Are profit maximizers wealth creators

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Are profit maximizers wealth creators?By B Rajesh Kumar1

Institute of Management Technology, Dubai, UAE

Email: [email protected]

Abstract

The study examines whether the maximum profit maximizers are the greatest wealthcreators in stock market in the context of sectors and companies.

The study also aims to understand the determinants of the wealth creators in the stockmarket on the basis of empirical analysis.The survey study was based on an exhaustive list of 9707 Indian companies. The sourceof the database is CMIE prowess database. The period of study was 2003-2007. For thesectoral analysis, altogether 22 sectors were identified. The basis for sector wise andcompany wise analysis was five yearly averagesThe electricity and non conventional energy sector which emerged as the top wealthcreator 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 largestwealth maximizer in terms of market capitalization was the biggest sector in terms ofsales, cash flow and net profit maximization.

ONGC Ltd was the greatest wealth creator among all the 9707 companies undertaken forthe study in the Indian corporate sector. Indian Oil Corporation was the market leaderwith respect to sales. In terms of cash flow, State Bank of India was the king. In terms ofnet profit ONGC, Reliance Ltd, BSNL, IOC, NTPC and SBI were the largest profitmaximizers.ONGC Ltd was the largest average wealth creator in terms of market capitalization andnet profit during the period 2003-2007. At the same time it was the second largest cashflow maximizer. Reliance Industries Ltd which was the third largest wealth creatoroccupied second position in terms of sales and net profit and occupied fourth position interms of cash flow. Indian Oil Corporation Ltd which occupied 9 th position among thelargest 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 thelist 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 topten wealth creators couldnt find a position among the top ten in sales, cash flow and netprofit.ONGC, DLF Ltd and Reliance Industries have the highest excess value. This signifies thehigher 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 isexplained 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 statisticallysignificant at all levels. Higher the net profit of the company, greater will be the marketcapitalization of the company. Tobin q model results signify that the variable of profitbefore depreciation and tax is positively related to the market variable of Tobins q whichis a measure of investment opportunities

1Assistant Professor, Institute of Management Technology, Dubai International Academic City,Dubai, UAE.

1
mailto:[email protected]:[email protected]


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Are profit maximizers wealth creators?

Profit maximization and wealth maximization are the financial goal & objectives offinancial management. The traditional approach of financial management was all aboutprofit maximization. The main objectives of the companies were to make profits. . In theeconomic theory, the behavior of a firm is analyzed in terms of profit maximization. It isassumed that profit maximization causes the efficient allocation of resources under thecompetitive market conditions, and profit is considered as the most appropriate measure

of a firms performance. The profit maximization objective has been criticized. It isargued that profit maximization assumes perfect competition, and in the face of imperfectmodern markets, it cannot be a legitimate objective of the firm. It is also argued thatprofit maximization, as a business objective, developed in the early 19 th century when thecharacteristic feature of the business structure were self-financing, private property andsingle entrepreneurship. The only aim of the single owner then was to enhance his or herindividual wealth and personal power, which could easily be satisfied by the profitmaximization objective. It is also feared that profit maximization behavior in a marketeconomy may tend to produce goods and services that are wasteful and unnecessary fromthe societys point of view. Also, it might lead to inequality of income and wealth. Theprice system and therefore, the profit maximization principle may not work due to

imperfections in practice. Firms producing same goods and services differ substantially interms of technology, costs and capital. In view of such conditions, it is difficult to have atruly competitive price system, and thus, it is doubtful if the profit maximizing behaviorwill lead to the optimum social welfare.Shareholders wealth maximization is theoretically logical and operationally feasiblenormative goal for guiding the financial decision making. Shareholders wealthmaximization means maximizing the net present value of a course of action toshareholders. The goal of maximization of shareholders wealth as reflected in the marketprice of the share makes the interest of the shareholders compatible with that of themanagement. With this objective in sight, the management will allocate the availableeconomic 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 tofinance these investments. Further, the goal of maximization of shareholders wealthimplies a long term perspective of the goal. The market price of a share reflect allexpected future benefits flowing from the firm to its shareholders, and therefore themanagement cannot emphasize the short term profits at the cost of long term perspective.Maximizing the shareholders economic welfare is equivalent to maximizing the utility oftheir consumption over time. With their wealth maximized, shareholders can adjust theircash flows in such a way as to optimize their consumption. From the shareholders pointof view, the wealth created by a company through its actions is reflected in the marketvalue of the companys shares. Therefore, the wealth maximization principle implies thatthe fundamental objective of a firm is to maximize the market value of its shares. The

value of the companys shares is represented by their market price that, in turn, is areflection of shareholders perception about quality of the firms performance decisions.The market price serves as the firms performance indicator. Based on extensiveempirical evidence, financial economists argue that in developed capital markets, at least,share prices are the least biased estimates of intrinsic values and managers are notgenerally better than investors at assessing values.The objective of profit maximization measures the performance of a firm by looking at itstotal profit. It does not consider the risk which the firm may undertake in maximization ofthe 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 theshareholders.On the other hand, the objective of maximization of shareholders wealth considers allfuture cash flows, dividends, earnings per share, risk of a decision etc. Hence theobjective of maximization of the shareholders wealth is operational and objective in itsapproach. A firm that wishes to maximize the profits may opt to pay no dividend and toreinvest the retained earnings, whereas a firm that wishes to maximize the shareholderswealth 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 theshareholder expected return, considers the long term prospects of the firm, reflects thedifferences in timing of the returns, considers risk and recognizes the importance ofdistribution of returns. Therefore, the maximization of shareholders wealth as reflected inthe market price of a share is viewed as a proper goal of financial management. Theprofit 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 stockmarket.Themain purpose of the study was to find out the most valuable companies interms of sales, cash flow, profit and average market capitalization. The study also

examines whether the maximum profit maximizers are the greatest wealth creators instock market in the context of sectors and companies. The study also aims to understandthe determinants of the wealth creators in the stock market on the basis of empiricalanalysis.Review of Literature:In the US, the cross sectional relationship between stock returns and fundamentalvariables has been extensively studies .In general , a positive relationship has been foundbetween equity returns and earnings yield, cash flow yield and book to market ratio and anegative relationship has been found between equity returns and size. Especiallyvoluminous are the studies that document the size and the earnings yield effects andstudies 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) relatesthe cross sectional differences on Japanese stocks to the underlying behavior of fourvariables: earnings yield, book to market ratio and cash flow yield. The study suggeststhat of the four variables considered, the book to market ratio and cash flow yield havethe most significant impact on expected returns. Rosenberg et al (1984) studies therelationship 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 sourceof the database is CMIE prowess database. The period of study was 2003-2007. For thesectoral analysis, altogether 22 sectors were identified. The stock market capitalization ofeach sector on a five yearly average basis was collected. The cumulative five yearlyaverages were also calculated. The top ten sectors in terms of market capitalization wereidentified. 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. Thebasis for sector wise and company wise analysis was five yearly averages. The top fivecompanies among the largest ten sectors in terms of market capitalization, sales, cashflow and net profit was identified on the basis of five yearly average values. The lists ofsectors taken for the study are given in Appendix 1.

