Handsome rise in EPS yet companies failing expand capital base: Study

Corporates have shown a handsome increase in the earning per share (EPS) but the trend points to the inability of the companies to expand capital base and raise finances through the equity route, an ASSOCHAM study has found.

The EPS trends, measured by the ASSOCHAM study of about 130 companies point out an increase of about 70% earning per share for the quarter ended September 2012 as compared to the same quarter in the previous financial year.

However, the trends do not suggest towards celebrations because these also indicate towards inability of the corporates to raise capital required for their investment by expanding the equity base. ''In the middle of sluggish stock markets and risk aversion towards equity, the corporates found it unviable to issue fresh capital through equity''.

As a result, the capital base of a large majority of the companies remained more or less stable, which in turn resulted in the higher EPS,'' ASSOCHAM president Rajkumar Dhoot said, seeing the reason behind such increase in the earnings per share.

The companies which have shown an impressive improvement as per the chamber Study in the EPS include Indo Rama Synthetics (India), Gujarat Mineral Development Corporation, Shree Cement, Somany Ceramics, Mindtree, Mahindra Holidays and Resorts and Exide India Ltd.

However, there are some firms, including the country's largest private sector company Reliance Industries, which have shown drop in the EPS. The Earning per share of Reliance Industries has shown a decline from Rs 17.4 in the second quarter of FY 12 to Rs 16.60 in the comparable quarter of the current financial year.

''The overall trend indicates a sharp improvement in the EPS. This could be attributed to factors which have got to do with the slowdown in the economy,'' said the ASSOCHAM chief.

He said ordinarily a healthy rise in the EPS should have resulted into an improved Price to Earning (PE) multiples. However, this is not seen in the market because of sluggish movement of the stock market barring the last couple of months.

''Thus, the EPS numbers do not tell the real story, which is that of stagnant investment resulting into slowdown in the economic growth,'' added Dhoot. In fact, several companies, instead of increasing their capital base resorted to buy-back of the shares by utilizing their reserves to boost the bottomline for the investors. The companies resorting to such an option included several of the topnotch names, the ASSOCHAM study found.

''To the extent these buy-backs were aimed at, has achieved results in some cases. However, the buy-backs are not the solutions. India Inc would like to operate in a vibrant capital market where raising funds by way of equity should be an easy option. For that, the investor confidence has to be restored, which seems a long haul as far as the stock markets, particularly the retail investors, are concerned,'' the ASSOCHAM study pointed out.

It said in the wake of inability of the companies to tap the capital market, the only option left for them is to raise funds through loans, thanks to high interest rates are very expensive.

''The disturbing trend is that many corporates are not raising fresh loans for investment but to redeem old loans, which itself has become an arduous task,'' said Dhoot.