India’s Top 500 Companies 2008
  
   
 

Overview of the Top 500 Companies

Composition of the Top 500 Companies

The Top 500 Companies in this edition include listed companies from the BSE and the NSE that represent 54 different sectors ranging from manufacturing to services. For the purpose of our analysis, all the 500 companies are segregated as large, medium and small by using the widely-used 80:15:5 principal on their market capitalisation. The large-cap companies comprise 110 companies with a market capitalisation of more than Rs 46,010 mn, while the mid-cap companies comprise 228 companies with a market capitalisation between Rs 46,010 mn and Rs 6,510 mn, and the small caps comprise 162 companies with a market capitalisation below Rs 6,510 mn. In terms of number of companies, the mid-cap companies have a majority share of 45.6% among the Top 500 Companies and are followed by smallcap companies who have a 32.4% share.

42 companies stage a debut in the Top 500 2009

The 2009 edition of India’s Top 500 Companies has 42 new companies on the list. The number of ‘new companies’ is lesser than that in 2008 (when 51 new companies debuted), which is an indication that FY09 marked a period of consolidation. FY09 was a tough year for the industry, and the situation was so grim that survival became the focus for few companies and growth aspirations took a back seat.

Among the 42 companies that were present in the previous edition, some failed to make it to the 2009 edition of Top 500 Companies; out of these companies, 3 recorded a negative net worth, 7 failed to make it through the primary inclusion criteria, that is, market capitalisation, and 21 companies underperformed during the year and subsequently failed to meet the total income criteria. Apart from these, the remaining companies did not make it to the top 500 because of either merger, delisting or non-availability of their Annual Report.

Among the various sectors, the real estate and the equity broking companies have been the worst hit during the period under consideration; consequently, either the ranks of these companies have fallen or these companies have not been included in the Top 500 because of the steep fall in their total income.

The 42 new entrants in the Top 500 list include: 9 companies from the iron & steel and construction – infrastructure development sectors, and 4 from food & agro processing sectors; all these companies have minimal exposure to international markets and have witnessed strong growth trends in the past year, which is why they have been included in the Top 500. Further, among the 42 new entrants, 14 are newly-listed or relisted companies or companies whose annual reports were unavailable last year due to restructuring or some other corporate action, and 5 companies have failed to meet the cut off for market capitalisation for the previous edition of Top 500. Over 22 new entrants have outperformed their sector averages due to a high degree of operating efficiency and have consequently earned a better topline and a commensurately strong equity performance, which has ensured their inclusion in the Top 500 list. The y-o-y TI growth of these 22 new companies was 47.7% in 2009 as compared with the average TI growth of 19.2% for the Top 500 Companies. The performance of these 22 companies was visible in their net profits which grew by 28.5% as compared with a decline of 6.9% in the total net profit of Top 500 Companies. Among the new entrants, 41 companies are private companies and 1 company is a foreign enterprise.

Top line grows, but net profit falters

In the 2009 edition of the Top 500 Companies, the total income for the Top 500 Companies grew by 19.2% to Rs 27,538 bn on a y-o-y basis and this growth was at a par with the growth witnessed during the previous year. The TI of the Top 500 Companies is equivalent to 49.4% of India’s GDP at market prices; however, at the net profit level, the companies struggled to keep their profitability intact. The net profit declined by 6.9% at the aggregate level, for the first time in more than a decade. For the period under consideration, the number of loss-making companies increased substantially. Of the Top 500 Companies, 51 companies (around 10% of the Top 500 Companies) suffered losses during 2009 as compared to profits reported in the previous year and this number was the highest in recent years. Further around 8 companies returned to profit during 2009 as compared to losses reported during the previous year.

The fluctuation in the foreign exchange market is to a certain extent responsible for the drop in net profit margins of a few sectors. India Inc reported a foreign exchange or mark to market loss of over Rs 276,610.1 mn during 2009 as compared to a gain of Rs 69,748 mn during the previous year.