Model Analysis:This section deals with the empirical model analysis where the association of stockmarket variables with accounting performance variables is tested. This analysis is basedon top fifty companies in terms of market capitalization. For the study, top fiftycompanies in terms of average market capitalization during the period 2003-2007 areselected. Detailed list of companies is provided in Appendix 2.

Firstly the excess present value of the sample firms is found out. To find the excesspresent value, the difference between the market value and book value of assets on a fiveyearly average basis is found out. The market value of assets is the sum of marketcapitalization and the book value of debt of the company. The book value of the asset isthe 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 marketvariable of market capitalization with sales, cash flow, net profit, dividend, total assetsand 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 ofaccounting 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

Sectors

No. of

Companies

5 Yearly Avg.

(Rs in Crores)

Cumulative Avg.

(Rs in Crores)

Electricity &Non ConventionalEnergy 13 10132.66 131724.63

Minerals 98 4058.69 447306.5Construction & 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

0

100000

200000

300000

400000

500000

Ele

ctricity

&

Non

Conv

entional

Cons

truction

&Allied(59)

Ele

ctronics

(263)

Base

metals

(175)

Service(602)

Sector - No. of Companies in brackets

Rs.inCrores

020004000600080001000012000

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 ElectricalMachinery, transport equipment, service, diversified and electronic sectors were thegreatest wealth creators.The electricity and non conventional energy sector represented by 13 companies had anaverage market capitalization of Rs 10,132.66 crores. The mineral sector represented by98 companies had an average year market capitalization of Rs 4058.69 crores. Theconstruction and allied sectors had an average market capitalization of Rs 2675.57 croresduring the period 2003-2007. The non electrical machinery sector had an average marketcapitalization of Rs 1267.51 crores during the five year period of study. On a comparativebasis the market capitalization of the electricity and non conventional energy sector wasabout 2.49 times that of the average market capitalization of the mineral sector.The electronics sector represented by 263 companies had an average marketcapitalization 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. Thechemical sector represented by 577 companies had an average market capitalization of Rs363.66 crores. The textile sector consisting of 481 companies had a market capitalizationof Rs 273.57 crores. The transport equipment and base metals accounted for an averagemarket 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. Thecumulative average market capitalization of all the companies in the electricity and nonconventional 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

Sectors

No. of

Companies

5 Yearly Avg.

(Rs in Crores)

Cumulative Avg.

(Rs in Crores)

Minerals 123 4645.45 571390.08

Electricity & Non ConventionalEnergy 54 1422.09 76792.8

Transport Equipments 219 550.39 120537.22

Diversified 48 510.95 24525.44Base Metals 395 450.04 177766.41

Non Metallic 186 351.44 65367.21


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 thefive year period of 2003-2007. It was followed by sectors like Electricity and non

conventional energy, transport equipment, diversified, base metals, non metallic, nonelectrical machinery.Mineral sector had an average five yearly sales of Rs 4645.45 and cumulative sales of Rs571390.08. The electricity and non conventional energy sector represented by 54companies had an average sales of Rs 1422.09 crores and cumulative average sales of Rs76792.80. The average sales of mineral sector were 3.27 times than that of the electricityand non conventional energy sectors. At the same time it can be pointed that in terms ofmarket capitalization, the electricity and non conventional energy sector had 2.49 timescapitalization compared to the mineral sector during the same period.Transport equipment sector representing 219 companies had an average five yearly salesof 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 diversifiedsector had average sales of Rs 510.95 crores. The five year average sales of 395companies in the base metal sector were Rs 450.04 crores.This sector had averagecumulative sales of Rs 177766.41 crores during the five year period of 2003-2007. Thecumulative revenue in the service sector accounted for Rs 524843.55 crores.

Fig: 2

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Table: 3

Top ten sectors in terms cash flow:

TOP 10 SECTORS IN 5 YEARLY AVG. CASH FLOW

SectorsNo. of

Companies5 Yearly Avg.(Rs in Crores)

Cumulative Avg.(Rs in Crores)

Minerals 123 641.72 78931.41


Base Metals 395 155.42 36500.66


Diversified 48 58.29 2798.09

Non Metallic 186 57.96 10782.24


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. Mineralsector accounted for Rs 641.72 crores during the period 2003-2007. The electricity andnon conventional energy sector and base metal sectors had an average cash flow of Rs480.45 crores and Rs 155.42 crores respectively. These sectors had a cumulative averagecash flow of Rs 25944.92 crores and Rs 36500.66 crores respectively. Other than the topthree sectors, all other sectors had an average cash flow of less than Rs 100 crores. It isobserved 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 cashflow of Rs 75.85 crores and cumulative average sales of Rs 16610.41. The service sectorrepresented by the highest number of companies (2332) had an average cash flow of Rs28.83 crores.The diversified sector had average cash flow of Rs 58.29 crores. The five year averagecash flow of 395 companies in the base metal sector was Rs 155.42 crores. This sectorhad average cumulative cash flow of Rs 36500.66 crores during the five year period of2003-2007.Fig: 3

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0100000200000300000400000500000600000

Mine

rals

Electr

icity

&N.

.

Transp

ortE

qui...

Dive

rsifie

d

Base

Met

als

Non

Metal

lic

NonEle

ctrica

l...

Fats

andO

ilsFo

od

Chem

icals


Rs.inCrores

010002000300040005000


TOP 10 SECTORS IN 5 YEARLY AVG SALES


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020000400006000080000

100000

Minerals

Electricity&N..

BaseMetals

TransportEqu...

Diversified

NonMetallic

NonElectrica...

Electronics

Che

micals

Food


Rs.inCrore

0100200300400500600700


Table: 4

Top ten sectors in terms net profit:

TOP 10 SECTORS IN 5 YEARLY AVG. NET PROFIT

Sectors

No. of

Companies

5 Yearly Avg.

(Rs in Crores)

Cumulative Avg.

(Rs in Crores)

Minerals 123 317.31 39029.54


Base Metals 395 76.42 15963.63



Non Metallic 186 23.42 4355.5

Electronics 424 22.44 6516.29Diversified 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 largestprofit maximizers. Mineral sector made an average net profit of 317.31 crores during theperiod 2003-2007.The electricity and non conventional energy sector had an average net profit of Rs 208.08crores. 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. Inthe same period the base metal sector had a cumulative average profit of Rs 15963.63crores. Other than the top three sectors, all other sectors had an average profit of less thanRs 50 crores. It is observed that the chemical sector with 569 companies had an averagenet profit of only Rs 14.43 crores.Transport equipment sector representing 219 companies had an average five yearly profitof Rs 34.79 crores and cumulative average profit of Rs 7620.51. The service sectorrepresented by the highest number of companies (2332) had an average net profit of Rs11.63 crores.

