Returns on equity of BSE500 companies at 16-year low: Report

Mumbai: A view of the BSE building in Mumbai, on May 20, 2019. Indian equity indices traded on a firm note on Monday after most exit polls showed a BJP-led NDA getting a comfortable majority in the now concluded general elections. The Sensex advanced over 1,079 points during the afternoon trade hitting an intra-day high of 39,010. The BSE Sensex was trading at 39,008.21 points up 1077.44 points or 2.44 per cent higher. (Photo: IANS)

Mumbai, Feb 21 (IANS) Return on equity (RoE), a key strategic metric used to evaluate the capital allocation efficiency of a company, is at a 16 year low for the S&P BSE 500 companies, a research report said on Friday.

An improving RoE and earnings growth are considered to be best for market cap creation but RoE for BSE 500 companies has been edging lower ever since the global financial crisis of 2008-09 and stands at 9.5 percent in FY19, lowest in the last 16 years.

“RoE of BSE500 moved up from 16.8 percent in FY03 to a high of 22.9 percent in FY07 but trended down after the financial crisis of 2008 due to a slew of macro and microeconomic factors,” a Motilal Oswal report said.

However, the report said that RoEs of corporate India – excluding public sector banks (PSBs), Telecom and Autos – have shown signs of improvement from FY15.

“Our analysis highlighted that the change in RoE has a material impact on market cap creation. Companies with improving RoE have significantly outperformed (CAGR of 7 per cent to 17 per cent) those with declining RoE over the three tested periods,” it said.

On the basis of its study, the brokerage firm listed its top stock picks as: Axis Bank, Bharti Airtel, Hindustan Unilever, Infosys and Ultratech Cement, in the large cap segment, and Federal Bank, JSW Energy, Tata Global, Trent and Voltas in the mid-cap segment.

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