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Are profit maximizers wealth creators?

By B Rajesh Kumar1
Institute of Management Technology, Dubai, UAE
Email: rajesh155_bk@yahoo.com

Abstract
The study examines whether the maximum profit maximizers are the greatest wealth
creators in stock market in the context of sectors and companies.
The study also aims to understand the determinants of the wealth creators in the stock
market on the basis of empirical analysis.
The survey study was based on an exhaustive list of 9707 Indian companies. The source
of the database is CMIE prowess database. The period of study was 2003-2007. For the
sectoral analysis, altogether 22 sectors were identified. The basis for sector wise and
company wise analysis was five yearly averages
The electricity and non conventional energy sector which emerged as the top wealth
creator in terms of market capitalization was the second highest with respect to sales,
cash flow and profit maximization. The mineral sector which was the second largest
wealth maximizer in terms of market capitalization was the biggest sector in terms of
sales, cash flow and net profit maximization.
ONGC Ltd was the greatest wealth creator among all the 9707 companies undertaken for
the study in the Indian corporate sector. Indian Oil Corporation was the market leader
with respect to sales. In terms of cash flow, State Bank of India was the king. In terms of
net profit ONGC, Reliance Ltd, BSNL, IOC, NTPC and SBI were the largest profit
maximizers.
ONGC Ltd was the largest average wealth creator in terms of market capitalization and
net profit during the period 2003-2007. At the same time it was the second largest cash
flow maximizer. Reliance Industries Ltd which was the third largest wealth creator
occupied second position in terms of sales and net profit and occupied fourth position in
terms of cash flow. Indian Oil Corporation Ltd which occupied 9 th position among the
largest wealth creators had first position in sales, sixth in terms of cash flow and fourth in
terms of net profit.ONGC, Reliance, NTPC and Indian Oil Corporation thus figures in the
list of top ten wealth maximizers as well as in sales, cash flow and net profit maximizers.
DLF Ltd, TCS Ltd and Bharti AirTel, WIPRO Ltd and ITC which were among the top
ten wealth creators couldn’t find a position among the top ten in sales, cash flow and net
profit.
ONGC, DLF Ltd and Reliance Industries have the highest excess value. This signifies the
higher market capitalization of these companies compared to their book value of equity.

The regression results show that 55.4% of variation in the market capitalization is
explained by the variation in the independent variables of dividends, sales, total assets,
cash flow, net profit and profit before depreciation. The model results show that the
variable of profit after tax is positively related to market capitalization and is statistically
significant at all levels. Higher the net profit of the company, greater will be the market
capitalization of the company. Tobin q model results signify that the variable of profit
before depreciation and tax is positively related to the market variable of Tobin’s q which
is a measure of investment opportunities

1
Assistant Professor, Institute of Management Technology, Dubai International Academic City,
Dubai, UAE.
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Are profit maximizers wealth creators?

Profit maximization and wealth maximization are the financial goal & objectives of
financial management. The traditional approach of financial management was all about
profit maximization. The main objectives of the companies were to make profits. . In the
economic theory, the behavior of a firm is analyzed in terms of profit maximization. It is
assumed that profit maximization causes the efficient allocation of resources under the
competitive market conditions, and profit is considered as the most appropriate measure
of a firm’s performance. The profit maximization objective has been criticized. It is
argued that profit maximization assumes perfect competition, and in the face of imperfect
modern markets, it cannot be a legitimate objective of the firm. It is also argued that
profit maximization, as a business objective, developed in the early 19 th century when the
characteristic feature of the business structure were self-financing, private property and
single entrepreneurship. The only aim of the single owner then was to enhance his or her
individual wealth and personal power, which could easily be satisfied by the profit
maximization objective. It is also feared that profit maximization behavior in a market
economy may tend to produce goods and services that are wasteful and unnecessary from
the society’s point of view. Also, it might lead to inequality of income and wealth. The
price system and therefore, the profit maximization principle may not work due to
imperfections in practice. Firms producing same goods and services differ substantially in
terms of technology, costs and capital. In view of such conditions, it is difficult to have a
truly competitive price system, and thus, it is doubtful if the profit maximizing behavior
will lead to the optimum social welfare.
Shareholders’ wealth maximization is theoretically logical and operationally feasible
normative goal for guiding the financial decision making. Shareholders’ wealth
maximization means maximizing the net present value of a course of action to
shareholders. The goal of maximization of shareholders wealth as reflected in the market
price of the share makes the interest of the shareholders compatible with that of the
management. With this objective in sight, the management will allocate the available
economic resources in the best possible way within the given constraints of risk. This
goal directly affects the policy decision of a firm about what to invest in and how to
finance these investments. Further, the goal of maximization of shareholders wealth
implies a long term perspective of the goal. The market price of a share reflect all
expected future benefits flowing from the firm to its shareholders, and therefore the
management cannot emphasize the short term profits at the cost of long term perspective.
Maximizing the shareholders’ economic welfare is equivalent to maximizing the utility of
their consumption over time. With their wealth maximized, shareholders can adjust their
cash flows in such a way as to optimize their consumption. From the shareholders’ point
of view, the wealth created by a company through its actions is reflected in the market
value of the company’s shares. Therefore, the wealth maximization principle implies that
the fundamental objective of a firm is to maximize the market value of its shares. The
value of the company’s shares is represented by their market price that, in turn, is a
reflection of shareholders’ perception about quality of the firm’s performance decisions.
The market price serves as the firm’s performance indicator. Based on extensive
empirical evidence, financial economists argue that in developed capital markets, at least,
share prices are the least biased estimates of intrinsic values and managers are not
generally better than investors at assessing values.
The objective of profit maximization measures the performance of a firm by looking at its
total profit. It does not consider the risk which the firm may undertake in maximization of
the profits. The profit maximization, as an objective does not consider the effect of

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earnings per share, dividends paid or any other return to shareholders on the wealth of the
shareholders.
On the other hand, the objective of maximization of shareholders wealth considers all
future cash flows, dividends, earnings per share, risk of a decision etc. Hence the
objective of maximization of the shareholders wealth is operational and objective in its
approach. A firm that wishes to maximize the profits may opt to pay no dividend and to
reinvest the retained earnings, whereas a firm that wishes to maximize the shareholders
wealth may pay regular dividends. The shareholders would certainly prefer an increase in
wealth against the generation of increasing flow of profits to the firm.
Moreover, the market price of a share, theoretically speaking, explicitly reflects the
shareholder expected return, considers the long term prospects of the firm, reflects the
differences in timing of the returns, considers risk and recognizes the importance of
distribution of returns. Therefore, the maximization of shareholders wealth as reflected in
the market price of a share is viewed as a proper goal of financial management. The
profit maximization can be considered as a part of the wealth maximization strategy.
Objectives of the study:
This research study analyzes whether the profit maximisers are wealth creators in stock
market. The main purpose of the study was to find out the most valuable companies in
terms of sales, cash flow, profit and average market capitalization. The study also
examines whether the maximum profit maximizers are the greatest wealth creators in
stock market in the context of sectors and companies. The study also aims to understand
the determinants of the wealth creators in the stock market on the basis of empirical
analysis.
Review of Literature:
In the US, the cross sectional relationship between stock returns and fundamental
variables has been extensively studies .In general , a positive relationship has been found
between equity returns and earnings yield, cash flow yield and book to market ratio and a
negative relationship has been found between equity returns and size. Especially
voluminous are the studies that document the size and the earnings yield effects and
studies that try to disentangle the two effects (for example, Basu (1977,1983) , Banz
(1981) , Reinganum(1981) ,Cook et al (1984), Lakonishok et al (1986), Banz et al
(1986) , Jaffe et al (1989) and Ritter et al(1989). The paper by Chan (et al., 1991) relates
the cross sectional differences on Japanese stocks to the underlying behavior of four
variables: earnings yield, book to market ratio and cash flow yield. The study suggests
that of the four variables considered, the book to market ratio and cash flow yield have
the most significant impact on expected returns. Rosenberg et al (1984) studies the
relationship between stock returns and the book to market ratio.

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Methodology:

The survey study was based on an exhaustive list of 9707 Indian companies. The source
of the database is CMIE prowess database. The period of study was 2003-2007. For the
sectoral analysis, altogether 22 sectors were identified. The stock market capitalization of
each sector on a five yearly average basis was collected. The cumulative five yearly
averages were also calculated. The top ten sectors in terms of market capitalization were
identified. The same procedure was repeated on a sectoral basis for the variables of sales,
cash flow and net profit. Cash flow is defined as profit before depreciation and tax. The
basis for sector wise and company wise analysis was five yearly averages. The top five
companies among the largest ten sectors in terms of market capitalization, sales, cash
flow and net profit was identified on the basis of five yearly average values. The lists of
sectors taken for the study are given in Appendix 1.
Model Analysis:
This section deals with the empirical model analysis where the association of stock
market variables with accounting performance variables is tested. This analysis is based
on top fifty companies in terms of market capitalization. For the study, top fifty
companies in terms of average market capitalization during the period 2003-2007 are
selected. Detailed list of companies is provided in Appendix 2.
Firstly the excess present value of the sample firms is found out. To find the excess
present value, the difference between the market value and book value of assets on a five
yearly average basis is found out. The market value of assets is the sum of market
capitalization and the book value of debt of the company. The book value of the asset is
the sum of the book value of equity and book value of debt of the company.
Then the correlation matrix analysis is done to find the association between the market
variable of market capitalization with sales, cash flow, net profit, dividend, total assets
and profit before depreciation and taxes (PBDT).
The final stage of regression analysis examines the determinants of market capitalization.
Two regression models were used for this part of study to examine the impact of
accounting variables like sales, cash flow, net profit, dividend, total assets and profit
before depreciation and tax on the variables of market capitalization.
Analysis and Interpretation

Section-A-Sector Analysis

Table: 1
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Top ten sectors in terms of market capitalization:

TOP 10 SECTORS IN 5 YEARLY AVG MARKET CAPITALIZATION


No. of 5 Yearly Avg. Cumulative Avg.
Sectors Companies (Rs in Crores) (Rs in Crores)
Electricity &Non Conventional
Energy 13 10132.66 131724.63
Minerals 98 4058.69 447306.5
Construction & Allied 59 2675.57 157858.88
Non Electrical Machinery 98 1267.51 124215.82
Electronics 263 1188.26 312514.49
Transport Equipment 97 1072.04 114708.45
Base metals 175 853.74 149406.11
Non Metallic Mineral Products 93 778.76 72424.42
Service 602 777.27 467917.67
Diversified 25 528.59 13214.85

