Saturday, May 20, 2006

How Profitable are the Indian Companies

In one of my recent postings, I mentioned that the stock returns observed for the small-cap stocks has been quite high (175%). The median FII stake and the median FI stake in these firms is zero and their dividend yield is 0. Not many may be convinced that these are hopeless stocks (not all of them, but on an average) just because the dividend yield is 0. May be these companies have a lot of growth opportunities and hence they do not pay dividends. So zero dividend-yield in itself does not tell us anything about the stock or the company.

I did a further analysis of the profitability of these companies. I found that the median ROE of the large-cap stocks decreased from 15.28% to 10.47% over the last one year (I did not include 2006 data because Prowess database does not have the annual figures for most of these companies). The median ROE of the mid-cap companies decreased from 4.7% to 0.86%.

The median ROE of the small-cap companies increased from -34% to -1% over the same time period. (If we ignore the outliers, then the profitability improves from -3% to 8%) That is, the small-cap companies have been able to reduce their loss over this time period.

The dividend yield is zero because they are loss-making companies, not because they are investing money in profitable projects. However, this improement in profitability could be one of the reasons why the stock return was 175% for the small-cap companies.

If we put data for all the companies together, we will find that the profitability of the Indian companies has actaully come down in the last one year. The total profit, of course has increased in the given time period. However, what matters from stock valuation point of view is not the total profit but profitability, and it has gone down for the large-cap and the mid-cap companies.





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Saturday, May 13, 2006

Equity Risk Premium in India

There is a big debate on what is the right equity risk premium for any country and whether the historically realized risk premium is more than enough given the risk associated with investing in equity. Using more than 100 years of data, Dimson, Marsh, and Staunton have found that the risk premium in the US is about 7.6 percent.

Unlike in the US, we do not have a rich array of historical data on the stock returns in India, though Mumbai Stock Exchange in more than 100 years old. Using 26 years of the data (available in the website of RBI), I estimated the risk premium in India. I found that the return on Sensex was on average 13.3 percent more than the yield on 1-year Government Securities (my proxy for a risk-free asset) in India. If we estimate the market risk premium using the post 1991 data, then the equity premium is about 9 percent in India. This comes pretty close to the figure Prof. Rajnish Mehra obtained by using 13 years of data from India. His estimate of the equity risk premium in India is 9.7 percent.

Is this risk premium more than necessary given the risk involved in investing in India? the annualized standard deviation for the 1900-2003 period was 20.1 percent (Dimson, Marsh, and Staunton's study). It was 28.37 percent in India. Ignoring the fact that risk is time-varying, the Sharpe Index in US is 0.378. It is 0.47 for India. For the post-1991 period, the Sharpe Index is much lower at 0.302.

If there is an equity premium puzzle in the US, then there certainly is one in India. The risk premium is just too high given the risk involved.

I am currently working on it. I will post my actual results later.

P.S. There was a mistake in my yesterday's posting. I did not include dividends while estimating returns on Sensex.


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Thursday, May 11, 2006

XLRI ranked No 4 in India by SSRN

SSRN.com has ranked XLRI at no.4 in India and 168 internationally (excluding US Business schools) based solely on the research paper downloads from the site.

Here are the details:

No.1 IIM Calcutta (international rank: 119)
2. ISB hyderabad (Int Rank: 130)
3. IIM Ahmedabad (Int rank136)
4. XLRI Jamshedpur, India (Int rank 168)

As of now, this ranking is not complete because many professors of IIMs do not post their working papers here. For example, if Prof. J R Varma of IIMA posts his papers here, then IIMA would easily become No1.

However, given the objectivity in its ranking system, I am sure after another 5 years, everybody in India will go by this ranking only. And its beauty lies in the fact that it gives 100% emphasis on research, the main job of a management faculty.



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Wednesday, May 10, 2006

How to become a millionaire

I found the following to be a good one. So I am sharing it.


A millionaire was being interviewed by a TV hostess.

"What do you think is your secret of becoming a millionaire?"

"My wife"

"Wow! She must be a great lady! By the way what were you doing before your marriage?'

"I was a billionaire."


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