Snap Shot

An examination of the performance of the navratna companies and the companies included in the Nifty shows that the market has been reposing confidence in public sector enterprises, especially in the navratna companies.

A related examination is required to understand the factors that have been reckoned with the market in its valuation of the navratna companies. The efficiency of utilisation of capital can be measured by ROCE and RONW. Overall, navratnas have utilised capital quite efficiently. The ROCE and RONW for these companies is 12.6 per cent and 14.4 per cent respectively.

Apart from ROCE and RONW, the tax paid out by a company measures its ability to produce real cash flows and simultaneously lower cost of capital. While an optimal amount of debt enforces the necessary discipline to produce a certain minimum profit before interest and tax, the presence of tax reduces the weighted average cost of capital of the company. At an intuitive level, a healthy tax payout implies that capital is not utilised for inefficient streams with sole intention of deriving tax shields. The navratna companies had an effective tax rate of 21.7 per cent in 1995-96. The effective tax rate of Nifty companies (excluding MRPL and Reliance Petroleum as they had not stabilised their operations by March 1996) was 29.8 per cent. The navratna companies stand to gain handsomely from the recent budget on the tax front.

 

Perhaps, this explains the sharp appreciation in the index of navratna companies immediately after the Budget. And it is likely that the index of navratna companies will continue to outperform the market index.

Turnaround travails

The stock markets are known to display