The Hindu Business Line : Return on shareholder funds on the rise

SHAREHOLDERS in Indian companies now get a better buck for every rupee invested than they did a couple of years ago. The last three years of belt-tightening, in terms of improving operating efficiency, better debt management and using assets effectively, has lead to a four-percentage point increase in the return on shareholder funds.

An analysis of 266 companies that have put out their balance sheets for 2003-04 so far reveals that investors earned on an average return of 17.9 per cent on their equity investment against 13.6 per cent in 2001-02.

At the operating level, two sectors — textiles and engineering — have shown a substantial year-on-year improvement over the last three years. Companies in these two industries have improved efficiency by cutting debt and restructuring operations. A higher capacity utilisation due to pick-up in demand has also lead to an overall increase in the return to an equity shareholder.

In both these industries, quite a few companies such as Timken, Siemens, Greaves Cotton and Bombay Dyeing's textile division have turned around creating substantial value to shareholders in these companies. The average operating margins for the sample have stabilised in 2003-04 after a sharp increase in 2002-03. This indicates that further gains through operating efficiency in future could be minimum.

Companies such as Tata Motors, Tata Steel, Mahindra & Mahindra and Gillette are a few others that have shown a substantial improvement in efficiency, generating better return to their shareholders in the process. For instance, Gillette has rejigged its product portfolio by weeding out low margin products and closing down some of its manufacturing facilities.

The average pre-tax profit rose at a faster pace than the operating profit indicating that a substantial portion of efficiency gains have been due to reduction in interest costs and higher profitability for every rupee worth of asset put to use. Interest costs constituted 49 per cent of the operating profits in 2003-04 against 61 per cent in 2001-02.

A lower rise in depreciation costs compared to sales growth also indicates that companies have been using existing assets efficiently and not invested much in new assets. If the efficiency improvements over the past couple of years are any indication, a consistent growth in the economy could create greater value for India Inc's shareholders.