It's payback time for India Inc
source:businessline
Which sectors have the potential to ramp up their sales and profits on the
strength of existing assets, once the economy revives? Here’s our
take.
Indian companies sank substantial money into expanding their
capacity over the last five years. But thanks to the ongoing slowdown, many of
these projects are starting to pay off only now.
An analysis of the data for 255 companies constituting the CNX 500
Index shows that these companies have nearly doubled their productive assets
(gross block plus capital work-in progress) in the past five years. Their
revenues have just about doubled too.
But historical trends in asset turnover (how much sales a company
generates for every rupee of assets), suggest that these capacities can support
revenue growth of 33 per cent, if companies are able to milk their assets as
they did in the past.
The potential for growth is higher in sectors during a cyclical
downturn.
So which sectors have the potential to ramp up their sales and
profits, the most, on the strength of existing assets, once the economy revives?
Read on.
Capital spending
While assets for 255 companies have doubled, the growth in
revenues was 99 per cent in the period.
These companies enjoyed an average asset turnover ratio of 2.2
over the period 2007-12. The ratio peaked at 2.5 times in the year 2007-08;
which denotes that for every Rs 100 spent as capital investment, the firm was
able to generate peak revenues of Rs 250 from the invested capital.
Applying the peak ratio of 2.5 times to the current net block
indicates potential to scale up revenues by over a third.
The long-term borrowing of these companies increased by 59 per
cent during this period. This points to a balanced funding of investment,
through a mix of cash generated by the business and borrowings.
Major spenders
A deeper dive into the sector-wise spending pattern over the
period reveals that auto and ancillary companies topped the list, showing over
three times increase in total capital expenditure spend.
Organised retail has been the second largest sector to invest in
capacity expansion projects, almost trebling its total asset base.
Interestingly, the infrastructure sector also doubled its gross
assets during the same period.
Sector-wise trends
While the overall revenues have more or less kept pace with the
investments made over the last five years, the sector-wise data point to wide
differences.
In the core sector, capital goods had the highest average turnover
to assets ratio of 7.1 times over the period 2007-12; meaning that every Rs 100
invested generated revenues of Rs 710.
Petrochemicals sector closely followed capital goods on the asset
turnover ratio, clocking revenues that were 5.8 times higher than the net
assets.
Other sectors that generated meaningfully higher revenues from net
assets include IT (4.4 times), Agrochemicals (4.2) and Oil and gas (4.1).
In contrast, there were sectors whose revenue traction was lower.
The five year average asset turnover ratio of 14 out of the 39 sectors was lower
than the CNX 500’s average asset turnover of 2.2.
This includes sectors such as cement, media, telecom and sugar, to
name a few.
There have also been sectors where the total revenue generated has
been lower than the total assets.
For 6 out of the 39 sectors, the revenue generated from capacity
additions was less than the cumulative assets (implying an asset turnover ratio
of less than 1).
Shipping had the lowest asset turnover ratio of 0.4 implying
revenue generation of Rs 40 from assets worth Rs 100. Other sectors with a
similar trend include hotels, paper and power generation.
Why did these sectors have a depressed asset turnover ratio?
One reason seems to be that significant investments made in fixed
assets over the last five years have not paid off in the form of revenues.
Interestingly, the airline industry, despite having managed to
grow revenues faster than the addition to its gross assets, was yet among the
sectors with turnover ratio of less than one.
Double whammy
Some sectors saw their revenue decline over the last five years,
even as they were investing in expanding capacities.
It’s been a double whammy for these sectors where the investment
in gross assets increased over a five-year period, while the revenues were on a
downward spiral.
For the shipping industry, though its gross assets grew almost by
a third in the last five years, the revenues declined by 6 per cent leading to
lower asset turnover ratio.
Given the cyclic nature of sectors such as shipping, cement and
sugar, upturn in the business cycle may drive sales growth for these sectors.
With investments in place, the revenue flows for these sectors
could gather momentum over the next few years, barring any unforeseen regulatory
and business risk.
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