Fig: 1
Top 10 Sectors in 5 Yearly Avg Mkt. Capitalization

500000 12000
Rs. in Crores

400000 10000
300000 8000
6000
200000 4000
100000 2000
0 0
Service (602)
Conventional

Construction

Electronics

Base metals
& Allied (59)
Electricity

(263)
&Non

(175)

Sector - No. of Companies in brackets


Cumulative Avg. (Rs in Crores) 5 Yearly Avg. (Rs in Crores)

On the basis of five yearly average market capitalization, it can be stated that Electricity
& Non Conventional Energy, Minerals, Construction & Allied Activities, Non Electrical
Machinery, transport equipment, service, diversified and electronic sectors were the
greatest wealth creators.
The electricity and non conventional energy sector represented by 13 companies had an
average market capitalization of Rs 10,132.66 crores. The mineral sector represented by
98 companies had an average year market capitalization of Rs 4058.69 crores. The
construction and allied sectors had an average market capitalization of Rs 2675.57 crores
during the period 2003-2007. The non electrical machinery sector had an average market
capitalization of Rs 1267.51 crores during the five year period of study. On a comparative
basis the market capitalization of the electricity and non conventional energy sector was
about 2.49 times that of the average market capitalization of the mineral sector.
The electronics sector represented by 263 companies had an average market
capitalization of Rs 1188.26 crores. The service sector represented by the highest number
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of companies (602) had an average market capitalization of Rs 777.27 crores. The
chemical sector represented by 577 companies had an average market capitalization of Rs
363.66 crores. The textile sector consisting of 481 companies had a market capitalization
of Rs 273.57 crores. The transport equipment and base metals accounted for an average
market capitalization of Rs 1072.04 crores and Rs 853.74 crores respectively.
The diversified sector had an average market capitalization of Rs 528.59 crores. The
cumulative average market capitalization of all the companies in the electricity and non
conventional sector was Rs 131724.63 crores. The cumulative average market
capitalization for the mineral sector was Rs 447306.5 crores.
Table 2
Top ten sectors in terms of sales:
TOP 10 SECTORS IN 5 YEARLY AVG SALES
No. of 5 Yearly Avg. Cumulative Avg.
Sectors Companies (Rs in Crores) (Rs in Crores)
Minerals 123 4645.45 571390.08
Electricity & Non Conventional
Energy 54 1422.09 76792.8
Transport Equipments 219 550.39 120537.22
Diversified 48 510.95 24525.44
Base Metals 395 450.04 177766.41
Non Metallic 186 351.44 65367.21
Non Electrical Machinery 200 314.86 62971.27
Fats and Oils 75 308.21 23115.89
Food 221 263.77 58294.08
Chemicals 569 239.54 146494.55

The mineral sector accounted by 123 companies had the highest average sales during the
five year period of 2003-2007. It was followed by sectors like Electricity and non
conventional energy, transport equipment, diversified, base metals, non metallic, non
electrical machinery.
Mineral sector had an average five yearly sales of Rs 4645.45 and cumulative sales of Rs
571390.08. The electricity and non conventional energy sector represented by 54
companies had an average sales of Rs 1422.09 crores and cumulative average sales of Rs
76792.80. The average sales of mineral sector were 3.27 times than that of the electricity
and non conventional energy sectors. At the same time it can be pointed that in terms of
market capitalization, the electricity and non conventional energy sector had 2.49 times
capitalization compared to the mineral sector during the same period.
Transport equipment sector representing 219 companies had an average five yearly sales
of Rs 550.39 crores and cumulative average sales of Rs 120537.22. The service sector
represented by the highest number of companies (2332) had an average sale of Rs 225.06,
but service sector does not figure among the top ten profit maximizers.The diversified
sector had average sales of Rs 510.95 crores. The five year average sales of 395
companies in the base metal sector were Rs 450.04 crores.This sector had average
cumulative sales of Rs 177766.41 crores during the five year period of 2003-2007. The
cumulative revenue in the service sector accounted for Rs 524843.55 crores.

Fig: 2

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Top
TOP 1010SECTORS
Sectors in 5 Yearly
IN 5Avg Mkt. Capitalization
YEARLY AVG SALES
600000 5000

Rs. in Crores
500000 4000
400000 3000
300000
200000 2000
100000 1000
0 0
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Sector - No. of Companies in brackets

Cumulative Avg. (Rs in Crores) 5 Yearly Avg. (Rs in Crores)

Table: 3
Top ten sectors in terms cash flow:
TOP 10 SECTORS IN 5 YEARLY AVG. CASH FLOW
No. of 5 Yearly Avg. Cumulative Avg.
Sectors Companies (Rs in Crores) (Rs in Crores)
Minerals 123 641.72 78931.41
Electricity &Non Conventional
Energy 54 480.45 25944.52
Base Metals 395 155.42 36500.66
Transport Equipments 219 75.85 16610.41
Diversified 48 58.29 2798.09
Non Metallic 186 57.96 10782.24
Non Electrical Machinery 200 47.79 9559.48
Electronics 424 39.12 16586.87
Chemicals 569 39.04 23618.78
Food 221 37.64 8319.99
Mineral sector had the highest average cash flow during the period of study. Mineral
sector accounted for Rs 641.72 crores during the period 2003-2007. The electricity and
non conventional energy sector and base metal sectors had an average cash flow of Rs
480.45 crores and Rs 155.42 crores respectively. These sectors had a cumulative average
cash flow of Rs 25944.92 crores and Rs 36500.66 crores respectively. Other than the top
three sectors, all other sectors had an average cash flow of less than Rs 100 crores. It is
observed that the chemical sector with 569 companies had an average cash flow of only
Rs 39.04 crores.
Transport equipment sector representing 219 companies had an average five yearly cash
flow of Rs 75.85 crores and cumulative average sales of Rs 16610.41. The service sector
represented by the highest number of companies (2332) had an average cash flow of Rs
28.83 crores.
The diversified sector had average cash flow of Rs 58.29 crores. The five year average
cash flow of 395 companies in the base metal sector was Rs 155.42 crores. This sector
had average cumulative cash flow of Rs 36500.66 crores during the five year period of
2003-2007.
Fig: 3
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Top 10 Sectors in 5 Yearly Avg Mkt. Capitalization
TOP 10 SECTORS IN 5 YEARLY AVG. CASH FLOW

Rs. in Crores
100000 700
80000 600
500
60000 400
40000 300
20000 200
100
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Sector - No. of Companies in brackets

Cumulative Avg. (Rs in Crores) 5 Yearly Avg. (Rs in Crores)

Table: 4
Top ten sectors in terms net profit:
TOP 10 SECTORS IN 5 YEARLY AVG. NET PROFIT
No. of 5 Yearly Avg. Cumulative Avg.
Sectors Companies (Rs in Crores) (Rs in Crores)
Minerals 123 317.31 39029.54
Electricity &Non Conventional
Energy 54 208.8 11275.31
Base Metals 395 76.42 15963.63
Transport Equipments 219 34.79 7620.51
Non Electrical Machinery 200 23.78 4757.29
Non Metallic 186 23.42 4355.5
Electronics 424 22.44 6516.29
Diversified 48 17.87 857.67
Food 221 17.25 3813.33
Chemicals 569 14.43 8212.1

Minerals, electricity & non conventional energy sectors and base metals were the largest
profit maximizers. Mineral sector made an average net profit of 317.31 crores during the
period 2003-2007.
The electricity and non conventional energy sector had an average net profit of Rs 208.08
crores. The base metal sector accounted for an average net profit of Rs 76.42 crores. The
five year cumulative average net profit of the mineral sector was Rs 39029.54 crores. In
the same period the base metal sector had a cumulative average profit of Rs 15963.63
crores. Other than the top three sectors, all other sectors had an average profit of less than
Rs 50 crores. It is observed that the chemical sector with 569 companies had an average
net profit of only Rs 14.43 crores.
Transport equipment sector representing 219 companies had an average five yearly profit
of Rs 34.79 crores and cumulative average profit of Rs 7620.51. The service sector
represented by the highest number of companies (2332) had an average net profit of Rs
11.63 crores.

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Fig :4

Top 10
TOP 10 Sectors
SECTORS in 5 IN
Yearly Avg Mkt. AVG.
5 YEARLY Capitaliz
NET ation
PROFIT

100000 700
Rs. in Crores

80000 600
500
60000 400
40000 300
20000 200
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Se ctor - No. of Com pa nie s in bra cke ts

Cumulative Avg. (Rs in Crores) 5 Yearly Avg. (Rs in Crores)

Table: 5
Wealth Maximization & Profit maximization –Ranking of sectors:
Rank MARCAP SALES PAT CASH FLOW
Electricity & Non
1 Conventional Energy Minerals Minerals Minerals
Electricity & Non Electricity & Non Electricity & Non
2 Minerals Conventional Energy Conventional Energy Conventional Energy
Transport Transport
3 Construction & Allied Equipments Base Metals Equipments
Non Electrical Transport
4 Machinery Diversified Equipments Diversified
Non Electrical
5 Electronics Base Metals Machinery Base Metals
Non Metallic Mineral Non Metallic Mineral Non Metallic
6 Transport Equipment Products Products Mineral Products
Non Electrical Non Electrical
7 Base metals Machinery Electronics Machinery
Non Metallic Mineral
8 Products Fats and Oils Diversified Fats and Oils
9 Service Food Food Food
10 Diversified Chemicals Chemicals Chemicals

The electricity and non conventional energy sector which emerged as the top wealth
creator in terms of market capitalization was the second highest with respect to sales,
cash flow and profit maximization. The mineral sector which was the second largest
wealth maximizer in terms of market capitalization was the biggest sector in terms of
sales, cash flow and net profit maximization. The construction and allied activities sector
which was the third largest stock market wealth maximizer did not figure in the top ten
performance maximizer list of sales, cash flow and net profit. The electronics sector
which figured in the fifth position in the market capitalization category found a place
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among the top ten only in the net profit ranking. Transport equipment, base metal sector
and non metallic mineral product sector was among the top ten in terms of market
capitalization and all operating performance variables. The service sector though
occupies ninth position in terms of ranking in market capitalization have a ranking
beyond the tenth position in terms of sales , cash flow and net profit . The chemical
sector though having a tenth position in terms of sales, net profit and cash flow occupies
12th position in terms of market capitalization.

