With the BSE Sensex hovering around an all-time high of 6,000, and the bulls firmly in the driver's seat on the bourses, it's time to take stock of the returns that shares deliver to investors. A BT-CMIE study ranks 1,000 companies on the basis of their Total Shareholder Returns (TSR) over a 5-year period.

By Rajeev Dubey

On Dalal Street, as on every bourse in the world, when the going gets good, the bulls get going. And, for the past 8 months, the going has been good. With glad tidings from the corporate sector lending a hand--most CEOs have been talking about ending the year with healthier bottomlines--share-prices are on a roll.

On February 11, 2000, the BSE Sensex touched an all-time peak of 6,005.85 and, since then, it has hovered in the 5,500 to 5,800 band. Although the bull run, as always, has been led by the big players, like the mutual funds and the foreign institutional investors, what is significant is the return of the small investor, who is looking, once again, for long-term gains from his investments in stocks.

Before this, the Sensex had peaked at 4,643.31 on September 12, 1994. In the 5 years since then, it has been a roller-coaster ride, with the Sensex plunging to 2,796.03 on December 4, 1996, and recovering to 4,285.57 on April 21, 1998, before plummeting again to 2,845.86 on October 20, 1998. But since June, 1999, not surprisingly, stocks are back as the favourite of investors of both the institutional and individual varieties. What returns have the stockmarkets given those who invested in shares? Which are the sectors that have been goldmines? And which are the companies that turned out to be lemons?

To find out, Business TODAY commissioned India's largest corporate database-manager, the Centre For Monitoring Indian Economy (CMIE), to calculate the Total Shareholder Returns from India's 1,000 most investor-friendly companies. Since individuals are, typically, long-term investors, the study covered a 5-year period--from 1994-95 to 1998-99--and the sample comprised the top 1,300 companies in terms of market cap in 1998-99.

TSR AS A STRATEGY TOOL

Nine years after liberalisation, India's CEOs are obsessed with new metrics to measure the performance of their companies. Unlike the past, when the virtuous acronym was pat (Profits After Tax), and every effort was focused on generating its growth, the focus now is on a company's post-financing returns. The new concerns, therefore, are whether your Economic Value Added (EVA) is positive, or what the Net Present Value (NPV) of your future earnings is. Although metrics like these are, arguably, the best measures of how efficiently companies use capital, for the corporate sector's largest constituency--shareholders--the most crucial yardstick of performance is the return that accrues to them from holding a company's shares.

Shares deliver returns to shareholders by appreciation in their prices (capital gains), and by way of annual dividends that are paid out of a company's pat. In addition, other returns accrue if companies issue more shares through rights or bonus issues. And the predominant proportion of Total Shareholder Returns is capital gains, which, in turn, depend on how the stockmarket expects a company to perform. Yet, few managers shape their strategies based on the signals they get from the stockmarkets. Of the 3 components of Total Shareholder Returns, price-appreciation is the biggest. And, since stock-price changes reflect what shareholders expect from companies, Total Shareholder Returns is a robust measurement of whether investors endorse a company's strategy or not.

Between feckless investors and clever ones lies the ability to spot investor-friendly companies. The legendary Warren Buffet spotted Coca-Cola as a potential winner as long ago as 1982-83, but how do you spot the best bets for long-term investments on the Indian bourses? While there is no surefire solution, looking at the past is a good way to begin.

The most glaring finding from the BT-CMIE study is that the 1,300 companies together reported negative Total Shareholder Returns of 1.93 per cent in the 5-year period. Stung by an average 10.23 per cent deficit by way of returns via share-price gains, India Inc.'s attempt at salvaging investor confidence with a 6.38 per cent return by way of dividends--and another 1.92 per cent buffer by means of miscellaneous returns--was just not enough to bridge the gap. Simply put, if an investor had put in Rs 100 on March 31, 1994, 5 years later, it would have been worth only Rs 98.07!

Worse, as the BT-CMIE study shows, only 211 companies recorded positive returns for the 5-year period. The range of positive returns varied from a piffling 0.30 per cent (Modi Xerox) to a massive 3,461.25 per cent (SSI). Still, the average positive return was 223.63 per cent (208.98 per cent from share-price appreciation, 10.44 per cent through dividend-payouts, and 4.21 per cent from other returns).