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TOP 10 SECTORS IN 5 YEARLY AVG. CASH FLOW


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Fig :4

Top 10 Sectors in 5 Yearly Avg Mkt. Capitaliza

0

20000

4000060000

80000

100000

Mine

rals

Electricity&

N..

Base

Metals

Tran

sportE

q...

NonElec

trica...

NonMetallic

Electro

nics

Dive

rsifie

dFo

od

Chem

icals

Sector - No. of Companies in brack

Rs.inCrores

0100200300400500600700

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

1Electricity & NonConventional Energy Minerals Minerals Minerals

2 MineralsElectricity & NonConventional Energy

Electricity & NonConventional Energy

Electricity & NonConventional En

3 Construction & AlliedTransportEquipments Base Metals

TransportEquipments

4Non ElectricalMachinery Diversified

TransportEquipments Diversified

5 Electronics Base MetalsNon ElectricalMachinery Base Metals

6 Transport EquipmentNon Metallic MineralProducts

Non Metallic MineralProducts

Non MetallicMineral Products

7 Base metalsNon ElectricalMachinery Electronics

Non ElectricalMachinery

8Non Metallic MineralProducts 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 wealthcreator 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 largestwealth maximizer in terms of market capitalization was the biggest sector in terms ofsales, cash flow and net profit maximization. The construction and allied activities sectorwhich was the third largest stock market wealth maximizer did not figure in the top tenperformance maximizer list of sales, cash flow and net profit. The electronics sectorwhich figured in the fifth position in the market capitalization category found a place

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TOP 10 SECTORS IN 5 YEARLY AVG. NET PROFIT


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among the top ten only in the net profit ranking. Transport equipment, base metal sectorand non metallic mineral product sector was among the top ten in terms of marketcapitalization and all operating performance variables. The service sector thoughoccupies ninth position in terms of ranking in market capitalization have a rankingbeyond the tenth position in terms of sales , cash flow and net profit . The chemicalsector though having a tenth position in terms of sales, net profit and cash flow occupies12th position in terms of market capitalization.

Section: B

Company Wise AnalysisThis section highlights the company wise analysis among and across top sectors withrespect to stock wealth creation, sales, cash flow and profit maximization.The table below highlights the top company in terms of market capitalization, sales, cashflow 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 NonConventional Energy

N T P C Ltd. 94163.055

2 Minerals Oil & Natural Gas Corp. Ltd 134918.53

3 Construction & Alliedsectors

Unitech Ltd. 11445.584

4 Non ElectricalMachinery

Bharat Heavy Electricals Ltd 33689.25

5 Electronics Tata Consultancy Services Ltd 82194.366 Transport Equipment Tata Motors Ltd. 20514.062

7 Base Metals Steel Authority Of India Ltd 27236.792

8 Non Metallic MineralProducts

Grasim Industries Ltd 14236.898

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 theelectrical and non conventional energy sector. It was followed by Reliance Energy Ltdwith a five yearly average of Rs 10535.4 crores. The other top wealth maximizers in thesector were Neyveli Lignite Corpn Ltd, Tata Power Co Ltd and B F Utilities Ltd. In themineral sector, ONGC and Reliance Industries were the largest wealth maximizers withan average market capitalization of Rs 134918.53 crores and Rs 1, 16673.082 croresrespectively. 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 Rs1,16673.082 crores respectively. The other major wealth creators in the sector wereIndian Oil Corporation, National Mineral Development Corporation Ltd and BharatPetroleum Ltd. In the construction and allied sector, the largest wealth maximizers duringthe last five year period were Unitech Ltd, Jaiprakash Associates Ltd and Aban OffshoreLtd. In the non electric machinery sector the top wealth creators were Bharat HeavyElectricals Ltd with average market capitalization of Rs 33, 689.25 crores. Suzlon energyhad 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 anaverage market capitalization of Rs 68030.99 crores.In the transport sector, Tata Motors Ltd is the largest wealth creator with an averagemarket capitalization of Rs 20514.062 crores. The other major wealth creators are MarutiSuzuki India Ltd and Bajaj Auto Ltd with an average market capitalization of Rs16779.524 crores and Rs 16514.33 crores respectively.In the base metals sector, Steel Authority of India Ltd and Tata Steel Ltd were the largestwealth creators with an average market capitalization of Rs 27236.792 crores and Rs21170.31 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 wealthmaximizers in the non metallic mineral products sector. It was followed by AmbujaCements Ltd with a five year average market capitalization of Rs 10345.982 crores. Theother top wealth creators in the sector were ACC Ltd, Ultratech Cement Ltd and CenturyTextiles & Inds Ltd. In the service sector, Bharti Airtel was the maximum wealth creatorwith a five year average market capitalization of Rs 63280.666 crores. The othermaximum wealth creators G A I L (India) Ltd was the second largest wealth creator withan average market capitalization of Rs 18961.65 crores. H D F C Bank Ltd and I C I C IBank Ltd were the other wealth creators with an average market capitalization of and Rs20199.676 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 withan average of Rs 1721.424 crores. The other wealth creators in the sector are SintexIndustries 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


5 Base Metals Steel Authority Of India Ltd 30976.176 Non metallic mineral

productsGrasim Industries Ltd. 7202.258

7 Non Electricalmachinery

L& T Ltd 13029.34

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 anaverage sale of Rs 177013.40 crores. The second largest sales making company wasReliance Industries Ltd with an average sale of Rs 84035.52 crores. The other largestsales making companies are Bharat Petroleum Corporation Ltd, Hindustan PetroleumCorporation Ltd and O N G C.In the Electrical and Non Conventional Energy sector, N T P C Ltd was the largest salesmaking 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 croresrespectively.In the Transport equipment sector, Tata motors Ltd was the maximum sales creator withan average sale of Rs 20195.81 crores as compared to Maruti Suzuki India Ltd with anaverage of Rs 13305.48 crores. The other maximum sales making companies were HeroHonda Motors Ltd, Mahindra & Mahindra Ltd and Bajaj Auto Ltd.In the Diversified sector Aditya Birla Novo Ltd was the largest sales maker with anaverage sales of Rs 3656.886 crores. D C M Shriram Consolidated Ltd took the secondposition as the largest sales maker with average sales of Rs 1976.466 crores. The othersales making companies were Kesoram Industries Ltd, Godrej & Boyce Mfg. Co. Ltd andVoltas Ltd.