Section: B

Company Wise Analysis


This section highlights the company wise analysis among and across top sectors with
respect to stock wealth creation, sales, cash flow and profit maximization.
The table below highlights the top company in terms of market capitalization, sales, cash
flow and profit maximization across top ten sectors.

Table: 6
Five yearly average market capitalization (Rs in Crores):Top Companies in top 10
sectors :
SL Sectors Company Name Rs in crores
1 Electrical and Non N T P C Ltd. 94163.055
Conventional Energy
2 Minerals Oil & Natural Gas Corp. Ltd 134918.53

3 Construction & Allied Unitech Ltd. 11445.584


sectors
4 Non Electrical Bharat Heavy Electricals Ltd 33689.25
Machinery

5 Electronics Tata Consultancy Services Ltd 82194.36


6 Transport Equipment Tata Motors Ltd. 20514.062
7 Base Metals Steel Authority Of India Ltd 27236.792
8 Non Metallic Mineral Grasim Industries Ltd 14236.898
Products

9 Service Bharti Airtel Ltd. 63820.666


10 Diversified Aditya Birla Nuvo Ltd. 4687.114

NTPC Ltd with average of Rs 94163.055 crores was the largest wealth maximizer in the
electrical and non conventional energy sector. It was followed by Reliance Energy Ltd
with a five yearly average of Rs 10535.4 crores. The other top wealth maximizers in the
sector were Neyveli Lignite Corpn Ltd, Tata Power Co Ltd and B F Utilities Ltd. In the
mineral sector, ONGC and Reliance Industries were the largest wealth maximizers with
an average market capitalization of Rs 134918.53 crores and Rs 1, 16673.082 crores
respectively. In the mineral sector, ONGC and Reliance Industries were the largest

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wealth maximizers with an average market capitalization of Rs 134918.53 crores and Rs
1,16673.082 crores respectively. The other major wealth creators in the sector were
Indian Oil Corporation, National Mineral Development Corporation Ltd and Bharat
Petroleum Ltd. In the construction and allied sector, the largest wealth maximizers during
the last five year period were Unitech Ltd, Jaiprakash Associates Ltd and Aban Offshore
Ltd. In the non electric machinery sector the top wealth creators were Bharat Heavy
Electricals Ltd with average market capitalization of Rs 33, 689.25 crores. Suzlon energy
had an average market capitalization of Rs 31342.2 crores.
In the software sector, Tata Consultancy Services Ltd is the maximum wealth creator.
The company had a market capitalization of Rs 82194.36 crores. Infosys Ltd had an
average market capitalization of Rs 68030.99 crores.
In the transport sector, Tata Motors Ltd is the largest wealth creator with an average
market capitalization of Rs 20514.062 crores. The other major wealth creators are Maruti
Suzuki India Ltd and Bajaj Auto Ltd with an average market capitalization of Rs
16779.524 crores and Rs 16514.33 crores respectively.
In the base metals sector, Steel Authority of India Ltd and Tata Steel Ltd were the largest
wealth creators with an average market capitalization of Rs 27236.792 crores and Rs
21170.31 crores respectively. Other wealth creators were Sterlite Industries (India) Ltd,
Hindustan Zinc Ltd and Hindalco Industries Ltd.
Grasim Industries Ltd with average of Rs 14236.898 crores was the largest wealth
maximizers in the non metallic mineral products sector. It was followed by Ambuja
Cements Ltd with a five year average market capitalization of Rs 10345.982 crores. The
other top wealth creators in the sector were ACC Ltd, Ultratech Cement Ltd and Century
Textiles & Inds Ltd. In the service sector, Bharti Airtel was the maximum wealth creator
with a five year average market capitalization of Rs 63280.666 crores. The other
maximum wealth creators G A I L (India) Ltd was the second largest wealth creator with
an average market capitalization of Rs 18961.65 crores. H D F C Bank Ltd and I C I C I
Bank Ltd were the other wealth creators with an average market capitalization of and Rs
20199.676 crores and Rs 42262.296 crores respectively.
In the diversified sector, Aditya Birla Novo ltd was the largest wealth creator with an
average market capitalization of Rs 4687.114 crores. It was followed by Voltas Ltd with
an average of Rs 1721.424 crores. The other wealth creators in the sector are Sintex
Industries Ltd, Kesoram Industries Ltd and D C M Shriram Consolidated Ltd.
Table: 7
Five yearly average sales: Top Companies in top 10 sectors

SL Sectors Company Name Rs in crores


1 Mineral Indian Oil Corpn. Ltd. 177013.4
2 Elec & Non Conven N T P C Ltd. 24648.14
3 Transport Tata Motors Ltd. 20195.81
4 Diversified Aditya Birla Nuvo Ltd. 3656.886
5 Base Metals Steel Authority Of India Ltd 30976.17
6 Non metallic mineral Grasim Industries Ltd. 7202.258
products
7 Non Electrical L& T Ltd 13029.34
machinery
8 Fat Oils Ruchi Soya Inds. Ltd. 5316.742
9 Foods ITC ltd 14116.47
10 Chemicals Hindustan Unilever Ltd. 12146.26

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Indian Oil Corporation was the largest profit maximizers in terms of sales, with an
average sale of Rs 177013.40 crores. The second largest sales making company was
Reliance Industries Ltd with an average sale of Rs 84035.52 crores. The other largest
sales making companies are Bharat Petroleum Corporation Ltd, Hindustan Petroleum
Corporation Ltd and O N G C.
In the Electrical and Non Conventional Energy sector, N T P C Ltd was the largest sales
making company with a five year average sale of Rs 24648.14 crores for the period 2003-
2007. The other largest sales making companies were Tata Power Co. Ltd and Reliance
Energy Ltd with an average sale of Rs 4386.716 crores and Rs 4242.508 crores
respectively.
In the Transport equipment sector, Tata motors Ltd was the maximum sales creator with
an average sale of Rs 20195.81 crores as compared to Maruti Suzuki India Ltd with an
average of Rs 13305.48 crores. The other maximum sales making companies were Hero
Honda Motors Ltd, Mahindra & Mahindra Ltd and Bajaj Auto Ltd.
In the Diversified sector Aditya Birla Novo Ltd was the largest sales maker with an
average sales of Rs 3656.886 crores. D C M Shriram Consolidated Ltd took the second
position as the largest sales maker with average sales of Rs 1976.466 crores. The other
sales making companies were Kesoram Industries Ltd, Godrej & Boyce Mfg. Co. Ltd and
Voltas Ltd.
Steel Authority of India Ltd was the largest sales maker in the base metals sector with an
average of Rs 30976.17 crores. Tata Steel Ltd and Hindalco Industries Ltd were the other
largest sales makers with an average sale of Rs 15190.49 crores and Rs 11029.31 crores
for the period 2003-2007.
Grasim Industries Ltd with an average sale of Rs 7202.258 crores was the maximum
sales making company in Non metallic mineral products sector. ACC Ltd and Ambuja
Cements Ltd were the other maximum sales makers with an average sale of Rs 4783.10
crores and Rs 4286.88 crores respectively. Ultratech Cements Ltd has the average sale of
Rs 3758.78 crores.
In the non electrical machinery sector L&T Ltd was the largest sales maker with an
average sale of Rs 13029.34 crores. Bharat Heavy Electricals Ltd was the second largest
sales maker with an average of Rs 12349.58 crores. The other sales makers are Suzlon
Energy Ltd, B E M L Ltd and Cummins India Ltd In fats and oils sector, the largest profit
maker in terms of sales was Ruchi Soya Inds Ltd with an average sale of Rs 5316.742
crores. Adani Wilmar Ltd and Gujarat Ambuja Exports Ltd were the other sales making
company with an average sale of Rs 2103.17 crores and Rs 1102.568. Liberty Oil Mills
Ltd and Agro Tech Foods Ltd were the other largest sales making companies.
In the food sector I T C Ltd was the maximum sales maker with an average of Rs
14116.47 crores. Nestle India Ltd and United Spirits Ltd were other largest sales makers
with an average of Rs 2638.208 crores and Rs 2129.885 crores respectively. Britannia
Industries and Godfrey Phillips India Ltd were the other maximum sales making
companies in the food sector.
In the chemical sector, Hindustan Unilever Ltd was the largest sales maximizer with an
average sale of Rs 12146.26 crores for the period of five years. It was followed by Indian
Farmers Fertilizer Co-Op Ltd and Ranbaxy Laboratories Ltd with an average sale of Rs
8124.516 crores and Rs 421.954 crores. National Fertilizers Ltd and Tata Chemicals Ltd
were the other maximum sales making companies.

Table: 8
Five yearly average cash flow: Top Companies in top 10 sectors
12
SL Sectors Company Name Rs in crores
1 Mineral Oil & Natural Gas Corpn. Ltd. 26789.4
2 Elec & Non conv Hateshwari Om Power 9607.34
energy Enterprises Pvt. Ltd
3 Transport Equipment Tata Motors Ltd. 2360.516
4 Diversified Aditya Birla Nuvo Ltd. 383.304
5 Base Metals Steel Authority Of India Ltd. 7363.676
6 Non metallic mineral Grasim Industries Ltd. 1706.546
products
7 Non Electrical Bharat Heavy Electricals Ltd. 2314.658
Machinery
8 Electronics Infosys Technologies Ltd. 2734.502
9 Food ITC Ltd 3339.438
10 Chemicals Hindustan Unilever Ltd. 2205.78

In the mineral sector, O N G C was the largest cash flow maximizer with an average cash
flow of Rs 26789.40 crores. The other largest cash flow maximizers are Reliance
Industries Ltd and Indian Oil Corporation Ltd with an average cash flow of Rs 14060.08
crores and Rs 11222.02 crores respectively.
In electrical and non conventional energy sector Hateshwari Om Power Enterprises Pvt
Ltd was the maximum cash flow maximizer with an average of Rs 9607.34 crores. It was
followed by Jaiprakash Hydro Power Ltd and Ispat Energy Ltd with average cash flow of
Rs 2720.308 crores and Rs 1844.196 crores respectively.
Tata Motors Ltd was the largest cash flow maximizer with an average of Rs 2360.516
crores. Other cash flow maximizers were Maruti Suzuki India Ltd, Bajaj Auto Ltd, Hero
Honda Motors Ltd and Hindustan Aeronautics Ltd.
In the diversified sector, Aditya Birla Nuvo Ltd was the largest cash flow maximizers
with a five year average cash flow of Rs 383.304 crores. Prakash Industries Ltd and D C
M Shriram Consolidated Ltd were the other cash flow maximizers with average of Rs
320.78 crores and Rs 219.726 crores respectively.
Steel Authority of India Ltd was the largest cash flow maker with an average of Rs
7363.676 crores for the period of five years. Tata Steel Ltd and Hindalco Industries Ltd
were the other cash flow maximizers with an average of Rs 5131.626 crores and Rs
2552.912 crores.
In the non metallic mineral products sector, Grasim Industries Ltd was the largest cash
flow maker with an average of Rs 1706.546 crores. It was followed by Ambuja Cements
Ltd and ACC Ltd with an average of Rs 1341.112 crores and Rs 1150.35 crores.
Ultratech Cement Ltd and Century Cement Ltd were the other cash flow maximizers.

