India Inc’s Best Capital Allocation Policies

Podcast Duration: 06:54
Angel Broking Podcast ke naye episode me aapka swagat hai!

Hum aksar news me sune hai - India Inc, which is shortened form of India Incorporated. India Inc phrase use kiya jaata hai for the formal sector of our country’s economy. Ye formal sector employment ke perspective se deha jaata hai. It can be both governmental or corporate.

Agar hum numbers ki baat karein, toh India Inc me desh ka 7% workforce employed hai - aur ye workforce nominal GDP yaani ki Gross Domestic Product me 60% tak ka contribution rakhta hai! In fact, Ministry of Corporate Affairs ne 2018 March ki figures batayi thi - unke according India Inc ki iss defition me 17,49,359 companies aati hai! Isn’t that mind-blowing just to imagine? In companies me se zyadatar companies Business services sector me hai - kareeb 3.56 lakh. Manufacturing sector me usse hodi kam hai - kareeb 2.33 lakh aur trading sector me 1.52 lakh ke kareeb.

Is podcast me hum dekhenge ke ki India Inc me included companies capital allocation kaise karti hain aur iske baare me janna zaruri kyun hai. Shuruaat karne ke liye lets first understand ke capital allocation hota kya hai. Kisi bhi company ka capital hota hai uske financial resources. Company kisi bhi tarah ke business ya trade me ho, it is necessary that woh apne financial resources ko achhe se use karein - in the most optimal way - jisse shareholders ki wealth maximise ki ja sake.

Capital allocation isi structure ko kaha jaata hai - that allows a company to ‘allocate’ its resources in such departments and in such expenses and revenue streams that ultimately they are able to create wealth for the shareholders.

Capital allocation ka concept important hota hai for investors because ek company apna capital kahan aur kaise laga rahi hai - this determines ke usko profit kitna hoga. This means ke company ko sahi departments me growth ke liye emphasise karna hoga so that they are able to generate profits. Company ka aim uski overall performance ko better karna hai. For the shareholder, this would automatically mean that they get a share from larger profits. Har company ki capital allocation strategy alag hoti hai. Infosys ka example lete hai. Recently, it tweaked its capital allocation policy. As a result, shareholders ko 85% returns mile as free cash flow. Pichli capital allocation strategy ke under shareholders ko returns ke taur pe 70% mil raha tha.

Sawaal ye uthta hai ke ek company ki capital allocation strategy ko assess kaise kiya jaaye? Investor ke point of view se ye company ka return on capital hai. So there are 2 ways to assess ke ek company ki capital allocation policy kitni steady aur sound hai.

The first way is by looking at the company’s average return on capital employed, or ROCE for short. As the name suggests, ROCE ek aisi ratio hai jisse ek company ki earnings ki quality pata chalti hai relative to the capital that has been invested in the company. Isse directly ye pata chalta hai ki company capital aur resources ko efficiently use kar rahi hai ya nahi? Because efficiency would mean that the company is able to generate sufficient revenue from its use of resources.

Capital allocation policy ko judge karne ka doosra tarika hai Durability. This means ke aap sirf high returns hi nahi dekh rahe, balki ye bhi dekh rahe hai ki wo returns kitni consistently aa rahe hain. Iss parameter se aap ye bhi samajh payenge ke market fluctuations ya aur external forces ki wajah se company ki performance pe kya asar padta hai. Agar company fluctuations aur external threats ke bawajood aapko achhe returns ke pa rahi hai toh its capital allocation strategy is said to be working. The longer a company is able to maintain a high ROCE average, the better it’s capital allocation policy.

Ab baat karte hain un India Inc companies ki jo best capital allocation policies lagu kar rahi hain. Hindustan Unilever ka naam to aapne suna hi hoga. Ye FMCG company bahut saare popular brands ke liye jaani jaati hai. jaise Axe, Cornetto, Lifebuoy, Knorr, Dove, Lux, pepsodent, Pond’s, Sunsilk, and many others Iska ROCE 92.3% annually hai aur durability score 80/100 hai. Ye company sirf achhe returns hi nahi de rahi, balki ye returns consistent bhi hain.

Next, have a look at Tata Consultancy Services Pvt Ltd. (TCS). Ye Indian multinational software aur IT ke field me bahut bada naam hai. Iska 5-year average ROCE 55 hai, which makes it a dependable performer. And this also indicates ke company ki capital allocation policy is bringing good results.

Another company to watch out for is Castrol India. Yakeen ke saath keh sakti hun ke aapne castrol ki ads dekhi hongi - no matter your age. Castrol India oil manufacturing aur distribution ke business me long-term player hai. Uska current ROCE 93.1 hai, and uska 5 saal ka average 120 pe aur bhi impressive hai! Its durability is 65/100 indicating high financial strength.

There are other FMCG players to watch out for. Colgate-Palmolive ad Procter & Gamble Hygiene. In fact, Colgate Palmolive toh BSE 100 ki list ke top annual ROCE ke liye listed bhi thi! Wahin doosri ore, Proceter and Gamble ka Profit:Equity ratio is the highest at 90.63!

Aap India Inc ko jitne kareeb se dekhenge, aap dekh sakenge ke kon-konsi capital allocation practices work karti hain. And then, as an investor, you can make a decision to invest in the best options!