Investors Don'T Stand To Benefit

Since liberalisation, the top Indian corporates have recorded large increase in sales as well as profits. But EPS growth has lagged substantially. The table below compares the percentage change in net profit with the percentage change in EPS since liberalisation.

For instance, net profit at Reliance moved up 700 per cent from 1991-92 to 1995-96. However, the increase in earnings per share was 300 per cent.

During the same period, profits at Telco and L&T have also moved up by more than 200 per cent. Other corporates like Tisco and ITC have also shown 100 per cent increase in their profits. However, earnings growth has comparatively been slow, even after making allowances for bonus issues. In fact, in some cases, the earnings growth has been negative despite a smart increase in its profits. Essar Steel is one such example.

This would mean that Indian companies have diluted equity faster than net profits have increased. This is one factor which has reduced the attractiveness of Indian scrips, leading to lower prices.