In the non electrical energy sector Bharat Heavy Electricals Ltd was the largest cash flow
maximizer with an average of Rs 2314.658 crores. Larsen & Tourbo Ltd had an average
of Rs 1686.502 crores. Suzlon Energy Ltd, Kirloskar Brothers Ltd and Cummins India
Ltd were the other cash flow maximizers in the sector.
In the electronics sector Infosys Technologies Ltd was the highest cash flow maker with
an average of Rs 2734.502 crores. Wipro Ltd and Tata Consultancy Services Ltd were the
other cash flow maximizers with an average of Rs 2127.786 crores and Rs 2052.868
crores respectively.
I T C Ltd was the largest cash flow maximizers with an average of Rs 3339.438 crores in
the Food sector. It was followed by Nestle India Ltd and Balrampur Chini Mills Ltd with

13
an average of Rs 203.496 crores and Rs 222.43 crores respectively. Bajaj Hindustan Ltd
and Britannia Industries Ltd were the other cash flow maximizers in the sector.
In the chemical sector, Hindustan Unilever Ltd was the largest cash flow maximizer with
an average of Rs 2205.78 crores. Indian Farmers Fertilizer Co-Op Ltd, Ranbaxy
Laboratories Ltd, Tata Chemicals Ltd and Cipla Ltd were the other cash flow maximizers
in the sector.

Table: 9
Five yearly average net profit: Top Companies in top 10 sectors

SL Sectors Company Name Rs in crores


1 Mineral Oil & Natural Gas Corpn. Ltd. 12450.1
2 Elec & Non
conventional N T P C Ltd. 5472.04
3 Transport Equipment Tata Motors Ltd. 1157.948
4 Diversified Prakash Industries Ltd. 208.048
5 Base Metals Steel Authority Of India Ltd. 3848
6 Non metallic mineral
products Grasim Industries Ltd. 886.314
7 Non elec machinery Bharat Heavy Electricals Ltd. 1229.984
8 Electronics Infosys Technologies Ltd. 2061.68
9 Food I T C Ltd. 2018.184
10 Chemicals Hindustan Unilever Ltd. 1617.594
O N G C Ltd was the largest net profit maker with a five year average of Rs 12450.10
crores. Reliance Industries Ltd and Indian Oil Corporation Ltd were the other profit
maximizers with an average of Rs 7565.27 crores and Rs 6084.32 crores respectively.
Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd were the
other profit maximizers in the sector.
In the electrical and non conventional energy sector N T PC Ltd was the largest profit
maximizers with an average of Rs 5472.04 crores. Nuclear Power Corporation of India
Ltd and Neyveli Lignite Corporation Ltd were the other profit maximizers in the sector
with an average of Rs 1815.602 crores and Rs 954.556 crores respectively
In the transport equipment sector, Tata Motors Ltd was the largest profit maximizer with
an average of Rs 1157.948 crores. Bajaj Auto Ltd and Maruti Suzuki India Ltd were the
other maximum profit makers with an average of Rs 872.51 crores and Rs 858.64 crores
respectively. In the diversified sector Prakash Industries Ltd was the maximum profit
maker with an average of Rs 208.048 crores. Aditya Birla Nuvo Ltd with an average of
Rs 152.446 crores was second largest profit maker. Johnson & Johnson Ltd, Kesoram
Industries Ltd and D C M Shriram Consolidated Ltd were the other profit maximizers in
the sector.
In the base metal sector, Steel Authority of India was the largest profit maximizers with
an average of Rs 3848.00 crores. It was followed by Tata Steel Ltd and Hindustan Zinc
Ltd with an average profit of Rs 2792.244 crores and Rs 1423.272 crores respectively.
Hindalco Industries Ltd and Rashtriya Ispat Nigam Ltd were the other profit maximizers
in the sector. In the non metallic mineral products sector, Grasim Industries Ltd and
Ambuja Cements Ltd were the largest profit maximizers with an average net profit of Rs
886.314 crores and Rs 806.734 crores respectively. The other major profit maximizers in
the sector were A C C Ltd, Ultratech Cement Ltd and Century Textiles & Inds. Ltd.

14
In the non electric machinery sector the top profit creators were Bharat Heavy Electricals
Ltd with average net profit of Rs 1229.984 crores. Larsen & Toubro Ltd and Suzlon
energy had an average net profit of Rs 872.706 crores and Rs 490.98 crores respectively
In the electronics sector Infosys Technologies Ltd was the highest profit maximizers with
an average of Rs 2061.68 crores. Tata Consultancy Services Ltd and Wipro Ltd were the
other profit maximizers with an average of Rs 1664.354 crores and Rs 1617.106 crores
respectively. In the food sector I T C Ltd was the maximum profit maker with an average
of Rs 2018.184 crores. Nestle India Ltd and Balrampur Chini Mills Ltd were other largest
profit maximizers with an average of Rs 290.954 crores and Rs 126.755 crores. Britannia
Industries and Bajaj Hindustan Ltd were the other maximum profit making companies. In
the chemical sector, Hindustan Unilever Ltd was the largest profit maximizer with an
average profit of Rs 1617.594 crores for the period 2003-2007. It was followed by
Ranbaxy Laboratories Ltd and Cipla Ltd with an average profit of Rs 464.918 crores and
Rs 445.722 crores respectively. Dr. Reddy's Laboratories Ltd and GlaxoSmithKline
Pharmaceuticals Ltd were the other profit maximizers in the sector.

Top 15 companies across all sectors:


This section highlights the top 15 companies across sectors in terms of market
capitalization, sales, cash flow and net profit. The top 15 companies were selected across
sectors on the basis of five yearly average basis.

Fig: 5
5 Yearly Avg. (Rs. in Crores)

Top 15 Companies in terms of Market


134,918.53

Capitalization
116,781.35

116,673.08

94,163.06

82,194.36

68,030.99

160,000.00
63,820.67

54,445.95

49,327.67

140,000.00
43,208.67

41,631.89
42,262.30

33,689.25

31,342.20

27,236.79
120,000.00
100,000.00
80,000.00
60,000.00
40,000.00
20,000.00
- . .
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Company Name

ONGC Ltd with a five yearly average market capitalization of Rs 134918.53 crores was
the greatest wealth creator among all the 9707 companies undertaken for the study in the
Indian corporate sector. DLF and Reliance Ltd were the next largest wealth creators in
terms of market capitalization. The average market capitalizations for these companies
were Rs 116781.35 crores and Rs 116673.08 crores respectively. The other top wealth
creators were NTPC, TCS and Infosys Ltd.

Fig 6

15
Top 15 Companies in terms of Sales

177,013.41
5 Yearly Avg. (Rs. in Crores)
200,000.00
180,000.00

84,035.52

72,815.87

71,890.42
160,000.00
140,000.00

45,006.44

40,049.06

32,513.07

30,976.17
120,000.00

24,648.14

21,300.86

20,195.81

18,883.56

16,608.41

15,190.49

14,869.22
100,000.00
80,000.00
60,000.00
40,000.00
20,000.00
-
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Company Name

Indian Oil Corporation was the market leader with respect to sales. The company had
average sales of Rs 177013.414 crores during the period 2003-2007. The other top sales
maximizers were Reliance Industries Ltd, Hindustan Petroleum, Bharat Petroleum Ltd
and ONGC Ltd.
Fig:7

Top 15 Companies in terms of Cash Flow


27,456.74

26,789.40
5 Yearly Avg. (Rs. in Crores)

18,130.73

30,000.00
14,060.08

12,695.09

25,000.00
11,222.02

9,607.34

20,000.00
7,363.68

6,821.89

6,753.56

6,140.62

5,444.08

5,355.04

5,131.63

4,314.42

15,000.00
10,000.00
5,000.00
-
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f In pn. am ies nk pn. C i a al B ra B nk O a ro f In e l L f I n
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ank Co r N i du s I B l Co T f I atio a n n t nk O an t a n
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In terms of cash flow, State Bank of India was the king. The company on an average
made profit before depreciation, interest and tax to an amount of Rs 27456.78 crores
16
during the fiver year period 2003-2007. The other cash flow maximizers were ONGC,
BSNL, Reliance and ICICI Ltd.
Fig:8

5 Yearly Avg. (Rs. in Crores)

12,450.10
Top 15 Companies in terms of Net Profit

7,565.27
14,000.00

6,635.99

6,084.32

5,472.04
12,000.00

4,007.70

3,848.00
10,000.00

2,792.24

2,099.76

2,061.68

2,031.82

2,018.18

1,815.60

1,794.14

1,664.35
8,000.00
6,000.00
4,000.00
2,000.00
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Company Name

In terms of net profit ONGC, Reliance Ltd, BSNL, IOC, NTPC and SBI were the largest
profit maximizers. ONGC on an average made a net profit of Rs 12450.10 crores during
the period 2003-2007. During the same period Reliance Industries had made an average
net profit of Rs 7565.27 crores and BSNL made an average net profit of Rs 6635.99
crores.

Table: 10

Wealth Maximization & Profit Maximization –Ranking of Companies:

Rank MARCAP SALES CASH FLOW PAT


1 ONGC Ltd. Indian Oil Corpn. Ltd. State Bank Of India ONGC Ltd
Reliance Industries
2 D L F Ltd. Reliance Industries Ltd. ONGC Ltd Ltd.
Reliance Industries Bharat Petroleum Bharat Sanchar Bharat Sanchar
3 Ltd. Corpn. Ltd. Nigam Ltd. Nigam Ltd.
Hindustan Petroleum Reliance Industries Indian Oil Corpn.
4 N T P C Ltd. Corpn. Ltd. Ltd. Ltd.
Oil & Natural Gas
5 TCS Ltd Corpn. Ltd. I C I C I Bank Ltd. N T P C Ltd.
Infosys Technologies
6 Ltd. State Bank Of India Indian Oil Corpn. Ltd. State Bank Of India
Bharat Sanchar Nigam Steel Authority Of
7 Bharti Airtel Ltd. Ltd. N T P C Ltd. India Ltd.
Steel Authority Of Steel Authority Of
8 Wipro Ltd. India Ltd. India Ltd. Tata Steel Ltd.
Indian Oil Corpn.
9 Ltd. N T P C Ltd. Punjab National Bank I C I C I Bank Ltd.
10 I T C Ltd. MRPL Canara Bank Infosys
17
Technologies Ltd.