India Inc is better placed compared to the previous slowdown of 2001

The financial data was consistently available for the last 10 years in the case of 410 companies and to further analyse their profit trend, these companies were evaluated on the basis of their NPMs over the last decade. The study revealed that in spite of the steepest y-o-y decline in net profits during recent times, the profit margins for the sample of 410 companies on an aggregate basis during 2009 were over 200 basis points above the profit margin witnessed during the previous slowdown in 2001.

PSUs outperform their private sector peers

The companies are categorised as private, public and foreign companies to further study the composition. In the current edition, the privately-promoted companies dominate the composition of the Top 500 in terms of ownership with a share of more than 75%. However, the PSUs continue to lead the 500 companies in terms of share in the total income at 47.8% and are followed by their private and foreign peers at 46.3% and 6.0%, respectively. In terms of NPMs, the foreign companies enjoy a higher NPM as compared with their public and private sector counterparts; the NPM of PSUs, private players and foreign companies was 6.9%, 9.2% and 11.3%, respectively. The lower margins of PSUs can be justified to a certain extent because of their social obligation; for example: the subsidy burden of the government owned oil refining and marketing companies. The oil companies bled to maintain retail prices of petroleum products low when crude oil prices hit a peak of over $147.

However, for the year under review, the performance of PSUs has been far better than their private sector and foreign peers. The total income of PSUs recorded a y-o-y growth of 22.8% as compared to the TI growth of 16.7% and 10.8% for private sector enterprises and foreign companies respectively. The y-o-y profit growth for the PSUs was stagnant when its private and foreign peers saw their net profits decline by 11.3% and 8.9% respectively.

Despite the global slowdown, export income increases 16.2% y-o-y

The total exports of the non-financial Top 500 Companies grew to Rs 3,719.2 bn up by 16.2% y-o-y. The oil-refining and marketing companies continued to dominate the export market with an export value of Rs 1,258,432 mn, contributing over 33% to the total exports of Top 500 Companies. Surprisingly, for the period under review the Software and ITeS sector, which was expected to bear the brunt of the financial meltdown, saw its exports grwoing by 23.6%. The growth in exports has been spectacular for engineering and capital goods, power equipment, agro chemicals, and a y-o-y decline in sectors such as non-ferrous metals, petrochemicals and polymers and automobiles.

Tough economic conditions forces India Inc to take on more debt

India Inc absorbed more debt to survive the downturn during FY09. As equity markets crashed and the credit markets froze the world over during the year, many companies faced cash crunch and resorted to loans at higher interest rates. The year also saw a rise in defaults and subsequent restructuring of loans.

The total debt, including long-term and short-term loans, of the 446 non-financial companies under consideration increased by 40.1% to Rs 7,640.6 bn during 2009. The long-term debt grew the fastest by 43.2% to Rs 5,661.2 bn at the end of the year. The interest paid for the period under consideration increased by 61% y-o-y to Rs 475,425 mn. The interest paid as a percentage of total loans is a close indicator of interest rate paid on debt and this was at 6.2% during the year up by over 80 basis points as compared to the previous year.

The oil-refining and marketing sector contributes little less than a quarter to the total debt of the 446 non-financial companies (as seen in the table below). The first 4 sectors in the table namely, oil-refining and marketing, power, iron and steel and telecom services (includes 53 companies) constitute half of the total debt of the non-financial companies. Sectors such as power, iron & steel have massive capital expenditure projects in the pipeline and thus the long term debt accounts for a substantial share in total debt. The long term debt for oil refining and marketing companies stood at 67.1% of total debt; and the total debt for the sector rose by 53.7%. The volatile oil prices and subsequent higher working capital requirements forced the oil refining and marketing companies to take on more total debt to tide over the liquidity crisis. The telecom services sector which witnessed impressive growth in subscribers over the last year raised debt to support the network expansion and up gradation of networks and for the 3G auctions and the roll out of 3G services as well.

