Bang for their buck: Behind corporate India's asset efficiency

Businesses are doing better two years after the pandemic began, but not everyone is sailing smoothly

Indian companies are wringing more business from existing assets than they were in the immediate aftermath of the Covid-19 pandemic.

A median company generated around Rs 94 in sales for every Rs 100 worth of assets in 2018-19. This dropped to Rs 86 in 2019-20, and then to Rs 79 in 2020-21.

Companies are showing signs of improvement for the first time since the pandemic began at the end of 2019-2020. They made Rs 91 worth of sales in 2021-22, as seen in chart 1.

This analysis considered 636 listed companies with comparable data across the years. The improvement over the last two years is still below numbers for 2014-15 before the impact of demonetisation in 2016. The analysis used the asset turnover ratio, which looks at sales as a proportion of average company assets during a year and is a measure of efficiency. The average asset turnover ratio varies depending on the business sector.

The latest numbers for key sectors were compared to 2018-19. The changes have not been uniform. Key sectors like steel, non-ferrous metals, pharmaceuticals and cement improved over 2018-19. They are better placed than before the pandemic. Automobile is one key sector that has not done well. Fast-moving consumer goods (FMCG) and retail sectors added assets, but sales haven’t yet risen to the same extent and this affected their numbers (<see chart 2>).

Companies have seen increased capacity utilisation in recent times, according to the Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS). Capacity utilisation is said to have reached 72.4 per cent in the three months ending December 2021. It is said to have increased to 74.5 per cent by March, according to a recent statement by RBI Governor Shaktikanta Das.

Investment is important for driving economic growth. Companies will invest in new capacity, such as by building factories, only if existing assets are not lying unused.

A recent note by rating agency Icra said state governments aren’t investing due to concerns over a lower borrowing limit and the end of a five-year period during which they were compensated for any shortfall in revenue after introducing the goods and services tax (GST).

“Developments on this front would need to be closely monitored given the need for robust government capex, to support and sustain the private capex cycle, which remains nascent at this juncture,” said the July 2022 Icra note.

Large companies have seen their asset turnover ratio improve between 2018 and 2019. Smaller ones have seen it worsen (<see chart 3>).

While overall asset turnover shows improvement, size and sector could determine who sets up new factories, and who holds back.