ONGC Ltd was the largest average wealth creator in terms of market capitalization and
net profit during the period 2003-2007. At the same time it was the second largest cash
flow maximizer. Reliance Industries Ltd which was the third largest wealth creator
occupied second position in terms of sales and net profit and occupied fourth position in
terms of cash flow. Infosys Ltd which was the sixth largest wealth creator in terms of
market cap occupied 10th position among the profit maximizers. Indian Oil Corporation
Ltd which occupied 9th position among the largest wealth creators had first position in
sales, sixth in terms of cash flow and fourth in terms of net profit. NTPC which figures
among the top wealth creators also figure among the top ten in sales, cash flow and net
profit. ONGC, Reliance, NTPC and Indian Oil Corporation thus figures in the list of top
ten wealth maximizers as well as in sales, cash flow and net profit maximizers. DLF Ltd,
TCS Ltd and Bharti AirTel, WIPRO Ltd and ITC which were among the top ten wealth
creators couldn’t find a position among the top ten in sales, cash flow and net profit.

Ranking by Cumulative figure: 2003-2007

Top five companies on the basis of cumulative data:


Top five companies – Cumulative Market Capitalization:
Fig 9

Five year cumulative market cap

800000
700000
600000
500000
400000 Series1
300000
200000
100000
0
td . td. td. td. td .
n. L sL C L g ies L ices L
C o rp du st rie N T P l o rv
as In no Se
lG ce ec h cy
t ur a e lia n sy s T sult an
a
&N R Info a Con
Oil Tat

In terms of cumulative market capitalization, ONGC and Reliance Industries were the top
wealth creators. NTPC, Infosys and TCS were the other top performers in terms of
cumulative market capitalization.

Fig 10 Top five companies – Cumulative Sales

18
company name 5 year cum (Rs in crores)
Five year cumulative sales
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
Indian Oil Reliance Bharat Hindustan Oil & Natural
Corpn. Ltd. Industries Petroleum Petroleum Gas Corpn.
Ltd. Corpn. Ltd. Corpn. Ltd. Ltd.

company name 5 year cum (Rs in crores)

In cumulative sales, Indian Oil Corporation and Reliance Industries occupied the top
position. The two companies’ cumulative sales were Rs 885067.07 crores and Rs
420177.62 crores respectively.

Fig 11 Five Top companies – Cumulative Cash flow

company name 5 year cum (Rs in crores)


Five year cumulative Cash Flow
160000
140000
120000
100000
80000
60000
40000
20000
0
State Bank Oil & Natural Bharat Reliance I C I C I Bank
Of India Gas Corpn. Sanchar Industries Ltd.
Ltd. Nigam Ltd. Ltd.

company name 5 year cum (Rs in crores)

State Bank of India and ONGC were the top performers in terms of cumulative cash flow.
BSNL, Reliance Industries Ltd and ICICI Bank Ltd were the other lead performers in
terms of cumulative cash flow during the period 2003-2007.

Top five companies – Cumulative Net Profit:


Fig 12

19
company name 5 year cum (Rs in crores)
Five year cumulative Net Profit
70000
60000
50000
40000
30000
20000
10000
0
Oil & Natural Reliance Indian Oil N T P C Ltd. Bharat
Gas Corpn. Industries Corpn. Ltd. Sanchar
Ltd. Ltd. Nigam Ltd.

company name 5 year cum (Rs in crores)

ONGC, RIL and IOC were the top profit maximizers on a cumulative basis during the
period 2003-2007. ONGC made a cumulative net profit of Rs 62,250.50 crores during the
five year period 2003-2007.

Table: 11
Excess Value of top 10 Companies in terms of Market capitalization:
(Rs in crores)
Sl.
No. COMPANY NAME MV OF ASSET BV OF ASSET PV OF ASSET
1 Oil & Natural Gas Corpn. Ltd. 137820.708 4470.698 133350.01
2 D L F Ltd. 117838.9525 1069.6775 116769.27
3 Reliance Industries Ltd. 138508.862 23242.076 115266.78
4 N T P C Ltd. 112263.235 26172.48 86090.75
5 Tata Consultancy Services Ltd. 82310.756 169.932 82140.82
6 Infosys Technologies Ltd. 68030.99 125.088 67905.90
7 Bharti Airtel Ltd. 66966.546 5016.408 61950.13
8 Wipro Ltd. 54550.172 266.378 54283.79
9 Indian Oil Corpn. Ltd. 68821.842 20589.186 48232.65
10 I T C Ltd. 43369.434 460.032 42909.40

Fig 13

20
Fig : Excess Value of Top 10 Companies in
terms of Market Capitalization (Rs. in Crores)

160000 30000
140000 25000
120000
100000 20000
80000 15000
60000 10000
40000
20000 5000
0 0
Oil & Natural

Industries Ltd.

Consultancy

Bharti Airtel
Services Ltd.

Corpn. Ltd.
Gas Corpn.

Indian Oil
Reliance

Ltd.
Tata
Ltd.

MV OF ASSET PV OF ASSET BV OF ASSET

According to Table 11 ONGC, DLF Ltd and Reliance Industries have the highest excess
value.This signifies the higher market capitalization of these companies compared to their
book value of equity. The five yearly average values were considered for the analysis

Table: 12
Association of Variables: Correlation Analysis

net
mc div cf sales tot asset prof Pbdt

Mc 0.64 0.58 0.31 0.24 0.72 0.69

Div 0.64 0.75 0.48 0.27 0.92 0.94

Cf 0.58 0.75 0.49 0.79 0.85 0.85

Sales 0.31 0.48 0.49 0.29 0.59 0.58


tot
asset 0.24 0.27 0.79 0.29 0.39 0.39
net
prof 0.72 0.92 0.85 0.59 0.39 0.99

Pbdt 0.69 0.94 0.85 0.58 0.39 0.99

Variable definition given in Appendix 3.

21
The correlation analysis reveals that the variables of net profit and profit before
depreciation and tax are highly correlated with the variable of market capitalization. The
values of correlation coefficient being 0.72 and 0.69 respectively. The correlation
coefficient of 0.64 between market capitalization and dividend signify a positive
correlation between the two variables. Thus it can be summarized that the variable of
market capitalization have a positive correlation with accounting variables of dividends ,
net profit and profit before depreciation and tax. The correlation analysis also reveals
high degree of correlation between many operating performance variables.
Regression Model Analysis:
For the regression analysis, the same top 50 companies in terms of five yearly average
market capitalizations across all sectors were used. In model 1, the variable of market
capitalization was regressed upon the independent variables of five yearly average of
dividends, total assets, profit before depreciation and taxes, cash flow (PBDIT), net profit
and sales. The objective is to determine the percentage of variation in the dependent
variable on account of the independent variables.
The model is given by
Model 1:

MARCAP= α + β1DIV + β2TA+ β3PBDT+ β4CAF+ β5PAT+ β6SA2


Regression Result:
Mode Unstandardized Standardized
l Coefficients Coefficients t Sig.
B Std. Error Beta B Std. Error
1 (Constant) 9974.018 4036.824 2.471 .018
DIV 2.083 10.238 .061 .203 .840
TA .228 .154 .531 1.478 .147
PBDT -14.627 6.982 -1.876 -2.095 .042
CAF -5.393 3.289 -1.001 -1.640 .108
PAT 47.011 13.527 3.330 3.475 .001
SA -.280 .131 -.269 -2.140 .038

ANOVA
Mode Sum of
l Squares df Mean Square F Sig.
1 Regression 286553873 4775897892.39
6 11.147 .000(a)
54.340 0
Residual 184230552
43 428443145.754
67.409
Total 470784426
49
21.749

Model Summary:
2
DIV= Dividend, TA=Total Assets, PBDT= Profit before depreciation and tax, CAF= Cash flow measured
by profit before depreciation, interest and tax, PAT=Net profit after tax, SA= Sales. All values are the
average for the five year period 2003-2007.
22
Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .780(a) .609 .554 20698.86822

a Predictors: (Constant), SA, TA, DIV, PAT, CAF, PBDT


The results show that 55.4% of variation in the market capitalization is explained by the
variation in the independent variables of dividends, sales, total assets, cash flow, net
profit and profit before depreciation. The regression model is powerful with F value
=11.47 which are statistically significant (see p values). The model results show that the
variable of profit after tax is positively related to market capitalization and is statistically
significant at all levels. In other words higher the net profit of the company, greater will
be the market capitalization of the company. But the results suggest that the variables of
sales and profit before depreciation and tax are negatively related to market
capitalization.