What tilted the scales was the 788 companies which had net negative Total Shareholder Returns of 62.33 per cent (-68.94 per cent because of the slump in share-prices, 5.30 per cent due to dividend payouts, and 1.31 per cent in lieu of other returns), with the negative returns ranging between -0.27 per cent (Eimco Elecon) to Ä102.56 per cent (Nagarjuna Construction). Explains U.R. Bhatt, 48, Director and CIO, Jardine Fleming Asset Management: "In the last 5 years, industry has gone through quantum changes. The bottomline is the real representative of what is happening. Companies have raised huge resources between 1991-93, and are now unable to service them effectively." Consider too some qualitative findings of the Total Shareholder Return study:

• LOOK FOR PROFESSIONAL MANAGEMENTS. Widely-owned and professionally-managed companies tend to reward their shareholders better than those owned and managed by business families, or even transnationals. Professionally-managed companies delivered an average Total Shareholder Return of 400.99 per cent and transnationals, 85.52 per cent, while family businesses could manage only an average of Ä22.17 per cent. And the 12 joint sector companies in the sample were the worst of the lot, with an average of Ä66.50 per cent.

• LOOK FOR YOUNGER COMPANIES. Older companies, burdened by the baggage of the past, tend to deliver the lowest returns. In fact, the 263 companies that were incorporated in the pre-FERA era (1947-73) emerged as shareholder value-destroyers, delivering an average return of -27.70 per cent. In contrast, the 521 companies that were born in the post-FERA, pre-liberalisation period (1974-90) had an average Total Shareholder Return of 5.21 per cent. Most of these companies were survivors of the licence raj, having grown in an unfocused manner, dictated more by the availability of licences rather than through a focused strategy. Not surprisingly, the 72 companies incorporated after liberalisation delivered an average return of 40.96, endorsing the fact that focused business strategies are the ones that pay back the best.

INFOTECH TOPPERS

Not surprisingly, infotech companies were the ones that hogged the limelight in the Total Shareholder Returns sweepstakes. Of the Top 10 ranks, 9 were bagged by infotech companies. While SSI topped the list, delivering a return of 3,461.25 per cent. PSI Data Systems was in the No. 2 spot, Wipro (No. 3), Infosys Technologies (No. 5), Satyam Computers (No. 6), NIIT (No. 7), Leading Edge Systems (No. 8), Fujitsu-ICIM (No. 9), and BFL Software (No. 10) came next. The only non-software company in the line-up: Soundcraft Industries, a Mumbai-based diamond-trading company, which came in at No. 4, with Total Shareholder Returns of 2,448.18 per cent.

Driven by the stockmarket's infatuation, software stocks registered handsome price-appreciations. Between April 1, 1994, and March 31, 1999, Wipro's market cap rose by 5,854.22 per cent--from Rs 309.68 crore to Rs 18,439.07 crore--while its Earnings Per Share (EPS) rose from Rs 7.01 to Rs 36.40. Similarly, fifth-ranker Infosys Technologies saw its market cap rise by 4,339.30 per cent--from Rs 217.89 crore to Rs 9,672.80 crore--and NIIT's (No. 7) market cap shot up by 1,714.45 per cent: from Rs 399.41 crore to Rs 7,247.08 crore. Infotech companies dominated not only the Top 10, they made their presence felt down the line too.

Still, the signals about infotech companies have turned positive only in the last 2 years; their average Total Shareholder Return was 107.83 per cent (1997-98) and 497.78 per cent (1998-99) as against averages of 53.09 per cent (1994-95), -23.48 per cent (1995-96), and -16.87 per cent (1996-97). Says Shantanu Rudra, 42, General Manager (Finance), NIIT: "India possesses a huge advantage in software. What we're witnessing on the stockmarkets is only a sample of what's to come." Corroborates Virat Bhatia, 35, Managing Director, AT&T: "In recent times, that has been emphasised by companies like Satyam and Infosys, who have dreamt big. That has been duly recognised by the international investing community, followed by domestic investors."

LESSONS FOR THE INVESTOR. Picking infotech stocks may still be a good idea. Although valuations are quite high now, there's still growth left in such stocks. Most listed stocks are software companies, whose bottomlines, unlike those of American tech companies, are in the black.

