from the domestic demand and have consistently paid out high dividends across business cycles. The oil – refining and marketing is one sector where the dividend payments increased despite a fall in profits; in fact, the dividend payout ratio of this segment almost doubled.

As compared with the Top 500 2008, the power sector climbed to the second position, whereas the oil – refining and marketing sector climbed to the fourth position, ahead of FMCG in terms of the total dividend payment of Top 500 Companies in 2009.

During 2009, 17 companies paid dividends in spite of reporting losses. In fact, for a few companies, the dividend payment has increased despite reporting losses. For over 6 companies the dividend payment was more than their reported net profit.

 

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