The contest for the top slot

For the past two decades India has been a fast-growing market. The returns on equity and capital employed of Sensex companies have always been among the best in global markets. However, the Sensex seems to have been losing its sheen over the last ten years. The Sensex yielded an RoE of 28 per cent in FY05. It has reduced to 14 per cent in FY15. Similarly, the return on investment was 29 per cent in FY05. It has come down to 16 per cent in FY15.

So, does it mean that investors in the India story have a reason to worry? Should they start looking for new avenues to get the maximum bang for their buck? Not really. The reason behind the falling returns is the presence of commodity and capital goods sector in the Sensex. These two sectors have a high weightage in the Sensex and therefore the fall in their earnings has impacted the Sensex returns. In the table below, you can see how the companies in these two sectors have witnessed a constant fall in the their profitability over the years. Since the companies performing suboptimally are ejected from the Sensex, the fall in Sensex returns could have been worse if there were no exits from it.

On the brighter side, despite the Sensex losing its steam, India still leads emerging economies in terms of return on equity. As per FY14 data, the Sensex gave an RoE of 16 per cent, which is way ahead of the returns on equity of the market indices in Indonesia, China, Taiwan, South Korea and Brazil.

For the Sensex to perform regain its lost ground, the companies constituting it will have to show improvements in their results. The positive sentiment which led to exceptional gains the last year can only be sustained if the Sensex companies do well. They will have to improve their RoE from here so that the Sensex retains its position of leadership in emerging countries.