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

Return on equity (ROE) of Sensex companies rose to a three-year 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 company’s profitability by showing how much profit it generates with shareholders’ money. ROCE maps the efficiency with which a company employs capital.

Analysts said ROE recovered due to various 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 an earnings per share (EPS) of 18.5% of Sensex net growth. “Due to decline in cost of capital and inflation fall expected in FY18, ROE is likely to improve with rise in profitability of companies. Overall, domestic and consumption-oriented companies should do well. Capex recovery is also seen in this fiscal,” Pandey said

Automobile and consumer goods companies saw an increase in ROE while tech, 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 peaked in 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 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 growth is led by improvement in margins in a few sectors due to low material cost, coupled with a rise in capacity utilisation.”

IT and pharma firms did not see any improvement in ROE and ROCE. After a recovery in FY14, ROE for IT firms 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 firms also fell to 17.08% from 19.53% last fiscal.

Emkay Global Financial Services Ltd expects steady-state earnings growth to be around 10%. It sees consensus earnings growth estimate for FY18 at over 20%, but implementation of GST in July may bring forth inventory correction across sectors.