INDIA'S BIGGEST WEALTH CREATORS
- BT-Stern Stewart Study

Top 10 Wealth Creators

For the uninitiated, the BT-Stern Stewart listing is probably the most accurate report card of India Inc's ability to create or destroy wealth. And what is more, they don't just stop at identifying India's largest wealth creators. They find out how these compare with their US counterparts in terms of wealth added for each unit of capital employed.

The study goes beyond mere audited financial results. It examines each criteria that is of value to shareholders - earning per share, market capitalisation, net profit, highest sales, operating profit margins, etc. The measures used are MVA (Market Value Added) and EVA (Economic Value Added). While MVA measures the value added to the shareholders' investment, EVA tells us how much shareholder wealth the business has created in a given time period and provides a road-map to creating wealth at a business unit level within a company.

At one level, they are accurate measures of the wealth created by a company. At another level, they are tools that can be used to enhance the quality of governance and management within an organisation. They could form the basis of an effective decision-making, corporate governance, and employee-motivation framework.

The Indian infotech sector creates nearly Rs4 for every Re1 used while the FMCG sector does around Rs5 for every Re1. On the other hand, the US FMCG sector does approximately Rs2.

Companies like HLL and Infosys are among the best in the world in terms of market value added (or wealth created) per unit of capital employed while companies like ONGC, IOC, SAIL and TISCO sit closer to the bottom of the wealth-creation list.

The World Beaters: IT and FMCG


India's Infotech and FMCG sectors are truly world-class wealth creators relative to their peers in the US. These sectors along with the pharma sector, create more than 175 percent of India Inc's wealth.

The flip side of this coin is that we have wealth destroyers too, mainly in the consumer durables and petrochemicals sectors.. They destroy 30 paise for each rupee of capital invested today, up from 14 paise five years ago.

Interestingly, the profit margins earned by both the wealth creators and the destroyers are pretty much the same. It is the ability to utilize capital efficiently that differentiates the two. And that's why investors who back companies simply by looking at net profits often go wrong.


Capital Allocation

The good news is that our wealth creators are world class. But the bad news is that relative to other economies, we continue to have far too much capital tied up in wealth destroyers. Thus, while the capital allocation to the IT sector increased by over 400 percent between 1997 and 2001, and that of the FMCG and pharma sectors by close to 90 percent and 60 percent respectively, wealth destroying sectors like consumer durables and petrochemicals too, continue to increase their capital usage at significant rates.

Ideally, shareholders would like to see some of the wealth destroyers harvest and return capital back to them, so that they can re-deploy it to more productive parts of the economy.

To create wealth on a sustained basis, companies should focus on maximizing the 'value added' to the capital employed over the long term and not merely grow in terms of size.

Source: Business Today

Source: Outlook