Return On Investment Of 50 Firms Down To 11.60 %

The gross profit to total assets ratio for 50 major companies declined from 13.34 per cent in 1995-96 to 11.60 per cent in 1996-97 due to a lower growth rate of gross profit than the growth rate of total assets

Owing to political and economic changes at the centre, the industrial growth rate slowed down from 12 per cent in the previous year to eight per cent in 1996-97. However, due to the rise in agricultural growth from 0.4 per cent to three per cent in the current year, the overall GDP is expected to touch 6.8 per cent by March-end, 1997. The exports growth rate is witnessing a major decline from 29 per cent in the previous year to just around 15 per cent in 1996-97 and the imports growth rate from 36 per cent to 13 per cent.

These are surely, signs of slower growth in economic development, if not positive signs of recession. Infrastructure industries like coal, power, cement, steel and petroleum refinery products experienced growth at 3.3 per cent per annum as compared to 8.8 per cent last year. On the otherhand subdued primary and secondary share market, despite relaxation in Statutory Liquidity Ratio and Cash Reserve Ratio of the commercial banks, have injected excess liquidity in the market & lowered the interest rates marginally. This has given rise to subdued investment climate not matching the savings. The proposed disinvestment plan of the public sector enterprises has hardly taken off and the private corporate sector depends more on private placements, rather than rights or public issues.

Considering the general economic scenario, most of companies were affected adversely during the current year. The return on investment (ROI) ratio is a good indicator of the profitability of capital employed. It is the ratio of gross profit as a percentage of total assets. A comparative study has been made for 50 major companies from 1995-96 to 1996-97. These companies aggregated a gross profit of Rs.10104.83 crore in 1996-97 as against Rs.9635.90 crore in 1995-96. Total capital employed of the companies increased by 20.6 per cent to Rs.87087.60 crore (Rs.72234.87 crore). The study on these 50 firms reveals that the ratio of gross profits to total assets (which is used to measure the return on investment) declined from 35.47 per cent in 1995-96 to 34.77 per cent in 1996-97 in the case of Motor Industries, from 31.16 per cent to 30.64 per cent in Kirloskar Cummins, from 35.71 per cent to 28.60 per cent in Castrol India, from 25.84 per cent to 23.33 per cent in Gujarat Gas, from 29.95 per cent to 20.14 per cent

in Advani Oerlikon, from 17.91 per cent to 17.29 per cent in EIH Ltd, from 16.18 per cent to 15.95 per cent in ICI India, from 20.91 to 15.44 per cent in Hindalco, from 15.69 per cent to 14.52 per cent in Telco, from 16.89 per cent to 13.78 per cent in Mahindra & Mahindra, from 16.70 per cent to 12.32 per cent in Tata Hydro, from 15.85 per cent to 11.85 per cent in A V Power, from 17.06 per cent to 11.81 per cent in Tata Power, from 18.86 per cent to 8.98 per cent in Indo-Gulf Fertilisers, from 16.52 per cent to 8.81 per cent in Indal, from 12.82 per cent to 7.07 per cent in LML, from 17.85 per cent to 4.85 per cent in Orient Paper, from 10.45 per cent to 4.74 per cent in Garware Polyester, and from 10.50 per cent to 4.34 per cent in Century Textiles.

The return on investment of Orient Paper showed a significant decline during 1996-97 from the level of 1995-96. The profitability of the company was affected by the higher cost of production. Additionally, acute shortage of water during the summer months resulted in longer than usual period of annual summer shutdown in both the mills at Amlai and Brajrajnagar.The production at Brajrajnagar was also affected due to breakdowns of machinery, particularly in the power generation department, and slowdown tactics adopted by workmen in some sections of the mill. Consequently, the production of paper and board during the year under review was 1,13,194 tonnes as against 1,28,307 tonnes in the previous year.

In the case of Indo Gulf Fertilisers, the return on investment declined significantly during the current year. The breakdown of the ammonia converter basket due to an initial erection deficiency led to plant stoppage in the first quarter of the year. Yet another constraint was faced in the supply of natural gas by GAIL. These factors put pressure on the profit margin.

A significant increase in the ratio was witnessed in Marico Industries from 14.99 per cent in 1995-96 to 22.28 per cent in 1996-97, in Essel Packaging from 12.85 per cent to 16.03 per cent, in Goetze (India) from 9.68 per cent to 12.12 per cent and in Bayer(India) from 4.78 per cent to 8.45 per cent. Total sales and related income of Bayer at Rs 457 crore for the year-ended 31 December 1996 are up by 14.81 per cent on an annualised basis over the previous period.

The agrochemicals business group, registered an impressive growth over the previous year. In the field of consumer care products, Baygon Oilspray recorded substantial growth.

An increase or decrease in the gross profit ratio in comparison with previous years, may suggest a higher or lower cost of operation and/or cost of total income. In 1996-97, the highest and lowest ratio of gross profit to assets was recorded in the case of Motor Industries (Castrol India in the previous year)and Crompton Greaves(Bayer India in the previous year) respectively. It is also interesting to observe the changes in rank according to the gross profit to total assets ratio among the 50 companies. In 1996-97, the top five companies in the descending order are Motor Industries, Kirloskar Cummins, Castrol India, Smithkline Beecham Pharma and Gujarat Gas. In 1995-96,the top five were Castrol India, Motor Industries, Kirloskar Cummins,Advani-Oerlikon and Smithkline Beecham Pharma. Four companies are common in both the list. Similarly, the bottom five companies in 1996-97 are Crompton Greaves, Century Textiles, Garware Polyester, Orient Paper and LML. In 1995-96, the last five were Bayer India, Otis, Apollo Tyres, Ashok Leyland and Crompton Greaves. Bayer India,Apollo Tyres and Ashok Leyland have climbed up the list of companies in 1996-97. A significant improvement in ranks from 1995-96 to 1996-97 was witnessed in the case of Marico Industries (23rd in 1995-96 to 8th in 1996-97), Essel Packaging (28th to 13th),Century Enka (22nd to 15th), ITC Hotels (25th to 17th), MRF (31st to 19th), Goetze (India) (39th to 25th) and Exide Industries (44th to 29th).

A significant decline in rank was noticed in the case of Tata Hydro (17th in 1995-96 to 24th in 1996-97), Tata Power(15th to 27th), Indo Gulf Fertilisers(11th to 36th), Indal (18th to 38th) and Orient Paper (14th to 47th).