Model: 2

TOBIN Q = = α + β1DIVTA + β2PBDTA+ β3CFTA+ β4PATA+ β5SATA3


Model Standardized
2 Unstandardized Coefficients Coefficients T Sig.
B Std. Error Beta B Std. Error
(Constant) 2.371 2.446 .970 .338
DIVTA -46.595 42.176 -.212 -1.105 .275
PBDTA -139.181 60.893 -2.245 -2.286 .027
CFTA 51.276 58.414 .803 .878 .385
PATA 155.997 53.635 1.771 2.908 .006
SATA .119 1.428 .012 .084 .934

ANOVA
Model Sum of
2 Squares df Mean Square F Sig.
Regression .582 5 .116 417.464 .000(a)
Residual .012 44 .000
Total .595 49
Model Summary:

Adjusted R Std. Error of the


Model 2 R R Square Square Estimate
.990(a) .979 .977 .01670

a Predictors: (Constant), TOBINQ, DIVTA, SATA, PBDTA, PATA

3
TOBIN Q = Market Value of Assets divided by Book Value of Assets, where market value of assets is the
sum of market value of equity and book value of debt; DIVTA = Dividend divided by total assets;
PBDTA= Profit before depreciation and taxes divided by total assets, CFTA = Cash flow divided by total
assets, PATA = Profit after tax divided by total assets, SATA= Sales divided by total assets. All variable
values are average of five years -2003-2007.
23
Model 2 results signify that the variable of profit before depreciation and tax is positively
related to the market variable of Tobin’s q which is a measure of investment
opportunities. Greater the profitability, greater will be the investment opportunities for a
company. Higher the profitability, higher the value of the ratio of market value of assets
to book value of assets.
Findings and Conclusion:
This study examines whether profit maximizers are the greatest wealth creators in the
context of sectors and companies. This study was based on a period of five years. The
study finds that companies like ONGC, Reliance Industries Ltd and Indian Oil
Corporation Ltd. are leaders in terms of profit maximization and wealth maximization.
The major findings were:

♦ In sectoral analysis, Electricity & Non Conventional Energy sector has the highest
average with Rs.10132.66 crores of 13 companies and with a cumulative average
of Rs. 131724.63 in terms of five yearly average market capitalizations.
♦ On a comparative basis the market capitalization of the electricity and non
conventional energy sector was about 2.49 times that of the average market
capitalization of the mineral sector.
♦ Minerals sector stood first in terms of five yearly average sale, cash flow and net
profit.
♦ The mineral sector accounted by 123 companies had the highest average sales
during the five year period of 2003-2007 and had an average five yearly sales of
Rs 4645.45 and cumulative sales of Rs 571390.08.
♦ Mineral sector had the highest average cash flow during the period of study.
Mineral sector accounted for Rs 641.72 crores during the period 2003-2007.
♦ Minerals, electricity & non conventional energy sectors and base metals were the
largest profit maximizes.
♦ The electricity and non conventional energy sector which emerged as the top
wealth creator in terms of market capitalization was the second highest with
respect to sales, cash flow and profit maximization.
♦ ONGC Ltd with a five yearly average market capitalization of Rs 134918.53
crores was the greatest wealth creator among all the 9707 companies in the Indian
corporate sector.
♦ DLF and Reliance Ltd were the next largest wealth creators in terms of market
capitalization. The other top wealth creators were NTPC, TCS and Infosys Ltd.
♦ Indian Oil Corporation was the market leader with respect to sales. The company
had average sales of Rs 177013.414 crores during the period 2003-2007.
♦ Reliance Industries Ltd, Hindustan Petroleum, Bharat Petroleum Ltd and ONGC
Ltd were the other market leaders with respect to sales.
♦ State bank of India emerged as the top most in case of cash flow. The company on
an average made profit before depreciation, interest and tax to an amount of
Rs 27456.78 crores during the fiver year period 2003-2007.
♦ In terms of net profit ONGC, Reliance Ltd, BSNL, IOC, NTPC and SBI were the
largest profit maximizes.
♦ ONGC on an average made a net profit of Rs 12450.10 crores.
♦ According to study we noticed that ONGC Ltd was the largest average wealth
creator in terms of market capitalization and net profit during the period of
2003-2007. At the same time it was the second largest cash flow maximizers.

24
♦ NTPC which figures among the top wealth creators also figure among the top ten
in sales, cash flow and net profit.
♦ Indian Oil Corporation Ltd which occupied 9th position among the largest wealth
creators had first position in sales, sixth in terms of cash flow and fourth in terms
of net profit.
♦ DLF Ltd, TCS Ltd and Bharti AirTel, WIPRO Ltd and ITC which were among
the top ten wealth creators couldn’t find a position among the top ten in sales,
cash flow and net profit.
♦ Reliance Industries Ltd which was the third largest wealth creator occupied
second position in terms of sales and net profit and occupied fourth position in
terms of cash flow.
♦ In terms of cumulative market capitalization, ONGC and Reliance Industries were
the top wealth creators.
♦ In cumulative sales, Indian Oil Corporation and Reliance Industries occupied the
top position. And ONGC, RIL and IOC were the top profit maximizers on a
cumulative basis during the period 2003-2007.
♦ State Bank of India and ONGC were the top performers in terms of cumulative
cash flow.
♦ The correlation analysis reveals that the variables of net profit and profit before
depreciation and tax are highly correlated with the variable of market
capitalization. The values of correlation coefficient being 0.72 and 0.69
respectively.
♦ The correlation coefficient of 0.64 between market capitalization and dividend
signify a positive correlation between the two variables.
♦ It can be summarized that the variable of market capitalization have a positive
correlation with accounting variables of dividends , net profit and profit before
depreciation and tax.
♦ ONGC, DLF Ltd and Reliance Industries have the highest excess value. This
signifies the higher market capitalization of these companies compared to their
book value of equity.

Regression Results:

♦ The results show that 55.4% of variation in the market capitalization is explained
by the variation in the independent variables of dividends, sales, total assets, cash
flow, net profit and profit before depreciation.
♦ The model results show that the variable of profit after tax is positively related to
market capitalization and is statistically significant at all levels.
♦ The results suggest that the variables of sales and profit before depreciation and
tax are negatively related to market capitalization.
♦ Higher the net profit of the company, greater will be the market capitalization of
the company.
♦ Tobin q model results signify that the variable of profit before depreciation and
tax is positively related to the market variable of Tobin’s q which is a measure of
investment opportunities.
♦ Greater the profitability, greater will be the investment opportunities for a
company. Higher the profitability, higher the value of the ratio of market value of
assets to book value of assets.

25
A Review of Key sectors and Companies:

The Indian minerals sector has been a star performer during the study period. The
impressive growth rate in top line was on the back of strong realizations aided by firm
international product prices. The changing face of industrializing Indian economy
coupled with rapid urbanization and higher living standards share the credit for the
growing consumption of oil. According to the estimates by the Integrated Energy Policy
Report, Planning Commission of India, 2006, the total energy requirement (including oil,
gas, coal, nuclear and hydro energy sources) in the country by 2032 would be 1,651
million tones of oil equivalent (MTOE). This assumes an 8 per cent GDP growth rate
through 2032.
The oil and gas industry in recent years has been characterized by rising consumption of
oil products, declining crude production and low reserve accretion.From 1994 to 2006
world crude oil demand grew an average of 1.76% per year. World demand for oil is
projected to increase 37% over 2006 levels by 2030 (118 million barrels per day, from
86 million barrels. Worth attention is the emergence of thriving economies like India,
which are quickly becoming large oil consumers. India's oil imports are expected to more
than triple from 2005 levels by 2020, rising to 5 million barrels per day. The pivotal
factor being the boom in the transport sector, because of which the demand in the Indian
oil sector has been growing consistently.

In fact the performance has lost some sheen, because of the reluctance to allow market
pricing mechanism. This under recovery has lead to sharing of losses – subsidies- by
upstream companies (ONGC, GAIL) and downstream oil marketing companies (BPCL,
HPCL, and IOCL).

The substantiation of holistic growth of an economy is best reflected in the growth of the
transport sector. The Indian automobile sector after years of teetering growth,
punctuated by periods of surge owe its recovery to sustained investment in infrastructure
projects and on high agricultural growth. The government has also liberalized the norms
for foreign investment and import of technology and that appears to be in its favor.

The passenger car industry was saddled with excess unused production capacity -at about
13.5 lakh cars per annum, the industry's capacity was about double the 6.9 lakh passenger
vehicles produced in 2000-01.

The NCAER study on passenger cars and utility vehicles also projected the size of the
industry to more than double by the year 2011-12 from 2002-03 levels. From about 7.43
lakh vehicles in 2002-03, the demand for cars and multi-utility vehicles is projected to
reach about 15 lakh vehicles by 2011-12.

However, rapid growth in demand on the domestic and export fronts, booming economy,
access to easy financing options with lowered interest options has reinvigorated the
sector. Also the sector was able to sustain the demand growth as well as maintain cost &
operational efficiencies.

Therefore with future prospects being promising the sector has witnessed great activity
both by promoters as well as equity investors

26
Cement industries in the non-metallic mineral products sector have undoubtedly
hogged the equity market during the study period. There are definitive factors like, no
greenfield or brown field addition in capacity bridging the gap between erstwhile excess
capacities and growth in demand has lead to price stabilization. With the government
going in for 25 per cent concretization of roads, six-laning 6,500 km Golden quadrilateral
and selected National highways, four-laning and widening of roads, constructing new
rural roads, capacity addition of major ports, additional 70,000 MW generation of power
capacity, upgrading and modernizing of railways and ports, improving irrigation facilities
etc is likely to translate into higher demand for cement.
Besides construction and modernization of four airports and two seaports will boost
demand for cement. Also demand from housing boom is also growing phenomenally as
interest rates and cost of servicing housing loans have halved, and still continuing their
southward journey. This, coupled with tax breaks and stable real estate prices, has
triggered an unprecedented housing boom favoring the cement sector.

Also export prospects have brightened as India is nearest source to supply cement for Iraq
reconstruction and cater to the demand from Middle East.
Consequently this rising demand supply mismatch has ensured higher realizations and
higher returns to the investors.

The Indian information technology sector continues to be one of the sunshine sectors of
the Indian economy. With a growth figure of 30.7 percent in 2006-07, the sector has left
its global counterpart, which grew at 10 percent way behind. The Government expects
the exports turnover to touch US$ 80 billion by 2011, growing at an annual rate of 30
percent per annum. India has emerged as the fastest growing IT hub in the world, its
growth dominated by IT software and services such as Custom Application Development
and Maintenance ( CADM), System Integration, IT Consulting, Application
Management, Infrastructure Management Services, Software Testing, Service- oriented
architecture and Web services. Indian is the undisputed leader in offshore services,
accounting for 65-70 percent of the global off shoring pie. It tops the list of 30 countries
on criteria such as language, Government support, labour pool, infrastructure, educational
system, cost, political environment, cultural compatibility, global & legal maturity, and
data & intellectual property security and privacy, says Gartner 2007.

In 2006-07, software and services exports grew by 33 percent to register revenue of US$
31.4 billion, whereas the domestic segment grew by 23 percent to US$ 8.2 billion. Within
exports, IT services touched US$ 18 billion, a growth of 35.5 percent. The country’s IT
exports have, in fact, come quite far, starting from a few million dollars in the early 90s.
The Government expects the exports turnover to touch US$ 80 billion by 2011, growing
at an annual rate of 30 percent per annum.

The “Electricity & Non- conventional energy” sector has definitely had unprecedented
reforms working in favor of the sectors valuations.