CYCLICAL SHOCKERS

If the performance of the infotech companies threw none, that's because the surprises were hidden elsewhere. India's largest private sector company, Reliance Industries Ltd (RIL), posted a paltry Total Shareholder Return of 4.42 per cent over the 5-year period. Ironically, since 1991, RIL has raised the most funds from the market, mopping up Rs 2,912.49 crore (including Rs 1,437 crore via GDRs) from the public to raise its equity capital from Rs 152.15 crore in 1990-91 to Rs 933.75 crore today. Given the commodity-orientation of its mainstream business, ril's margins are under pressure. Although its world-scale capacities have helped it grow volumes to make up for low margins, investors have shown their declining interest in its future. Between 1994-95 and 1998-99, the RIL stock declined from Rs 336.25 on April 4, 1994, to Rs 130.40 on March 31, 1999. And dividend payouts during the period accounted for 4.59 per cent while the price-gains were down by Ä0.17 per cent.

What's worse, some big names of corporate India delivered negative returns to their shareholders. For instance, in 1994-95, if an investor had put Rs 100 in Larsen & Toubro (L&T), it would have been worth Rs 99.04 at the end of 1998-99. L&T's return of -0.96 per cent was primarily because of the rocky fortunes of the engineering sector, whose average return saw a decline of 29.68 per cent.

L&T lost 10 per cent in returns via capital appreciation, but the dividend-returns were a positive 9.04 per cent. What is interesting is that, over the same period, L&T's turnover grew by 124.83 per cent--from Rs 3,269.54 crore to Rs 7,350.99 crore--while its bottomline rose by 69.58 per cent: from Rs 277.60 crore to Rs 470.74 crore. Other companies that disappointed shareholders: Eicher (-1.58 per cent), MRF (-5.62 per cent), Asian Paints (-7.74 per cent), Nirma (-10.15 per cent), and Hindalco Industries (-19.07 per cent).

The worst performers were those that managed to nearly wipe out the investments made by their shareholders. At the bottom of the rung was Nagarjuna Construction, with Total Shareholder Returns of Ä102.56 per cent, Rajinder Steels (-97.78 per cent), and Shree Digvijay Cement (-97.69 per cent). The primary reason was their failure to excite the stockmarkets. While Nagarjuna Construction traded at Rs 63.60 on October 8, 1999, (down from Rs 75 on April 4, 1994), Rajinder Steels and Shree Digvijay Cement were trading at Rs 2.05 (Rs 100 on April 4, 1994) and Rs 32 (Rs 485 on April 4, 1994), respectively, on October 8, 1999.

It's no coincidence that sagging bottomlines mirrored the dismal performance of these scrips. Steel, cement, and construction were ravaged by the recession; consequently, their dividend-payout history is dismal. While Nagarjuna Construction hasn't paid dividends since a 20 per cent payout in March, 1998, Rajinder Steels last paid a 12 per cent dividend in June, 1996, while Shree Digvijay Cement was able to pay a dividend just once (14 per cent in March, 1996) in the past 10 years.

LESSONS FOR THE INVESTOR. Cyclicals can be risky since their fortunes are impacted to a high degree by the health of the economy. Check for the right signals--a sustained recovery is one--before investing in such stocks.

SECTORAL BLUES

If that is how low things looked for companies, sliced across sectors, the macro-picture looks worse. Of the 32 sectors, only Infotech, Media, Consumer Non-Durables, Trading, Cigarettes, Pharmaceuticals, and Automobiles had positive Total Shareholder Returns, ranging from 39.86 per cent (automobiles), 535.74 per cent (infotech). The other 25 reported negative average Total Shareholder Returns, ranging from liquor(-11.32 per cent) to paper (-75.27 per cent).

But although auto-makers together delivered an average positive Total Shareholder Return of 39.86 per cent, the auto components industry recorded a negative average of -27.73 per cent, implying that manufacturers are more investor-friendly than suppliers. Says B.V.R. Subbu, 45, Director (Sales & Marketing), Hyundai Motor: "The margins of the manufacturers have been squeezed, which has affected the suppliers. But suppliers are worse-off because they don't have the volumes to spread the margins."

Thus, while Hero Honda topped the list with Total Shareholder Returns of 681.96 per cent, Punjab Tractors was a close second with 644.87 per cent, followed by Swaraj Engines' Total Shareholder Return of 590 per cent. Apart from these, only 3 other auto companies--TVS Suzuki, M&M, and Bajaj Auto--had positive TSRs of 125, 40.88, and 38.08 per cent, respectively. Among those who were at the bottom were Majestic Auto (-85.40 per cent), Premier Automobiles (-85.23 per cent), and Hindustan Motors (-82.90 per cent).