Steel Authority of India Ltd was the largest sales maker in the base metals sector with anaverage of Rs 30976.17 crores. Tata Steel Ltd and Hindalco Industries Ltd were the otherlargest sales makers with an average sale of Rs 15190.49 crores and Rs 11029.31 croresfor the period 2003-2007.Grasim Industries Ltd with an average sale of Rs 7202.258 crores was the maximumsales making company in Non metallic mineral products sector. ACC Ltd and AmbujaCements Ltd were the other maximum sales makers with an average sale of Rs 4783.10crores and Rs 4286.88 crores respectively. Ultratech Cements Ltd has the average sale ofRs 3758.78 crores.In the non electrical machinery sector L&T Ltd was the largest sales maker with anaverage 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 SuzlonEnergy Ltd, B E M L Ltd and Cummins India Ltd In fats and oils sector, the largest profitmaker in terms of sales was Ruchi Soya Inds Ltd with an average sale of Rs 5316.742crores. Adani Wilmar Ltd and Gujarat Ambuja Exports Ltd were the other sales makingcompany with an average sale of Rs 2103.17 crores and Rs 1102.568. Liberty Oil MillsLtd 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 Rs14116.47 crores. Nestle India Ltd and United Spirits Ltd were other largest sales makerswith an average of Rs 2638.208 crores and Rs 2129.885 crores respectively. BritanniaIndustries and Godfrey Phillips India Ltd were the other maximum sales makingcompanies in the food sector.

In the chemical sector, Hindustan Unilever Ltd was the largest sales maximizer with anaverage sale of Rs 12146.26 crores for the period of five years. It was followed by IndianFarmers Fertilizer Co-Op Ltd and Ranbaxy Laboratories Ltd with an average sale of Rs8124.516 crores and Rs 421.954 crores. National Fertilizers Ltd and Tata Chemicals Ltdwere the other maximum sales making companies.

Table: 8

Five yearly average cash flow: Top Companies in top 10 sectors

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1 Mineral Oil & Natural Gas Corpn. Ltd. 26789.4

2 Elec & Non convenergy

Hateshwari Om PowerEnterprises Pvt. Ltd

9607.34

3 Transport Equipment Tata Motors Ltd. 2360.516


5 Base Metals Steel Authority Of India Ltd. 7363.676

6 Non metallic mineralproducts

Grasim Industries Ltd. 1706.546

7 Non ElectricalMachinery

Bharat Heavy Electricals Ltd. 2314.658

8 Electronics Infosys Technologies Ltd. 2734.502

9 Food ITC Ltd 3339.438


In the mineral sector, O N G C was the largest cash flow maximizer with an average cashflow of Rs 26789.40 crores. The other largest cash flow maximizers are RelianceIndustries Ltd and Indian Oil Corporation Ltd with an average cash flow of Rs 14060.08crores and Rs 11222.02 crores respectively.In electrical and non conventional energy sector Hateshwari Om Power Enterprises PvtLtd was the maximum cash flow maximizer with an average of Rs 9607.34 crores. It wasfollowed by Jaiprakash Hydro Power Ltd and Ispat Energy Ltd with average cash flow ofRs 2720.308 crores and Rs 1844.196 crores respectively.Tata Motors Ltd was the largest cash flow maximizer with an average of Rs 2360.516crores. Other cash flow maximizers were Maruti Suzuki India Ltd, Bajaj Auto Ltd, HeroHonda Motors Ltd and Hindustan Aeronautics Ltd.In the diversified sector, Aditya Birla Nuvo Ltd was the largest cash flow maximizerswith a five year average cash flow of Rs 383.304 crores. Prakash Industries Ltd and D CM Shriram Consolidated Ltd were the other cash flow maximizers with average of Rs320.78 crores and Rs 219.726 crores respectively.Steel Authority of India Ltd was the largest cash flow maker with an average of Rs7363.676 crores for the period of five years. Tata Steel Ltd and Hindalco Industries Ltdwere the other cash flow maximizers with an average of Rs 5131.626 crores and Rs2552.912 crores.In the non metallic mineral products sector, Grasim Industries Ltd was the largest cashflow maker with an average of Rs 1706.546 crores. It was followed by Ambuja CementsLtd 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 averageof Rs 1686.502 crores. Suzlon Energy Ltd, Kirloskar Brothers Ltd and Cummins IndiaLtd were the other cash flow maximizers in the sector.In the electronics sector Infosys Technologies Ltd was the highest cash flow maker withan average of Rs 2734.502 crores. Wipro Ltd and Tata Consultancy Services Ltd were theother cash flow maximizers with an average of Rs 2127.786 crores and Rs 2052.868crores respectively.I T C Ltd was the largest cash flow maximizers with an average of Rs 3339.438 crores inthe Food sector. It was followed by Nestle India Ltd and Balrampur Chini Mills Ltd with

13


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an average of Rs 203.496 crores and Rs 222.43 crores respectively. Bajaj Hindustan Ltdand 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 withan average of Rs 2205.78 crores. Indian Farmers Fertilizer Co-Op Ltd, RanbaxyLaboratories Ltd, Tata Chemicals Ltd and Cipla Ltd were the other cash flow maximizersin the sector.

Table: 9

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


1 Mineral Oil & Natural Gas Corpn. Ltd. 12450.1

2 Elec & Nonconventional 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 mineralproducts Grasim Industries Ltd. 886.314

7 Non elec machinery Bharat Heavy Electricals Ltd. 1229.9848 Electronics Infosys Technologies Ltd. 2061.68

9 Food I T C Ltd. 2018.184


O N G C Ltd was the largest net profit maker with a five year average of Rs 12450.10crores. Reliance Industries Ltd and Indian Oil Corporation Ltd were the other profitmaximizers with an average of Rs 7565.27 crores and Rs 6084.32 crores respectively.Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd were theother profit maximizers in the sector.In the electrical and non conventional energy sector N T PC Ltd was the largest profitmaximizers with an average of Rs 5472.04 crores. Nuclear Power Corporation of IndiaLtd and Neyveli Lignite Corporation Ltd were the other profit maximizers in the sectorwith an average of Rs 1815.602 crores and Rs 954.556 crores respectivelyIn the transport equipment sector, Tata Motors Ltd was the largest profit maximizer withan average of Rs 1157.948 crores. Bajaj Auto Ltd and Maruti Suzuki India Ltd were theother maximum profit makers with an average of Rs 872.51 crores and Rs 858.64 croresrespectively. In the diversified sector Prakash Industries Ltd was the maximum profitmaker with an average of Rs 208.048 crores. Aditya Birla Nuvo Ltd with an average ofRs 152.446 crores was second largest profit maker. Johnson & Johnson Ltd, KesoramIndustries Ltd and D C M Shriram Consolidated Ltd were the other profit maximizers inthe 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 ZincLtd 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 maximizersin the sector. In the non metallic mineral products sector, Grasim Industries Ltd andAmbuja Cements Ltd were the largest profit maximizers with an average net profit of Rs886.314 crores and Rs 806.734 crores respectively. The other major profit maximizers inthe sector were A C C Ltd, Ultratech Cement Ltd and Century Textiles & Inds. Ltd.

