India’s Top 500 Companies 2008
  
   
 

The most valuable sectors of Top 500 comprised oil – refining and marketing, power, software and ITeS, telecom services and these sectors contributed more than 7% to the total market capitalisation of the Top 500 Companies. These sectors collectively had a representation of only 7% (in numbers) of the 500 companies but constituted around 32% of the aggregate market capitalisation of the Top 500 Companies. All the four sectors individually posted a healthy income growth y-o-y and collectively recorded around 20% income growth. However, in spite of being the most valuable sectors, they fell short of posting positive profit growth and only the power and software sectors managed to record a decent profit growth.

Oil - Refining and marketing

The year gone by was one of the most difficult ones for the oil - refining and marketing companies. As the crude oil prices soared, the downstream companies had to undergo a major liquidity crisis. The companies kept borrowing funds and incurring higher interest expenses at the cost of their performance. Due to the government restriction on pricing of products, inflated interest expenses, liquidity crunch, and loss on sale of bonds, the industry profits dropped. However, the slump in crude oil prices from $147 per barrel in June 2008 to $35 per barrel in December 2008 proved beneficial for the industry.

In FY09, the oil - refining and marketing companies accounted for around 10.2% of the total market cap of the Top 500 2009 companies. In terms of total income, the companies contributed around 29% to the total income of the Top 500 Companies. During the same period, the profit share of the oil - refining and marketing companies stood at around 9% of the Top 500 Companies.

High interest expenses dampens PSU performance

Oil PSU’s saw their topline grow by 21.6% y-o-y in FY09. However, total income growth failed to help the ailing PSU’s and thus the companies posted miniscule profits with its NPM at 0.73% as against 2.27% in FY08. The fall in the profit margins was on account of inability to pass on the rise in input costs to the consumers. Along with this, delay in receipt of oil bonds from GoI added to their misery. The PSU’s saw a huge growth of 157.4% in their interest expenses which further worsened their situation.

Drop in crude oil prices save the day in second half of FY09

The total income of the oil - refining and marketing companies grew by 17.8% somewhat in line with the Top 500 Companies, which grew by 19.2%. For the same period, the total expenses too surged by 20.5%. Fortunately for the players, the raw material expenses as a percentage of total expenses fell from 53.3% in FY08 to 39.4% in FY09 due to the slump in crude oil prices during the latter half of FY09. However, the oil - refining and marketing companies incurred huge foreign exchange losses of Rs 74,385 mn in FY09 due to depreciating rupee as compared with a gain of Rs 33,038 mn during the previous year.

High debts show up on the balance sheet

The past year turned out to be eventful for the oil - refining and marketing companies, as the crude oil prices soared to historic peaks during FY09. The long-term debt of the companies jumped up unusually especially for the public sector undertakings due to the lag in receipt of oil bonds. Oil bonds are offered by the government to government-owned oil companies to compensate for selling oil to consumers at subsidised rates. Companies resorted to more debt (up by 54%) in FY09 to meet working capital requirements due to higher gross underrecoveries and delay in the receipt of oil bonds. The huge increase in borrowings and the fall in bond prices severely dented the profitability of these companies.

Due to the escalation in debt, interest expenses rose at the disadvantage of profitability of oil companies. According to figures given in the above table, the interest coverage ratio fell substantially to 3.7 times during FY09 from 11 times in FY08, indicating the heavily burdened debt expense of the companies. In future, the companies run the risk of financial imbalance unless they take pre-emptive measures to improve their revenue or pay back their debt. Moreover, in FY09, the debt to total assets ratio also scaled up by 500 bps, thus corresponding to the fact that the refining companies have borrowed heavily.

In spite of tumbling margins companies generous with dividends

The oil companies recorded a dismal performance when crude prices reached an all-time high ($147 per barrel) in June 2008; consequently, the oil companies found it difficult to meet their requirements and were inclined to borrow heavily. Increase in borrowings furthered interest expenses and pulled down margins. The interest expenses rose by around 137.1% in FY09 as compared with the earlier year. The PAT figures declined by 36.6% vis-à-vis the year earlier due to the effects of high interest outgo. However, instead of low profits, the dividend pay out ratio of these companies increased by 774 bps at 17.3% in FY09 from 9.5% in FY08. During FY09, the company paid 34.49 bn dividends as against 29.97 bn in FY08 with a growth of 15% y-o-y. Except for one company, all the other oil refining companies paid dividends. The total dividend amount paid by the companies accounted for 6.5% of all the Top 500 Companies.