The auto component sector was not so lucky. Just 13 of the 63 companies posted positive TSRs. Battery manufacturers Amara Raja Batteries, Exide Industries, and Tudor India were at the top of the heap with tsrs of 247.06, 204.83, and 113.33 per cent, respectively. They were ranked No. 1, 2, and 4 in the sector while the Coimbatore-based tyre-tread manufacturer, Elgitread India, was third with a Total Shareholder Return of 198 per cent. At the bottom were Dewan Rubber Industries (-93.14 per cent), Standard Industries (Ä87.24 per cent), and Jai Parabolic Springs (-86.10 per cent). While sector leader Amara Raja's market cap between March 31, 1994, and March 31, 1999, jumped from Rs 12.95 crore to Rs 293.82 crore, that of the laggard Dewan Rubber slipped from Rs 47.67 crore to Rs 7.41 crore.

The trends in the consumer durables and the consumer non-durables sectors are equally conflicting. The 20-company consumer non-durables sector reported an average Total Shareholder Return of 127.86 per cent, but the 53-company consumer durables sector had a negative Total Shareholder Return of -28.14 per cent. Indian Shaving Products (648.09 per cent) has emerged as the leader in the non-durables sector, followed by Britannia Industries (417.02 per cent). The mighty Hindustan Lever was at the fourth spot with Total Shareholder Returns of 312.91 per cent.

ISPL recovered from a net loss of Rs 7.07 crore (market cap: Rs 351.05 crore) on March 31, 1994, to a net profit of Rs 13.09 crore on December 31, 1998 (market cap on March 31, 1999: Rs 1,777.73 crore). Surprisingly, the 80 per cent family-owned Godrej Soaps, run by Managing Director Adi Godrej, was the poorest performer among consumer non-durables, with a Total Shareholder Return of -66.36 per cent. Although its sales have nearly doubled from Rs 436.77 crore to Rs 894.90 crore during the period, its pat of Rs 25.30 crore on March 31, 1994, has turned into a net loss of Rs 33.76 crore on March 31, 1999. As a result, its market cap has headed south from Rs 794.87 crore to Rs 228.85 crore.

LESSON FOR THE INVESTOR. While FMCG, media, and consumer durables are sectors with high growth potential, picking the right companies to invest in will determine success with returns. All of them are highly competitive sectors; so, identifying the winners is the key.

But does Total Shareholder Return have a correlation with EPS or P-E? A comprehensive look at the sample reveals that companies with positive Total Shareholder Return, indeed, reflect better market valuations. An analysis of the 211 positive Total Shareholder Return companies shows that while their average Total Shareholder Return was 223.63 per cent, their average EPS was a healthy Rs 17.34 and p-e multiple 39.76. Likewise, the 789 companies that reported an average Total Shareholder Return of Ä62.25 per cent recorded dismal average EPS and p-e at Rs 5.85 and 3.64, respectively.

What of the stocks that topped the 1994-99 Total Shareholder Return sweepstakes? Will they continue to be winners? Or will other contenders surpass them making predictions about stock price movements can be hazardous, but going by the bullish fervour in infotech stocks, at least 6 of the top 10 rankers--SSI (rank: 1), Wipro (2), Satyam Computers (4), Leading Edge (5), Tata Infotech (8), and DSQ Software (9)--will continue to rule the roost. Between April1, 1999, and February 15, 2000, the SSI stock price climbed by 507.37 per cent, Leading Edge by 364.92 per cent, and DSQ Software by 265.76 per cent. But the non-infotech top-rankers may find it increasingly difficult to maintain their lead. Already, some of them are being being nudged out by other infotech companies down the line. While Soundcraft Industries (rank: 3) has seen its share price move up by 30.90 per cent between April 1, 1999, and February 15, 2000, Hero Honda's (rank: 7) has risen by only 2.60 per cent from Rs 875.25 on March 31, 1999, to Rs 898 on February, 15, 2000.

The take-out from the Total Shareholder Return scorecard is simple. If you are a long-term investor with real gains on your mind, don't head blindly for the stockmarkets. Look closely before you put your money down. And remember that the payback on a 5-year fixed deposit with a commercial bank can be better than the returns that shares of a majority of Indian companies can get you. But for CEOs, Total Shareholder Return, 1994-99, should serve as a reminder to pay more heed to market expectations about their companies. For, if CEOs want to reward shareholders through gains in stock prices, they have to ensure that the market, which determines those prices, is appreciative of corporate strategies. That's the real lesson from Total Shareholder Returns, 1994-99.

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