Return on equity of Sensex firms at 3-year high in FY17

MUMBAI: Return on equity (RoE) of Sensex companies rose to a threeyear high of 11.27% in 2016-17, while return on capital employed (RoCE) hit a five-year high of 15.1%, data showed.

The 10-year data, sourced from Capitaline, does not include banks, financial companies and energy companies.

RoE measures a firm’s profitability by showing how much profit a company generates with shareholders’ money. RoCE measures the efficiency with which it employs its capital.

Analysts said RoE recovered due to factors including falling cost of debt. In FY17, cyclicals also had seen a bit of recovery and overall consumption improved.

Pankaj Pandey, head of research at ICICI Securities Ltd said RoE expansion was led by last fiscal’s higher demand, recovery in cyclicals and decent profits. He expects RoE to improve further this year, led by Sensex earnings per share (EPS) of 18.5%.“Due to decline in cost of capital and fall in inflation expected in FY18, RoE is likely to improve with rise in profitability of firms. Overall, domestic and consumption-oriented firms should do well. Capex recovery is also seen in this fiscal.”

Automobile and consumer goods firms saw a rise in RoE while technology, pharma, metals and FMCG saw a sharp fall.

RoE of auto companies stood at 233.7%, improving in the last two years after it had started falling from FY11. However, in the last 10 years, its best RoE was at 725.26% in FY08. Consumer goods sector RoE recovered to 9.33% in FY17, from a decline of -0.36% in FY15. For this sector, RoE has been declining since FY08. RoCE for consumer goods in FY17 is at 19.84%, up from 13.19% from the previous year.

Siddhartha Khemka, head, equity research (wealth) at Centrum Broking Ltd said, “RoE expansion is led by improvement in margins in a few sectors due to low material cost, coupled with the rise in capacity utilisation.”

IT and pharma companies did not see any improvement in RoE and RoCE. After a recovery in FY14, RoE for IT companies fell to 17.30% in FY17. In the last 10 years, its best RoE was at 24.39% in FY08. Its RoCE, too, fell to 22.05% in FY17 from 25.64% in FY16. After clocking 18.03% in FY15, RoE in the pharma sector has slipped, touching 16.04% in FY17. In the last 10 years, the sector’s best ROE was in FY11 at 35.29%. RoCE of pharma companies also fell to 17.08% from 19.53% in the last fiscal.

Emkay Global Financial Services Ltd expects steady-state earnings growth to be around 10% in FY18, but implementation of GST in July may bring forth inventory correction across sectors, thereby slowing sales growth temporarily.