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In the non electric machinery sector the top profit creators were Bharat Heavy ElectricalsLtd with average net profit of Rs 1229.984 crores. Larsen & Toubro Ltd and Suzlonenergy had an average net profit of Rs 872.706 crores and Rs 490.98 crores respectivelyIn the electronics sector Infosys Technologies Ltd was the highest profit maximizers withan average of Rs 2061.68 crores. Tata Consultancy Services Ltd and Wipro Ltd were theother profit maximizerswith an average of Rs 1664.354 crores and Rs 1617.106 croresrespectively. In the food sector I T C Ltd was the maximum profit maker with an averageof 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. BritanniaIndustries and Bajaj Hindustan Ltd were the other maximum profit making companies. Inthe chemical sector, Hindustan Unilever Ltd was the largest profit maximizer with anaverage profit of Rs 1617.594 crores for the period 2003-2007. It was followed byRanbaxy Laboratories Ltd and Cipla Ltd with an average profit of Rs 464.918 crores andRs 445.722 crores respectively. Dr. Reddy's Laboratories Ltd and GlaxoSmithKlinePharmaceuticals 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 marketcapitalization, sales, cash flow and net profit. The top 15 companies were selected across

sectors on the basis of five yearly average basis.

Fig: 5

Top 15 Companies in terms of Market

Capitalization

134,918.5

116,781.3

116,673.0

94,163.0

82,194.3

68,030.9

63,820.67

54,445.9

49,327.6

43,208.67

42,262.3

41,631.8

33,689.2

31,342.2

27,236.7

-20,000.0040,000.0060,000.0080,000.00

100,000.00120,000.00140,000.00160,000.00

Oil&

Natu

ralGasCorpn.

...

DLF

Ltd.

RelianceI

ndustriesL

t .

NTP

CLtd

.

Tata

ConsultancyServic

e...

InfosysTe

chnolog

iesLt

BhartiA

irtelLtd.

WiproLtd

.

Indian

OilC

orpn.Lt .

ITCLtd

.

ICIC

IBankL

td.

StateBa

nkOfIn

di

Bhara

tHea

vyEl

ectricals

Lt

Suzlo

nEne

rgyLtd.

SteelAu

thority

OfIn

diaLt

Company Name

5Ye

arlyAvg.(Rs.inCro

ONGC Ltd with a five yearly average market capitalization of Rs 134918.53 crores wasthe 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 interms of market capitalization. The average market capitalizations for these companieswere Rs 116781.35 crores and Rs 116673.08 crores respectively. The other top wealthcreators were NTPC, TCS and Infosys Ltd.

Fig 6

15


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Top 15 Companies in terms of Sales

177,013.41

84,035.52

72,815.87

71,890.42

45,006.44

40,049.06

32,513.07

30,976.17

24,648.14

21,300.86

20,195.81

18,883.56

16,608.41

15,190.49

14,869.22

-

20,000.0040,000.0060,000.0080,000.00

100,000.00120,000.00140,000.00160,000.00180,000.00200,000.00

Indian

OilC

orpn.

Ltd.

Relia

nceI

ndus

triesL

td.

Bhara

tPetr

oleum

Corp

n.Ltd

.

Hindu

stanP

etrole

umC

orpn.

Ltd.

Oil&

Natu

ralG

asC

orpn.

Ltd.

State

Bank

OfIn

dia

Bhara

tSan

char

Nigam

Ltd.

Steel

Autho

rityO

fIndia

Ltd.

NTP

CLt

d.

Mang

alore

Refin

ery&

Petro

...

Tata

Motor

sLtd.

Chen

naiP

etrole

umC

orpn.

Ltd.

ICIC

IBan

kLtd.

Tata

Steel

Ltd.

GAI

L(In

dia)L

td.

Company Name

5YearlyAvg.(Rs.inCrores)

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

Top 15 Companies in terms of Cash Flow

2

7,456.74

2

6,789.40

18,130.73

14,060.08

12,695.09

11,222.02

9,607.34

7,363.68

6,821.89

6,753.56

6,140.62

5,444.08

5,355.04

5,131.63

4,314.42

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.0030,000.00

State

Bank

OfIn

dia

Oil&

Natu

ralG

asC

orpn.

Ltd.

Bhara

tSan

char

Nigam

Ltd.

Relia

nceI

ndus

triesL

td.

ICIC

IBan

kLtd.

Indian

OilC

orpn.

Ltd.

NTP

CLt

d.

Steel

Autho

rityO

fIndia

Ltd.

Punja

bNati

onal

Bank

Cana

raBa

nk

Indus

trialD

evelo

pmen

tBan

kO...

Bank

OfB

aroda

Bank

OfIn

dia

Tata

Steel

Ltd.

Union

Bank

OfIn

dia

Company Name

5YearlyAvg.(Rs.inC

rores)

In terms of cash flow, State Bank of India was the king. The company on an averagemade profit before depreciation, interest and tax to an amount of Rs 27456.78 crores

16


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during the fiver year period 2003-2007. The other cash flow maximizers were ONGC,BSNL, Reliance and ICICI Ltd.Fig:8

Top 15 Companies in terms of Net Profit

12,450.1

7,565.2

6,635.9

6,084.3

5,4

72.0

4,007

.7

3,848

.0

2,792.2

2,099.7

2,061.6

2,031.8

2,018.1

1,815.6

1,794.1

1,664.3

-

2,000.00

4,000.00

6,000.008,000.00

10,000.00

12,000.00

14,000.00

Oil&Na

turalG

asCorpn.

RelianceIndustriesL

BharatSancharNigam

Indian

OilCo

rpn.L

NTPCLtd.

StateBa

nkOfIn

Stee

lAuthorityOfInd

ia

TataSteelLt.

ICICIB

ankL

t

InfosysT

echnolog

ies

GAIL(In

dia)Lt

ITCLtd.

Nucle

arPow

erCorpn.O

fIn

TataSon

sLt

.

TataCon

sultancySe

rvice

s

Company Name

5YearlyAvg.(Rs.inC

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

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

2 D L F Ltd. Reliance Industries Ltd. ONGC LtdReliance IndustriLtd.

3Reliance IndustriesLtd.

Bharat PetroleumCorpn. Ltd.

Bharat SancharNigam Ltd.

Bharat SancharNigam Ltd.

4 N T P C Ltd.Hindustan PetroleumCorpn. Ltd.

Reliance IndustriesLtd.

Indian Oil CorpnLtd.

5 TCS LtdOil & Natural GasCorpn. Ltd. I C I C I Bank Ltd. N T P C Ltd.

6Infosys TechnologiesLtd. State Bank Of India Indian Oil Corpn. Ltd. State Bank Of In

7 Bharti Airtel Ltd.Bharat Sanchar NigamLtd. N T P C Ltd.

Steel Authority OIndia Ltd.

8 Wipro Ltd.Steel Authority OfIndia Ltd.

Steel Authority OfIndia Ltd. Tata Steel Ltd.