With India scaling up its estimate of power requirement to between 800,000 MW and
950, 00 MW by 2030 expected flurry of activities are becoming reality. The triggers
have been both on regulatory as well as economic front. More than 112000 MW of
generation capacity addition is estimated by 2012 entail whopping Rs. 4.99 trillion
investments. This quantum of investment thus calls forth public –private partnerships in
the sector. A Central unified legislation called “The Electricity Act” is to govern the

27
Indian electricity sector which has proposed significant policy decisions that could
reform the Indian power sector over the long term. Licensing norms for entering
generation and T&D business of power have been eased. Govt. approved scheme called
“Accelerated Power Development and Reforms Programme (APDRP)” in March 2003
will expedite distribution sector reforms, ensuring efficient transmission and distribution.
Under the Electricity Act, captive generators will be able to sell excess power to
consumers. The requirement of techno economic clearance of CEA for thermal power
plants has also been done away with. Under the revised policy for setting up of mega
power projects, specific inter-state and inter-regional mega power projects were
identified for being developed in both public and private sector & would be extended the
concession of "Zero" customs duty on import of capital goods. Policy incentives like
assured return on equity up to 16 percent at 68.5 percent PLF for thermal power plants
have been implemented. Similar incentives are provided for hydroelectric power projects,
Import duty at the concessional rate of 20 percent has been set for import of equipment.
The government has a provision for a 5-year tax holiday for power generating projects
with an additional five years in which a deduction of 30 percent taxable profits is
allowed. New concepts like Tariff based bidding, Multi Year Tariff (MYT), Availability
Based Tariff (ABT), and Return on Equity (RoE) based return definitely bode well for
the sector.

In a power deficit scenario as in India where peak shortages are 13% and energy
shortages are 8% and given the assured returns regime in the industry, adding capacities
translates into higher profits. Hence the sector has automatically turned a cynosure for
wealth generation.

Star Companies
ONGC has been a safe bet for investors on the likelihood of stable crude oil prices which
are unlikely to ease significantly – during the study period. High crude oil prices resulted
in record profits for ONGC – an oil exploration and production company.ONGC’s
overseas acquisitions via ONGC Videsh Limited (OVL) have also started to have a
significant impact on the bottom-line. Subsidiary ONGC Videsh has become a large E&P
player in its own right and will start having a significant impact on the parent’s fortunes.
The recovery improvement program and new fields have added to its growth prospects
significantly in time.
The recent dismantling of APM (administered price mechanism) has proved to be a boon
for the companies engaged in the upstream activities. The company can now negotiate at
international crude prices unlike the prices set by the Government before April 2002. It
has acquired management control of MRPL, which marks its entry into the refinery
business. All this augurs well for ONGC, with demand for petroleum products likely to
give a fillip to the revenue side and stable supply of crude to its own refinery being the
advantage on the cost side. With the acquisition of MRPL, ONGC will now have better
bargaining power to dispose off the crude it produces.

Reliance is expected to continue its good run as the refining industry is also expected to
continue its strong performance on the back of high crude prices. Also, Reliance is not
burdened with heavy marketing losses. The company is also undertaking continuous
expansion projects for its petrochemical business, which have added to the margins going
forward. Reliance seems to be the best bet in the sector for the medium term investor.
ONGC is completing its 50th year and has already declared a bonus issue. Reliance

28
remains a good bet because of the strong outlook for the refining industry. Reliance also
has the most aggressive growth plans amongst the oil companies – it is putting up a new
refinery and is building new capacity in the petrochemical business while the upstream
business is also expected to start in 2008-09. Because of phasing out of the multi-fibre
agreement from January 2005, the demand for polyester should go up in the country
which means the capacity addition in polyester may also be well timed. Meanwhile,
demand from user industries for polypropylene is expected to remain strong in the
medium term and the company is leveraging this opportunity by expanding capacity. The
refining capacity addition also makes eminent sense, especially in the wake of favorable
demand-supply situation in the region. During the study period, refining margins have
gained from strength to strength owing to the buoyant demand.

The tie-up with Chevron has added luster to Reliance create a large refining capacity, it
will also help develop an easy access into the global markets from a product marketing as
well as facilitate optimization of refinery crude supplies. The mammoth size of oil & gas
discovery by Reliance has definitely added more gravity to the investors’ interest seeking
wealth multiplication.

NTPC Limited
NTPC is certainly the sector leader with its installed generation capacity. On account of
the reason that the plants are present across the country, it does not depend on any one
circle for selling its power. The generation capacity of NTPC is coal-based, the cost per
unit is much lower than the national average, which is a competitive advantage in itself.
The company plans to increase its generation capacity. to 30,000 MW by the end of
FY07 and to 46,000 MW by the end of FY12.
NTPC presence across the value chain is also hit the spot with the investors. By way of
backward integration, the company is diversifying into captive coal mining, so as to
secure future supplies of the black fuel. By way of forward integration, the company is
foraying into power transmission and distribution. By way of lateral integration, NTPC is
imparting a special thrust on hydropower in order to achieve operational and commercial
synergies.
NTPC generates power at one of the most competitive rates in the country because of the
highly depreciated asset base of the company. Extending Courtesy to the Electricity Act
2003 there is mitigated risk of lower ‘regulated’ returns because of new tariff regulations.
Also it has PPAs (power purchase agreements) signed for almost 99% of the power it
produces with various SEBs.

DLF

DLF has been a pleasant avenue for laggards of equity market. The real estate sector has
also been witnessing hectic activities, in tandem with the economic prosperity of the
country. The major bonus with the company has been its presence in major urban center
of the country where the real estate prices have appreciated by three to ten times in the
span of 1995-2005 decade. The existing land bank and the developable area have made
the company numero uno in the real estate sector. The laurel wreath has been the
valuation; which it was able to command for its latest initial public offer. In September
2003 the company was valued at Rs 112 crore (Rs 1.12 billion). That is over the past 45
months, DLF has seen an annualized appreciation of over 500 per cent going by the
valuation it is commanding for its IPO in 2007.

29
The net asset value of the company which is essentially a measure of cash flows of the
firm from its entire land bank discounted by its cost of capital (CoC) less the debt in its
books, is pegged in the range of Rs 70,000 crore (Rs 700 billion) to 95,000 crore (Rs 950
billion).

The latest plans are for development of special economic zones. Joint venture with US-
based Hospitality Company Hilton, expansion of operations in multiplex cinemas and a
possible wind power business are some of the new additions made.

One key advantage is that DLF's average cost of acquisition of land is fairly low at
around Rs 274 per square feet which will enable it sit out the cycles and not indulge in
distress sale ever.

Some key determinants of profitability for real estate companies apart from the land cost,
is the developer's land acquisition and aggregation skills, relationship with the state
authorities and reputation -- on all these DLF scores highly.

The company intends to focus on its core competence while partnering with leading
global players such as Nakheel (SEZs), Laing O'Rourke (construction), ESP (engineering
and design), Feedback Ventures (project management) for better execution.

Bharti Airtel Ltd

The telecom sector has grown at a scorching pace over the past few years aided by
enabling regulations, heightened competition resulting in across-the board lowering of
telecom tariffs, higher disposable income due to India's strong GDP growth rates and
greater coverage of India's landscape by mobile service operators.
The industry has recorded good subscriber growth rates, owing to low penetration levels,
heightened competitive intensity, a continued fall in minimum subscription costs and
tariffs leading to better affordability for lower-income rural users, expansion of coverage
area by mobile operators and government support
With teledensity in India reaching from 5.1 in 2003 to 23.89 in 2007 the impact on
valuations of telecom player have been enormous. The mobile subscriber base has
increased by a 91% CAGR, over 2002-2007 to 162mn and to 201mn in August 2007.

The opening up of NLD & ILD sector has made the investors in hot pursuit. The
teledensity in the country is very low. Besides new avenues like BPO business,
broadband business, Value added services like M-Commerce, M-Marketing, offer venues
of additional revenue. Also technologies like NGN, 3G, WiMAX, will open up new
frontier of business.
Bharti Airtel has been the top pick in the Telecom sector, given its flawless execution
track record, market leadership position, rapidly growing other business segments like
long distance and enterprise, and embedded value in the form of its tower business,
Bharti Infratel.

The company is taking initiatives to expand it’s suite of services and become 'fully
integrated entertainment players' rather than remaining merely telephone companies. The

30
company is making investments in businesses such as DTH and IPTV with a view to tap
a greater share of the entertainment spend of consumers.

With Indian economy taking a leap banking sector was obvious to perk up. ICICI bank
-the largest private sector bank, has also witnessed action during the study period since
the market is ready to add premium for the private banks for the growth and lower NPA.
The prospect for asset sale of Dabhol project, in which the bank had an exposure, has
improved sentiment for the stock. ICICI Bank is one of the more profitable banks in the
country also it has a strong position in almost all fast-growing financial service segments.
ICICI bank’s net interest margin (excess of rate at which funds are lent over the rate of
borrowing) is considerably lower than that of many private banks. ICICI has valuable
investments in securities broking, asset management and insurance. Investors are also
hoping for a jackpot in the value of its investments in the equity shares of other firms.
Also, there are some plus points in the form of value of valuable investments in securities
broking, asset management and insurance which add to the value of the stock.

The stellar growth has been witnessed in ICICI Bank's Loan book growth at a CAGR of
40% over FY2003-06 to Rs 1,146,163cr. Rural Banking continues to be the key focus
area of the bank. ICICI Bank has set up 8700 customer touch points and is targeting to
have100 touch points in each district of the country. Of late the Bank received approval
for opening up of new branches and received licenses for the same, which is the key
positive trigger for the bank. With the opening up of new branches the bank will facilitate
growth in to retail assets and access to low cost funds. Bank's retail focus is the key
driver for growth in fee income as retail banking contributes 58% of the banks total fee
income. The higher fee income growth model augurs well with the banks future growth
strategy and boosts investor’s confidence in the bank. Healthy growth in the fee income
has helped the bank in reporting a sustained profitability, despite depressed margins.
However going forward higher fee income contribution will facilitate sustained growth in
the bottom-line and insulate banks future earnings against lower treasury gains.

With Banks aggressive provisioning strategy and healthy recoveries, the bank reduced its
Gross NPA's from Rs 5027cr in FY2003 to Rs 2222.6cr in FY2006 and Net NPA's came
down from 5.21% in FY2003 to 0.72% in FY2006.