Telecom

Over the last decade, the Indian telecom industry has changed and grown significantly. Rapid growth in the sector has been propelled by huge demand in the wireless segment. India has the second-largest telecom market in the world after China. However, during FY09, the economic downturn had a negative effect on the sector as some factors such as drop in the ARPU and MOU affected the telecom companies. As new players are entering the Indian telecom market, the telecom company revenues may flatten following the savage price battle. Nevertheless, the sector has a huge potential in the unexplored rural market. The rural market, which accounts for 70% of the Indian population, will help the sector pursue new horizons.

The telecom sector accounted for 7.3% of the total market cap of the Top 500 2009 companies, which remained unchanged as compared with the year earlier. Though the share remained stagnant, the market cap of the telecom companies tumbled down from Rs 3,334.39 bn in FY08 to Rs 2,482.24 bn in FY09 by 26% y-o-y. The drop in the total market cap for the telecom companies was marginally more than the Top 500 Companies who collectively witnessed a fall of 25% in their total market cap. Again the share of total income of the telecom companies in the topline of the Top 500 Companies remained stable and accounted for around 2.6% of the same in FY09. The net profit contribution crawled up marginally and accounted for 5% of the Top 500 Companies in FY09 as compared with 4.8% in FY08.

Wireless subscriber growth takes a leap as wireline growth sees red

During FY04-FY09, as depicted in the graph, the total wireless subscriber base for the country grew by a high CAGR jump of 63%, while the wireline subscriber base dipped with a negative CAGR of 1.08%. As on March 31, 2009, the wireless subscriber base of the telecom companies in Top 500 2009, accounted for 54% of the total industry wireless subscribers. In FY09, for the wireless segment, the total subscriber base of the Top 500 telecom companies grew by 55% and surpassed the total industry wireless growth of 50% as compared with FY08.

Although the wireline subscriber base for the industry declined in FY09, the Top 500 telecom companies showed a different picture with their 8% growth in the same segment. Remarkably, the private players seemed keener on exploring the opportunities present in the wireline segment as compared to the sole government player in the Top 500 edition (MTNL). The private service providers namely Bharti Airtel and Reliance Communications have collectively seen a 21% y-o-y growth in their wireline subscriber base while MTNL which banks on its wireline customers, witnessed 300 bps decline in total wireline subscribers. The market share of these private players in the wireline segment has scaled up from 8% in FY08 to 10.1% in FY09. On the contrary, the market share of the govt. owned company grew marginally by 8 bps from 9.3% during the last year. This shows that the private companies have also started to establish a firm base in the wireline segment.

Bharti turns out to be a forerunner in the Indian telecom market

Out of all the telecom companies featuring in the Top 500 2009, Bharti Airtel had the largest number of subscribers, with close to a quarter of the total wireless subscriber base in India, while Reliance Communications was in the second position with over 72 mn subscribers as on March 31, 2009. Together, these two companies accounted for 43% of the total number of wireless subscribers in the Indian telecom market. After adding the subscriber base of Idea and MTNL to the former duo, these companies accounted for more than half of the total wireless subscriber base in India. According to TRAI, over 10 operators were offering mobile services as on March 31, 2009. With more players expected to commence their operations soon, we may further see overcrowding of operators and fierce tariff wars, which may lead to intensify the pressure on profit margins.

Eastern region - lowest wireless subscriber base records highest y-o-y growth

For the Top 500 telecom companies, the eastern region, which lags behind the other regions in terms of total number of subscribers, has seen the highest y-o-y growth of 61% as compared with the other regions. The growth was driven by three circles, namely West Bengal (75%), Orissa (63%) and Assam (60%). As the region has the lowest subscriber base and is growing rapidly, it could be a good opportunity for the companies to tap this state in the near future.

The northern region with the most number of wireless subscribers in its kitty saw a huge y-o-y growth in the subscriber base. In the same region, three circles namely Madhya Pradesh, Bihar and Delhi, were the pioneers in terms of total number of wireless subscribers. However, the Delhi circle, which stood second as per the total wireless subscribers in FY08, slipped from to the third in FY09 due to more additions by the Bihar circle, which witnessed a y-o-y increase of 40% in its subscriber base. The wireless teledensity for the Bihar circle has went up from 12% in FY08 to 21% in FY09.

Profitability takes a hit but remains stable

The total income of the companies grew at a decent pace of 23% due to surge in the subscriber base. In the same period, the total expenses grew by 30%, which was higher than the topline growth. Inflated total expenses dragged down the net profit of the companies marginally by 1%. During the same period, the sector saw its EBITDA margins go down to 29.9% from 38.1% in FY08. The fall in margins can be attributed to increasing expenses coupled with drop in ARPU and MOU.