The debt-equity for the 446 non-financial companies was 0.63 times in FY09, which implies a company has taken over debt of Rs 63 for every Rs 100 of equity. The median debt-equity ratio for the 54 Sectors was 0.75 times which implies half of the sectors had a debt-equity ratio of more than 0.75 times. The sectors whose debt-equity ratio was above the median are majorly represented by manufacturing sectors such as iron and steel, petrochemicals and polymers, food and agro, sugar, pharmaceuticals, textiles, cement, gems and jewellery, real estate, construction – infrastructure development, metal pipes, etc.

Capital expenditure continues to grow

The capital expenditure represented by CWIP rose over 49.5% to Rs 2,791,139 mn for 2009 as compared to the previous year. Few companies from few sectors had scrapped or delayed their proposed expansion plans in the midst of the slowdown, however, an analysis of the aggregate CWIP numbers shows that the CWIP saw a y-o-y increase for 35 sectors and declined for 17 sectors. The core infrastructure sectors such as oil refining and marketing, power and iron & steel and cement continued to dominate the CWIP with a share of over 66% in the total CWIP. Sectors such as oil refining and marketing, power equipment, gas – processing, transmission & marketing are few sectors that saw an extraordinary growth of over 100% in CWIP for 2009. The oil refining & marketing companies witnessed a y-o-y growth of 160% in CWIP to account for over one third of the total CWIP for 2009. Some of the major sectors that saw a decline in CWIP include cement, telecom services, software, etc.

Small companies are highly-leveraged

The debt ratio which compares a company’s total debt to its total assets and primarily used to estimate the amount of leverage being used by companies clearly indicates that the smallcap companies have a much higher proportion of debt on their balance sheet as compared to their large-cap and mid-cap peers. In 2009 the debt-equity ratio of large-cap, mid-cap and small-cap companies inched up to 0.53 times, 0.98 times and 1.21 times, respectively, from 0.45 times, 0.85 times, 1.09 times during 2008.

The total debt of private sector companies increased y-o-y by 41.7% to Rs 5,661,386 mn as compared with a y-o-y increase of 31.3% at Rs 1,853,150 mn for public sector companies and a y-o-y increase of 15.4% at Rs 126,076 mn of foreign companies. For the foreign companies, the debt as a percent of the total assets has declined marginally.

The private sector companies have a higher debt burden on their balance sheets as compared with their public and foreign counterparts, which has been largely responsible for their financial woes. The interest burden has further squeezed the net profit margins of the companies.

Foreign companies offer higher RoNW; private companies record worst fall in RoNW

The tough economic scenario amidst challenges in FY09 put a question mark on the survival of numerous companies during FY09 and subsequently adversely affected the profitability parameters of many sectors. The return on net worth for the public sector companies, private sector and foreign companies excluding banks and financial services was 15.34%, 14.73% and 20.41%, respectively, during 2009 as compared to 19.58%, 21.05% and 26.92% during 2008.

It is clearly evident from the graph that the return on net worth declined for the private, public and foreign companies. The foreign companies remained the undisputed leaders, as they offered a higher shareholder returns. The fall in return on equity was most severe for the private sector companies with the private sector companies falling behind their public sector peers in 2009.

The fall in the net profit margins (NPM) has been primarily responsible for pulling down the RoNW. The moderation of demand and tough economic conditions did see pressure on operating profit margins. However, the increase in financial leverage of companies and the resultant burgeoning interest expenses further curtailed the net profit margins of companies.

The return on net worth was broken into three components of the Du Pont model of return on equity namely net profit margins, asset turnover and financial leverage ratio to gauge the impact on shareholders returns. From this, it is evident that the public sector companies reported a better RONW despite having lower net profit margins as compared to their private companies primarily because of a higher asset turnover ratio of PSUs.