Best unlisted companies

In FY14, unlisted firms reported higher return on equity than listed ones, but earned lower net profits

Do private companies or companies that are closely held by a few promoters perform better than publicly-owned, listed companies? This debate has been on for a long time, because of the perception that in a listed company, promoters have to share the gains with a large number of minority shareholders, while in an unlisted company, they can keep the entire fruits of their labour.

Business Standard's list of India's top unlisted companies provides some clues. Unlisted firms have a slight edge over their listed peers in terms of return on equity, but lose out on operating and net profit margins. In FY14, a typical unlisted company reported return on equity (RoE) of 10.5 per cent, against the median RoE of 9.4 per cent for BS 1000 companies, all of which are listed. A typical listed firm however earns more operating profits on every rupee of its revenues (11.8 per cent against 8.6 per cent) than unlisted firms. Unlisted firms also grew faster last year (INDIA INC’S INVISIBLE CHAMPIONS).

Experts attribute this to the tendency of listed firms to bloat their equity base through dilution such as initial public offers, ESOPs and preference shares to promoters or institutional shareholders. The bulge is most prominent in low-capital-intensity but highly profitable businesses such as FMCG, consumer goods, IT and pharma. (UNLISTED COMPANIES)

In many cases, listed companies in these sectors maintain high equity levels just to facilitate liquidity in their counters on stock exchanges or to keep the market price of shares affordable for retail shareholders. For example, a single ITC share would have been worth thousands of rupees, if the company had not expanded its equity base at regular intervals.

Unlisted companies have no such obligation, as the beneficiaries are only a handful. Besides, limited ownership restricts the source of equity capital for unlisted companies, which puts an informal cap on their equity size. Typically, higher RoE translates into higher valuations for listed companies, but this is not an issue if the company maintains a high RoE and shows good revenues and earnings growth.