9Indian Oil Corpn.Ltd. N T P C Ltd. Punjab National Bank I C I C I Bank Lt

10 I T C Ltd. MRPL Canara Bank Infosys

17


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Technologies Ltd

ONGC Ltd was the largest average wealth creator in terms of market capitalization andnet profit during the period 2003-2007. At the same time it was the second largest cashflow maximizer. Reliance Industries Ltd which was the third largest wealth creatoroccupied second position in terms of sales and net profit and occupied fourth position interms of cash flow. Infosys Ltd which was the sixth largest wealth creator in terms ofmarket cap occupied 10th position among the profit maximizers. Indian Oil Corporation

Ltd which occupied 9th position among the largest wealth creators had first position insales, sixth in terms of cash flow and fourth in terms of net profit. NTPC which figuresamong the top wealth creators also figure among the top ten in sales, cash flow and netprofit. ONGC, Reliance, NTPC and Indian Oil Corporation thus figures in the list of topten 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 wealthcreators couldnt 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

0

100000

200000

300000

400000

500000

600000

700000

800000

Oil&N

atural

GasC

orpn.L

td.

Relianc

eIndus

triesLtd

.

NTPC

Ltd.

Infosys

Techn

ologies

Ltd.

TataC

onsulta

ncySe

rvicesL

td.

Series1

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 ofcumulative market capitalization.

Fig 10 Top five companies Cumulative Sales

18

Five year cumulative market cap


19/36

company name 5 year cum (Rs in crores)

0100000200000300000400000500000600000700000800000900000

1000000

Indian Oil

Corpn. Ltd.

Reliance

Industries

Ltd.

Bharat

Petroleum

Corpn. Ltd.

Hindustan

Petroleum

Corpn. Ltd.

Oil & Natural

Gas Corpn.

Ltd.


In cumulative sales, Indian Oil Corporation and Reliance Industries occupied the topposition. The two companies cumulative sales were Rs 885067.07 crores and Rs420177.62 crores respectively.

Fig 11 Five Top companies Cumulative Cash flow


020000400006000080000

100000120000140000160000

State Bank

Of India

Oil & Natural

Gas Corpn.Ltd.

Bharat

SancharNigam Ltd.

Reliance

IndustriesLtd.

I C I C I Bank

Ltd.


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 interms of cumulative cash flow during the period 2003-2007.

Top five companies Cumulative Net Profit:

Fig 12

19

Five year cumulative sales

Five ear cumulative Cash Flow


20/36


0

10000

20000

30000

40000

50000

60000

70000

Oil & Natural

Gas Corpn.

Ltd.

Reliance

Industries

Ltd.

Indian Oil

Corpn. Ltd.

N T P C Ltd. Bharat

Sanchar

Nigam Ltd.


ONGC, RIL and IOC were the top profit maximizers on a cumulative basis during theperiod 2003-2007. ONGC made a cumulative net profit of Rs 62,250.50 crores during thefive 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 82140.826 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

Five ear cumulative Net Profit


21/36

Fig : Excess Value of Top 10 Companies in

terms of Market Capitalization (Rs. in Crores)

020000400006000080000

100000120000140000160000

Oil&Natural

GasCorpn.

Ltd.

Reliance

IndustriesLtd.

Tata

Consultancy

ServicesLtd.

BhartiAirtel

Ltd.

IndianOil

Corpn.Ltd.

0

500010000

15000

20000

25000

30000

MV OF ASSET PV OF ASSET BV OF ASSET

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

Table: 12

Association of Variables: Correlation Analysis

mc div cf sales tot asset

net

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

totasset 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.

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The correlation analysis reveals that the variables of net profit and profit beforedepreciation and tax are highly correlated with the variable of market capitalization. Thevalues of correlation coefficient being 0.72 and 0.69 respectively. The correlationcoefficient of 0.64 between market capitalization and dividend signify a positivecorrelation between the two variables. Thus it can be summarized that the variable ofmarket capitalization have a positive correlation with accounting variables of dividends ,net profit and profit before depreciation and tax. The correlation analysis also revealshigh 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 averagemarket capitalizations across all sectors were used. In model 1, the variable of marketcapitalization was regressed upon the independent variables of five yearly average ofdividends, total assets, profit before depreciation and taxes, cash flow (PBDIT), net profitand sales. The objective is to determine the percentage of variation in the dependentvariable on account of the independent variables.The model is given byModel 1:

MARCAP= + 1DIV+ 2TA+ 3PBDT+ 4CAF+ 5PAT+ 6SA2

Regression Result:Model

UnstandardizedCoefficients

StandardizedCoefficients 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

Model

Sum ofSquares df Mean Square F Sig.

1 Regression 28655387354.340

64775897892.39

011.147 .000(a)

Residual 18423055267.409

43 428443145.754

Total 47078442621.749

49

Model Summary:

2 DIV= Dividend, TA=Total Assets, PBDT= Profit before depreciation and tax, CAF= Cash flow measuredby profit before depreciation, interest and tax, PAT=Net profit after tax, SA= Sales. All values are theaverage for the five year period 2003-2007.

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Model R R SquareAdjusted R

SquareStd. Error of the

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, netprofit 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 thevariable of profit after tax is positively related to market capitalization and is statisticallysignificant at all levels. In other words higher the net profit of the company, greater willbe the market capitalization of the company. But the results suggest that the variables ofsales and profit before depreciation and tax are negatively related to marketcapitalization.

Model: 2

TOBIN Q = = + 1DIVTA+ 2PBDTA+ 3CFTA+ 4PATA+ 5SATA3Model2 Unstandardized Coefficients

StandardizedCoefficients 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

Model2

Sum ofSquares df Mean Square F Sig.

Regression .582 5 .116 417.464 .000(a)

Residual .012 44 .000

Total .595 49

Model Summary:

Model 2 R R SquareAdjusted R

SquareStd. Error of the

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 thesum 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 totalassets, PATA = Profit after tax divided by total assets, SATA= Sales divided by total assets. All variablevalues are average of five years -2003-2007.

23


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Model 2 results signify that the variable of profit before depreciation and tax is positivelyrelated to the market variable of Tobins q which is a measure of investmentopportunities. Greater the profitability, greater will be the investment opportunities for acompany. Higher the profitability, higher the value of the ratio of market value of assetsto book value of assets.Findings and Conclusion:

This study examines whether profit maximizers are the greatest wealth creators in thecontext 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 OilCorporation 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 highestaverage with Rs.10132.66 crores of 13 companies and with a cumulative averageof Rs. 131724.63 in terms of five yearly average market capitalizations.

On a comparative basis the market capitalization of the electricity and nonconventional energy sector was about 2.49 times that of the average marketcapitalization of the mineral sector.

Minerals sector stood first in terms of five yearly average sale, cash flow and netprofit.

