Indian firms' profit margins fell from 20% to 14% in eight years
While corporate ROE has been in decline since 2008, it now appears to be stabilising at around 15%.
Indian firms' return on equity (ROE) which has been on a decline since 2008, is showing signs of stabilisation at around 15%, says an HSBC report. ROE shows how much profit a company generates with the money that the shareholders have invested. Profit margins of Indian companies have fallen from over 20% in 2007 to 13% in 2013 but by 2015, they have recovered to 14.1%.
According to the global financial services major, in the last few years ROE and margins have fallen in all major sectors in India but there are clear signs of stabilisation on both fronts.
"While corporate ROE has been in decline since 2008, it now appears to be stabilising at around 15%," HSBC said in a research note adding that "better balance sheet management could support a recovery in ROE, especially if margins continue to rise from current low levels".
As per the report, there were several reasons for the decline in profit margins of Indian companies prior to 2013, including increased domestic competition and the low returns on big ticket overseas acquisitions like the United Spirits buying Whyte & Mackay, Suzlon's purchase of REpower and Tata Steel buying Corus.
The global brokerage said it is 'overweight' on China, Indonesia, Singapore and the Philippines, 'underweight' on Taiwan, Thailand and Hong Kong and 'neutral' on India, Korea and Malaysia.
The report further noted that Indian companies are the third biggest cash hoarders after Taiwan and China across Asia. But a key difference with China is that some cash in India is being used to lower balance sheet leverage. "In China, leverage has remained high; in India, it has started to decline," it said.