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 a company generates with shareholders’ money. RoCE measures the efficiency with which a company employs its 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 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 increase in profitability of companies. Overall, domestic and consumption-oriented firms should do well. Capex recovery is also seen in this fiscal,” Pandey said.
Automobile and consumer goods companies saw an increase 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 increase 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 past 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.
Meanwhile, Ambit Capital Pvt. Ltd said in a 15 June report that the smallest stocks in the BSE500 (ex-BFSI) universe have the worst performance in terms of RoCE and RoE ratios. However, these stocks have seen the sharpest price to earnings (PE) re-rating over the last six years.
“Both for Indian midcaps and largecaps, the actual quarterly earnings have kept disappointing consensus expectations – even the ones built at the end of relevant quarter. When one considers the percentage of stocks in these indices with negative earnings surprise has remained consistently upwards of 50% throughout the last 12 quarters. Further, this number looks to be increasing again for the midcap space,” the brokerage firm said.
However, there is widespread optimism in the markets which is driving the momentum. Analysts still believe that earnings recovery will pick up and see healthy growth in FY18. Emkay Global Financial Services Ltd expects steady-state earnings growth to be around 10% which is somewhat higher than the 10-year average of 4.5% and flat growth of the past three years. It sees consensus earnings growth estimate for FY18 at over 20%, but implementation of GST in July may bring forth inventory correction across various sectors, thereby slowing sales growth temporarily, while recent modest appreciation in Indian rupee could also impact near term outlook on earnings.
Stating that, “this could be the beginning of a new growth cycle”, Ridham Desai, managing director and Sheela Rathi, equity strategist, Morgan Stanley said in 6 June note, “We watch for a turn in earnings revisions in the coming months as earnings surprise positively. Relative to US equities, this is about as attractive as Indian stocks have been in a while. India’s own price to book is at historical average. Versus emerging markets, India looks rich but then RoE is gapping higher.”
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