The sector posted decent profit margin of 15% though it was down from 18.7% in FY08 also due to huge growth in interest expenses. Interest expenses of the telecom companies recorded y-o-y growth of 43% on account of 42% growth in borrowings. The debt to equity ratio for the telecom sector crawled up to 0.7 times in FY09 from 0.3 times to FY08. However, the companies still seem to be in a good position to service their debt though their interest coverage ratio was at 6.2 times in FY09 down from 8.7 times in FY08.

Software and ITeS

The recessionary pressure that has been affecting economies around the globe has had its impact on the booming Indian IT industry too. Cautious IT spending across international markets, subdued demand from the domestic market and foreign exchange losses made it difficult for the sector to sustain its healthy margins. However, as the world markets are slowly recovering and the domestic market is growing, the Indian players are being challenged to offer innovative and cost-effective solutions for the new emerging verticals.

The 16 software and ITeS companies featured in Top 500 2009 collectively accounted for about 7.2% of the total market cap of all Top 500 Companies in FY09, indicating high market capitalisation of these companies. Around 50% of the companies in the sector fall under the mid-cap category; however, large-cap companies account for more than 90% share in the total market cap of the 16 software companies.

During FY09 the total income of the software and ITeS sector registered a growth of 20.9% at Rs 882.96 bn. The contribution of the sector in the Top 500 total income has been declined slightly from 3.7% in the FY08 publication to around 3.2% of the total income in FY09.

According to Nasscom estimates, the revenue for the Indian software and ITeS industry (includes IT services, BPO, engineering services and R&D, software products, excluding hardware) was US$ 59.6 bn in FY09. The software and ITeS sector in the Top 500 Companies had a revenue of US$ 19.2 bn during FY09, which constituted around 32.3% of the total industry revenue (average rate for FY09 - US$/Rs 45.9).

Top 500 software companies account for one fourth of total software industry export

According to Nasscom estimates, the export revenue of the software and ITeS industry grew by 16% over FY08. Export earnings of software and ITeS companies (15 companies) in Top 500 2009 accounted for more than 25% of the total software exports from India. More than 70% companies in the sector were found to be export-oriented, that is, they derived more than 50% of their total revenue from international markets. Such companies constituted both large-cap and mid-cap companies, and these companies registered about 23.4% growth in their export earnings. These companies also registered a growth of 21.9% in their total income, which was at par with the sectors total income growth. On the other hand, companies with a domestic focus reported 21.6% growth in total income.

Opportunities to explore new verticals

Over a period of time, the IT spending of domestic non-IT companies in Top 500 have increased significantly. The net intangible software assets of Top 500 Companies grew by about 22.4% y-o-y during FY09 at Rs 19 bn.

In FY09 the key verticals that drove the growth of the software and ITeS sector were BFSI, telecom, automobile, FMCG and pharmaceuticals. Despite being at the core of global crisis in the first half of FY09, the BFSI segment continued to be a critical domain for software and ITeS companies. In FY09, the sectors displaying highest growth in net intangible software assets on y-o-y basis included – BFSI (154%), FMCG (53.2%), construction-infrastructure (45.8%), pharmaceuticals (12%) and retail (10%).

Diversified revenue mix – Key to profitability

The software and ITeS industry is well-balanced across several mature and emerging sectors. For the purpose of gaining more insights on the criticality of a diversified revenue mix, the software and ITeS companies in the sector were divided into two groups on the basis of the number of verticals – catering up to five verticals and those above five verticals.

The companies catering to more than five verticals registered a strong growth in both topline and bottomline. The bottomline of companies catering to up to five verticals reported fairly low growth in PAT due to steep rise in total expenses.

The software and ITeS sector reported a y-o-y growth of about 20.9% in total expenses. The most prominent increase in spending was noticed in interest expenses, which grew y-o-y by 67%. Companies operating in up to five verticals took the worse hit, as their interest expenses soared to above 100%. Personnel expenses grew by 22.6% and accounted for about 50% of the total expenses for software and ITeS companies in Top 500. The sector further registered foreign exchange losses of about Rs 16.8 bn on account of Rupee fluctuation vis-a-vis foreign currencies particularly US dollar.

Decent profit growth but dividend payout subsides

The software companies combated the financial crisis and managed to post a decent 14.2% profit growth in FY09. The companies also managed to sustain their profit margins at around 21%. However despite higher margins, the companies paid an aggregate dividend of Rs 40,132.6 mn as compared with Rs 50,222.9 mn in FY08, representing a y-o-y decline of about 20%. Large-cap companies undoubtedly had a larger share in total dividends paid accounting for more than 80% of the total dividend paid. The dividend pay-out of the sector stood at 22.5% in FY09, which was much lower than the previous year’s rate of 32.1%. However, due to conservative dividend policy, the companies reported a 21% increase in reserves and surplus.