State Bank of India is the largest bank in the country in terms of branch network,
Balance sheet size, Profits, Deposits and employees. The bank had a total balance sheet
size of around 400,000 crore and a branch network in the region of 9000 in 2005. All this
articulates the fact that why investors are keen on to be a part of the growth story.
The bank has around 18 associate banks in the country and has a significant presence
overseas through its international subsidiaries. The Bank accounts for a huge 25% of total
banking business in the country till 2005. The Bank has relationships with the nearly 80%
of the corporates in the country. It is also among the largest retail banks in the country.
SBI has a customer base in the region of 90 million. The other subsidiaries apart from its
associate banks are SBI Life Insurance Ltd. which houses the Insurance business of the
bank, SBI caps which is the investment banking arm and SBI Funds Management
responsible for SBI Mutual fund. The Bank also has numerous international subsidiaries
to carry its overseas business.

The banking sector has been rerated in the light of the recent developments in the
banking sector such as buyback of G-Secs by the Government and Securitization Bill

31
which would benefit SBI the most. The pros with SBI are numerous like the bank is
expected to benefit significantly from the credit expansion in the economy, the strong pan
India franchisee, should help the bank further scale its retail assets at a faster rate, change
in the corporate loan mix towards mid corporates should improve yields and maintain
NIM at around 3.2%. And the great upside in valuations could come from any further
increase in FII limit.

The Indian steel industry has been on a recovery path from 2002 after being burdened
with low steel prices and rising interest rates previously, and SAIL is undoubtedly a story
to reckon with the wealth appreciation. The industry cycle has turned in the wake of an
upsurge in global and domestic demand as well as a sharp fall in interest rates. Also, the
steel companies who were caught in a debt trap took advantage of the lower interest rates
to restructure their debt, which put their finances back on an even keel. And with the steel
cycle turning again, owing to the surging Chinese demand and rising prices, Indian steel
companies are now confident enough to think big again, gearing up to meet the expected
quantum jump in both global and domestic demand.

Indian demand resuscitation for SAIL has also contributed to, improved financial profile.
Positive payoff from capacity expansion, positive earnings outlook, synergies from its
merger with Indian Iron and Steel Company (IISCO) and an improved product mix offer
scope for considerable appreciation in the medium term. Measures like, financial
restructuring, replacement of high cost debt with low-interest-bearing ones and
improvement in operational parameters have further strengthened the company.
Consistent reduction in manpower, coupled with reduced energy consumption, has helped
the steel giant improve productivity and reduce operating costs. The company's thrust on
enhancing revenue from value-added products has paid rich dividends. Apart from the
steel-making units, IISCO has captive iron ore and coal mines, a captive foundry and a
pipe-making plant. With SAIL's financial and managerial capabilities and IISCO's large
infrastructure, there would be greater synergy for capacity expansion and technological
upgradation of the plant.

The company has embarked on a Rs 25,000-crore capacity expansion and upgradation


program that would raise its output to 20 million tonnes by 2011-12 from 12 million
tonnes in 2005. This augurs well for the company in the context of the economic activity
in the country and the world and offers an opportunity to the equity holders to be a part of
the growth.

One of the long-awaited stocks to be listed in Indian market was that of TCS. TCS is the
largest software services exporter from India, ahead of the likes of Infosys and Wipro. In
FY03, it became the first Indian software company to cross the coveted US$ 1 billion
revenue mark.
With salubrious growth environment the global technology spending seems to be on an
up-trend after the past couple of years of slowdown. As per the leading IT research and
consultancy firm, Gartner, total worldwide IT services spending was expected to grow
from US$ 535 billion in 2002 to US$ 727 billion by 2007, a CAGR growth of 6.3%.
NASSCOM expects Indian IT services exports to cross the US$ 56 billion mark by
FY08, which would mean CAGR growth of over 45% in the four-year period (FY04-
FY08). These factors combine with TCS forte provide it a huge growth potential going
forward.

32
Management experience is the biggest strength for TCS. And it is well indicated by the
rapid growth of the company in the past which is level pegging with its Indian peers.
Also, the management can be credited with pioneering the global delivery model at an
early stage that MNCs are trying to replicate now. Favoring TCS, for mission critical
jobs, prospective international clients generally look at larger well-known companies that
can provide end-to-end solutions and TCS is likely to be the key beneficiary of the
increased demand for offshore projects. Also, to meet clients' end-to-end IT
requirements, the company has on offer a wide range of services, some of which are
software development and maintenance, package implementation, consulting and IT-
enabled services.
With global IT services market expected to grow at a CAGR of over 6% till 2008, there is
a huge potential for Indian software companies to garner larger long-term clients and
grow rapidly going forward. Also, TCS is less leveraged on the US unlike its domestic
peers which is a positive, & act for de-risking its business from unforeseen contingencies
arising in that particular region. The gold rush for the largest software services exporter
from India has thus proven remunerative to the investors.

References:

Banz Rolf (1981) “The relationship between returns and the market value of common
stocks “, Journal of Financial Economics “, Vol 9, page 3-18
Basu Sanjoy (1977) , Investment Performance of common stocks in relation to their price
earnings ratio : A test of the efficient market hypothesis, Journal of Finance ,Vol 32,
page 663-682
Chan K C, Yasushi Hamao and Lakonishok Josef (1991) “Fundamentals and Stock
returns in Japan“, The Journal of Finance, Vol 62, No:5 , page 1739-1764
Cook, Thomas and Michael Rozeff (1984) Size and earnings /price ratio anomalies: one
effect or two? Journal of Financial and Quantitative Analysis Vol19, page 449-466.
Lakonishok, Josef and Alan Shapiro (1986) Systematic risk, total risk and size as
determinants of stock market returns, Journal of Banking and Finance, Vol 10, page 115-
132
Reinganum Marc (1981), Misspecification of capital asset pricing: Empirical anomalies
based on earnings yield and market values. Journal of Financial Economics, Vol 9 , page
19-46
Rosenberg Barr, Kenneth Reid and Ronald Lanstein (1984), “Persuasive evidence of
market inefficiency” Journal of Portfolio Management , Vol 11, page 9-17

33
Appendix: 1
List of Sectors: Values in crores of rupees

Sl.
No. Cash Net
Sectors MARCAP Sales flow Profit
1 Electricity & Non
Conventional Energy 10132.66 1422.09 480.45 208.8
2
Minerals 4058.69 4645.45 641.72 317.31
3
Construction & Allied 2675.57 174.45 32.29 10.78
4
Non Electrical Machinery 1267.51 314.86 47.79 23.78
5
Electronics 1188.26 189.95 39.12 22.44
6
Transport Equipment 1072.04 550.39 75.85 34.79
7
Base metals 853.74 450.04 155.42 76.42
8 Non Metallic Mineral
Products 778.76 351.44 57.96 23.42
9
Service 777.27 225.06 28.83 11.63
10
Diversified 528.59 510.95 58.29 17.87
11
Food 401.45 263.77 37.64 17.25
12
Chemicals 363.36 239.54 39.04 14.43
13
Textile 273.57 117.84 15.76 1.6
14
Electrical Machinery 237.66 205.75 21.07 5.65
15
Plastic 175.87 184.78 21.28 5.65
16
Agricultural 135.29 51.23 6.2 1.99
17
Pulp 110.69 131.77 24.14 8.86
18
Misc Manufacturing Activities 73.26 60.78 6.54 -0.94
19
Leather 64.92 68.01 5.81 1.74
20
Fats and Oils 40.64 308.21 12.94 4.39
21
Wood 34.93 58.77 3.05 -4.11
22
Animal 27.27 108.23 9.71 2.81

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Appendix 2:
Top 50 companies in terms of market capitalization (database for
regression)
Sl. 5 Yearly Avg.
No. COMPANY NAME (Rs in crores)
1 Oil & Natural Gas Corpn. Ltd. 134918.53
2 D L F Ltd. 116781.35
3 Reliance Industries Ltd. 116673.082
4 N T P C Ltd. 94163.055
5 Tata Consultancy Services Ltd. 82194.36
6 Infosys Technologies Ltd. 68030.99
7 Bharti Airtel Ltd. 63820.666
8 Wipro Ltd. 54445.948
9 Indian Oil Corpn. Ltd. 49327.67
10 I T C Ltd. 43208.674
11 I C I C I Bank Ltd. 42262.296
12 State Bank Of India 41631.886
13 Bharat Heavy Electricals Ltd. 33689.25
14 Suzlon Energy Ltd. 31342.2
15 Steel Authority Of India Ltd. 27236.792
16 Housing Development Finance Corpn. Ltd. 25664.248
17 Larsen & Toubro Ltd. 24906.98
18 Tata Steel Ltd. 21170.31
19 Tata Motors Ltd. 20514.062
20 National Mineral Devp. Corpn. Ltd. 20425.712
21 H D F C Bank Ltd. 20199.676
22 G A I L (India) Ltd. 18961.65
23 Satyam Computer Services Ltd. 18121.538
24 Maruti Suzuki India Ltd. 16779.524
25 Bajaj Auto Ltd. 16514.33
26 Sterlite Industries (India) Ltd. 14619.688
27 Hindustan Zinc Ltd. 14382.75
28 Grasim Industries Ltd. 14236.898
29 Hindalco Industries Ltd. 14076.604
30 H C L Technologies Ltd. 13393.77
31 Ranbaxy Laboratories Ltd. 13299.488
32 National Aluminium Co. Ltd. 12039.57
33 Unitech Ltd. 11445.584
34 Hero Honda Motors Ltd. 11434.992
35 Bharat Petroleum Corpn. Ltd. 11343.968
36 Hindustan Petroleum Corpn. Ltd. 10867.362
37 Punjab National Bank 10843.998
38 Reliance Energy Ltd. 10535.44
39 I G Petrochemicals Ltd. 10484.962
40 Ambuja Cements Ltd. 10345.982
41 Neyveli Lignite Corpn. Ltd. 10276.46
42 Siemens Ltd. 10007.688
43 Mahindra & Mahindra Ltd. 9943.932

35
44 A C C Ltd. 9899.448
45 Infrastructure Development Finance Co. Ltd. 9407.31
46 Mahanagar Telephone Nigam Ltd. 8562.902
47 A B B Ltd. 8491.666
48 I-Flex Solutions Ltd. 8390.118
49 Reliance Capital Ltd. 8262.926
50 Tata Power Co. Ltd. 8202.632

Appendix 3

Variable definition of Table 12


• mc: five yearly average market capitalization.
• div: five yearly average dividend.
• cf: five yearly average cash flow or Profit Before Depreciation Interest and Taxes
(PBDIT).
• sales: five yearly average sales.
• tot assets: five yearly average of total assets.
• net profit: five yearly average of net profit or Profit After Tax (PAT).
• pbdt: five yearly average of Profit Before Depreciation and Taxes (PBDT).

36