The mineral sector accounted by 123 companies had the highest average salesduring the five year period of 2003-2007 and had an average five yearly sales ofRs 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 thelargest profit maximizes.

The electricity and non conventional energy sector which emerged as the topwealth 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 Indiancorporate sector.

DLF and Reliance Ltd were the next largest wealth creators in terms of marketcapitalization. The other top wealth creators were NTPC, TCS and Infosys Ltd.

Indian Oil Corporation was the market leader with respect to sales. The companyhad average sales of Rs 177013.414 crores during the period 2003-2007.

Reliance Industries Ltd, Hindustan Petroleum, Bharat Petroleum Ltd and ONGCLtd 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 ofRs 27456.78 crores during the fiver year period 2003-2007.

In terms of net profit ONGC, Reliance Ltd, BSNL, IOC, NTPC and SBI were thelargest 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 wealthcreator in terms of market capitalization and net profit during the period of2003-2007. At the same time it was the second largest cash flow maximizers.

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NTPC which figures among the top wealth creators also figure among the top tenin sales, cash flow and net profit.

Indian Oil Corporation Ltd which occupied 9th position among the largest wealthcreators had first position in sales, sixth in terms of cash flow and fourth in termsof net profit.

DLF Ltd, TCS Ltd and Bharti AirTel, WIPRO Ltd and ITC which were amongthe top ten wealth creators couldnt find a position among the top ten in sales,cash flow and net profit.

Reliance Industries Ltd which was the third largest wealth creator occupiedsecond position in terms of sales and net profit and occupied fourth position interms of cash flow.

In terms of cumulative market capitalization, ONGC and Reliance Industries werethe top wealth creators.

In cumulative sales, Indian Oil Corporation and Reliance Industries occupied thetop position. And ONGC, RIL and IOC were the top profit maximizers on acumulative basis during the period 2003-2007.

State Bank of India and ONGC were the top performers in terms of cumulativecash flow.

The correlation analysis reveals that the variables of net profit and profit beforedepreciation and tax are highly correlated with the variable of marketcapitalization. The values of correlation coefficient being 0.72 and 0.69respectively.

The correlation coefficient of 0.64 between market capitalization and dividendsignify a positive correlation between the two variables.

It can be summarized that the variable of market capitalization have a positivecorrelation with accounting variables of dividends , net profit and profit beforedepreciation and tax.

ONGC, DLF Ltd and Reliance Industries have the highest excess value. Thissignifies 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 explainedby the variation in the independent variables of dividends, sales, total assets, cashflow, net profit and profit before depreciation.

The model results show that the variable of profit after tax is positively related tomarket capitalization and is statistically significant at all levels.

The results suggest that the variables of sales and profit before depreciation andtax are negatively related to market capitalization.

Higher the net profit of the company, greater will be the market capitalization ofthe company.

Tobin q model results signify that the variable of profit before depreciation andtax is positively related to the market variable of Tobins q which is a measure ofinvestment opportunities.

Greater the profitability, greater will be the investment opportunities for acompany. Higher the profitability, higher the value of the ratio of market value ofassets to book value of assets.

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A Review of Key sectors and Companies:

The Indian minerals sector has been a star performer during the study period. Theimpressive growth rate in top line was on the back of strong realizations aided by firminternational product prices. The changing face of industrializing Indian economycoupled with rapid urbanization and higher living standards share the credit for thegrowing consumption of oil. According to the estimates by the Integrated Energy PolicyReport, 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 1,651million tones of oil equivalent (MTOE). This assumes an 8 per cent GDP growth ratethrough 2032.The oil and gas industry in recent years has been characterized by rising consumption ofoil products, declining crude production and low reserve accretion.From 1994 to 2006world crude oil demand grew an average of 1.76% per year. World demand for oil isprojected to increase 37% over 2006 levels by 2030 (118 million barrels per day, from86 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 morethan triple from 2005 levels by 2020, rising to 5 million barrels per day. The pivotalfactor 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 marketpricing mechanism. This under recovery has lead to sharing of losses subsidies- byupstream 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 thetransport sector. The Indian automobile sector after years of teetering growth,punctuated by periods of surge owe its recovery to sustained investment in infrastructureprojects 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 about13.5 lakh cars per annum, the industry's capacity was about double the 6.9 lakh passengervehicles produced in 2000-01.

The NCAER study on passenger cars and utility vehicles also projected the size of theindustry to more than double by the year 2011-12 from 2002-03 levels. From about 7.43lakh vehicles in 2002-03, the demand for cars and multi-utility vehicles is projected toreach 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 thesector. 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 activityboth by promoters as well as equity investors

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Cement industries in the non-metallic mineral products sector have undoubtedlyhogged the equity market during the study period. There are definitive factors like, nogreenfield or brown field addition in capacity bridging the gap between erstwhile excesscapacities and growth in demand has lead to price stabilization. With the governmentgoing in for 25 per cent concretization of roads, six-laning 6,500 km Golden quadrilateraland selected National highways, four-laning and widening of roads, constructing newrural roads, capacity addition of major ports, additional 70,000 MW generation of powercapacity, 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 boostdemand for cement. Also demand from housing boom is also growing phenomenally asinterest rates and cost of servicing housing loans have halved, and still continuing theirsouthward journey. This, coupled with tax breaks and stable real estate prices, hastriggered an unprecedented housing boom favoring the cement sector.

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

The Indian information technology sector continues to be one of the sunshine sectors ofthe Indian economy. With a growth figure of 30.7 percent in 2006-07, the sector has leftits global counterpart, which grew at 10 percent way behind. The Government expectsthe exports turnover to touch US$ 80 billion by 2011, growing at an annual rate of 30percent per annum. India has emerged as the fastest growing IT hub in the world, itsgrowth dominated by IT software and services such as Custom Application Developmentand Maintenance ( CADM), System Integration, IT Consulting, ApplicationManagement, Infrastructure Management Services, Software Testing, Service- orientedarchitecture 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, educationalsystem, cost, political environment, cultural compatibility, global & legal maturity, anddata & 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. Withinexports, IT services touched US$ 18 billion, a growth of 35.5 percent. The countrys ITexports 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, growingat an annual rate of 30 percent per annum.

The Electricity & Non- conventional energy sector has definitely had unprecedentedreforms working in favor of the sectors valuations.