In FY09 the EBITDA and NPM margins of the sector declined marginally to 26.2% and 20.2%, respectively. Small-caps seem to have taken the worst hit, considering the substantial y-o-y decline in their margins.

In FY09 the debt-equity ratio of 14 software and ITeS companies stood at 0.07 times, which was much lower as compared with the other sectors of Top 500 2009. Moreover, the debt/ EBITDA ratio of the software and ITeS companies was as low as 0.2 times. Large-cap software and ITeS companies continued to remain cash rich and are well positioned for growth.

Salaries as a percentage of personnel expenses steady for FY08 and FY09

The employee data available for 14 software and ITeS companies revealed that personnel expense was the highest expense element in the cost structure, as it accounted for about 50% of the total expenditure. During FY09, overall employee cost registered a growth of about 21.6 %. Large-cap companies reported y-o-y growth of 23.8% in personnel expenses, while salary and wage level grew by 24% over last year.

The bottom-line of small-cap companies was severely affected by soaring interest expenses and rising employee cost. In FY09, small-cap companies recorded highest y-o-y growth in interest expenses; however, interest accounted for just about 3% of total expenses. On the contrary, personnel expenses accounted for about 34.0% of the total expense and grew by 15.4% over FY08. The salary and wage component accounted for about 72% of the total personnel expense as compared with 68.6% last year. Further, due to the substantial variation in the exchange rates as compared with the last fiscal year, foreign exchange losses of small-caps stood at Rs 290.3 mn as compared with a gain of Rs 66.6 mn last year.

Power

The power sector is a highly capital-intensive and regulated sector that is dogged by long gestation periods for projects owing to many statutory clearances required. The 2009 Top 500 Edition comprises nine companies, of which five are public limited companies (including one state-controlled entity) and four are private limited companies. The companies in the sector are mainly involved in power generation, distribution and transmission, while a few of them are exclusively engaged in transmission and power trading businesses.

Power remains a government bastion

The total installed capacity of the nine power utilities as on March 31, 2009 was 36,100 MW. The public sector companies had a maximum share in this capacity at around 86%. In the power generation segment, out of the total 265,617 MU generated during FY09, the public utilities together held around of 87% at 232,234 MU, while the private companies held around 13% share at 33,383 MU.

During FY09 the companies in the power sector registered a y-o-y growth of 18.5% as compared with 13.5% in FY08 and the private players outperformed public players by registering a growth of around 24.0%. In spite of decent income growth, the EBITDA margin decelerated to 33.2% and 19.2% in case of government and private entities, respectively, mainly on account of rise in coal prices, which is the mainstay in the operating cost of power industry. Also, the commercial and technical losses of power, and the inefficiency in power generation escalated the operating cost of players. The NPM of the power companies showed a declining trend in FY09, owing to higher capex during the year and the consequent rise in depreciation, apart from the rise in interest costs due to additional debt for funding the projects.

Capex improves but at a slow pace

During FY09 the y-o-y growth in capital expenditure decreased as compared with FY08, which was one of the toughest years for the infrastructure segment because of the difficulty encountered by players in raising funds and in sustaining their growth momentum.

Private participants/IPP yet to contribute substantially to the sector

The power generation segment continued to underperform in FY09, as the sector failed to meet the power needs of a growing population that is influenced by: change in lifestyles along with delays in availability of funds, clearances, and financial closures, especially on the part of private players; along with shortage of equipment, and natural calamities (specific to hydropower players).

Escalating power demand and perpetual demand-supply imbalance has necessitated participation from private sector/IPPs. Even though the government has implemented regulatory reforms such as grant of tax benefits, introduction of competitive bidding, allocation of coal blocks to encourage the Indian and foreign private players, the highly capital-intensive projects and comparatively lower returns from serving a diverse set of consumers turns out to be a commercially less profitable venture for private entities. Despite having more technically-efficient plants, private entities are not able to pass on the advantage to end-consumers because of higher tariff as compared with state electricity boards. Further, private players are not able to complete their projects on time due to: difficulty in obtaining funds from banks and FIs owing to longer payback period; fuel risk; litigation delays in obtaining environmental clearances, and power purchase agreement negotiations.

Thus, the private participants have played a less proactive role in plugging the demand-supply gap in the power industry. Even though the distribution license for many cities is in private hands, the contribution of private players is insufficient in the transmission segment due to lack of satisfying conditions for transmission of power. Thus, the role of the government is very critical in the sector and the problems faced can only be overcome through government intervention at various stages of generation, distribution and transmission.

 

 

Top