With India scaling up its estimate of power requirement to between 800,000 MW and950, 00 MW by 2030 expected flurry of activities are becoming reality. The triggershave been both on regulatory as well as economic front. More than 112000 MW ofgeneration capacity addition is estimated by 2012 entail whopping Rs. 4.99 trillioninvestments. This quantum of investment thus calls forth public private partnerships inthe sector. A Central unified legislation called The Electricity Act is to govern the

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Indian electricity sector which has proposed significant policy decisions that couldreform the Indian power sector over the long term. Licensing norms for enteringgeneration and T&D business of power have been eased. Govt. approved scheme calledAccelerated Power Development and Reforms Programme (APDRP) in March 2003will expedite distribution sector reforms, ensuring efficient transmission and distribution.Under the Electricity Act, captive generators will be able to sell excess power toconsumers. The requirement of techno economic clearance of CEA for thermal powerplants 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 wereidentified for being developed in both public and private sector & would be extended theconcession of "Zero" customs duty on import of capital goods. Policy incentives likeassured return on equity up to 16 percent at 68.5 percent PLF for thermal power plantshave 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 projectswith an additional five years in which a deduction of 30 percent taxable profits isallowed. New concepts like Tariff based bidding, Multi Year Tariff (MYT), AvailabilityBased Tariff (ABT), and Return on Equity (RoE) based return definitely bode well forthe sector.

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

Star Companies

ONGC has been a safe bet for investors on the likelihood of stable crude oil prices whichare unlikely to ease significantly during the study period. High crude oil prices resultedin record profits for ONGC an oil exploration and production company.ONGCsoverseas 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&Pplayer in its own right and will start having a significant impact on the parents fortunes.The recovery improvement program and new fields have added to its growth prospectssignificantly in time.The recent dismantling of APM (administered price mechanism) has proved to be a boonfor the companies engaged in the upstream activities. The company can now negotiate atinternational crude prices unlike the prices set by the Government before April 2002. Ithas acquired management control of MRPL, which marks its entry into the refinerybusiness. All this augurs well for ONGC, with demand for petroleum products likely togive a fillip to the revenue side and stable supply of crude to its own refinery being theadvantage 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 tocontinue its strong performance on the back of high crude prices. Also, Reliance is notburdened with heavy marketing losses. The company is also undertaking continuousexpansion projects for its petrochemical business, which have added to the margins goingforward. 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

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remains a good bet because of the strong outlook for the refining industry. Reliance alsohas the most aggressive growth plans amongst the oil companies it is putting up a newrefinery and is building new capacity in the petrochemical business while the upstreambusiness is also expected to start in 2008-09. Because of phasing out of the multi-fibreagreement from January 2005, the demand for polyester should go up in the countrywhich means the capacity addition in polyester may also be well timed. Meanwhile,demand from user industries for polypropylene is expected to remain strong in themedium term and the company is leveraging this opportunity by expanding capacity. The

refining capacity addition also makes eminent sense, especially in the wake of favorabledemand-supply situation in the region. During the study period, refining margins havegained from strength to strength owing to the buoyant demand.

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

NTPC Limited

NTPC is certainly the sector leader with its installed generation capacity. On account ofthe reason that the plants are present across the country, it does not depend on any onecircle for selling its power. The generation capacity of NTPC is coal-based, the cost perunit 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 ofFY07 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 ofbackward integration, the company is diversifying into captive coal mining, so as tosecure future supplies of the black fuel. By way of forward integration, the company isforaying into power transmission and distribution. By way of lateral integration, NTPC isimparting 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 thehighly depreciated asset base of the company. Extending Courtesy to the Electricity Act2003 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 itproduces with various SEBs.DLF

DLF has been a pleasant avenue for laggards of equity market. The real estate sector hasalso 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 centerof the country where the real estate prices have appreciated by three to ten times in thespan of 1995-2005 decade. The existing land bank and the developable area have madethe company numero uno in the real estate sector. The laurel wreath has been thevaluation; which it was able to command for its latest initial public offer. In September2003 the company was valued at Rs 112 crore (Rs 1.12 billion). That is over the past 45months, DLF has seen an annualized appreciation of over 500 per cent going by thevaluation it is commanding for its IPO in 2007.

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

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 apossible 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 ataround Rs 274 per square feet which will enable it sit out the cycles and not indulge indistress 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 stateauthorities and reputation -- on all these DLF scores highly.

The company intends to focus on its core competence while partnering with leadingglobal 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 byenabling regulations, heightened competition resulting in across-the board lowering oftelecom tariffs, higher disposable income due to India's strong GDP growth rates andgreater 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 andtariffs leading to better affordability for lower-income rural users, expansion of coveragearea by mobile operators and government supportWith teledensity in India reaching from 5.1 in 2003 to 23.89 in 2007 the impact onvaluations of telecom player have been enormous. The mobile subscriber base hasincreased 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. Theteledensity in the country is very low. Besides new avenues like BPO business,broadband business, Value added services like M-Commerce, M-Marketing, offer venuesof 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 executiontrack record, market leadership position, rapidly growing other business segments likelong distance and enterprise, and embedded value in the form of its tower business,Bharti Infratel.

The company is taking initiatives to expand its suite of services and become 'fullyintegrated entertainment players' rather than remaining merely telephone companies. The

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company is making investments in businesses such as DTH and IPTV with a view to tapa 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 sincethe 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, hasimproved 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 banks net interest margin (excess of rate at which funds are lent over the rate ofborrowing) is considerably lower than that of many private banks. ICICI has valuableinvestments in securities broking, asset management and insurance. Investors are alsohoping 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 securitiesbroking, 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 of40% over FY2003-06 to Rs 1,146,163cr. Rural Banking continues to be the key focusarea 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 approvalfor opening up of new branches and received licenses for the same, which is the keypositive trigger for the bank. With the opening up of new branches the bank will facilitategrowth in to retail assets and access to low cost funds. Bank's retail focus is the keydriver for growth in fee income as retail banking contributes 58% of the banks total feeincome. The higher fee income growth model augurs well with the banks future growthstrategy and boosts investors confidence in the bank. Healthy growth in the fee incomehas helped the bank in reporting a sustained profitability, despite depressed margins.However going forward higher fee income contribution will facilitate sustained growth inthe bottom-line and insulate banks future earnings against lower treasury gains.

With Banks aggressive provisioning strategy and healthy recoveries, the bank reduced itsGross NPA's from Rs 5027cr in FY2003 to Rs 2222.6cr in FY2006 and Net NPA's camedown 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 sheetsize of around 400,000 crore and a branch network in the region of 9000 in 2005. All thisarticulates 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 presenceoverseas through its international subsidiaries. The Bank accounts for a huge 25% of totalbanking 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 itsassociate banks are SBI Life Insurance Ltd. which houses the Insurance business of thebank, SBI caps which is the investment banking arm and SBI Funds Managementresponsible for SBI Mutual fund. The Bank also has numerous international subsidiariesto carry its overseas business.

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

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Management experience is the biggest strength for TCS. And it is well indicated by therapid 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 anearly stage that MNCs are trying to replicate now. Favoring TCS, for mission criticaljobs, prospective international clients generally look at larger well-known companies thatcan provide end-to-end solutions and TCS is likely to be the key beneficiary of theincreased 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 aresoftware 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 isa huge potential for Indian software companies to garner larger long-term clients andgrow rapidly going forward. Also, TCS is less leveraged on the US unlike its domesticp

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