India Inc's subsidiaries beat parents in sales, profit game

NEW DELHI: India Inc’s babies are outperforming their parents. An ET study of FY07 financial results for over 600 companies shows that net sales and profit after tax (PAT) on a consolidated basis have grown faster than the standalone results of their parent companies. Consolidated results include figures of subsidiaries. Better performance on a consolidated basis indicates subsidiaries have performed better than the parent firm.

Some of the big corporate names where this phenomenon is visible include State Bank of India, Sterlite Industries, Aditya Birla Nuvo, Crompton Greaves, L&T, Ranbaxy, DLF, Wockhardt, GMR Infra, Godrej Consumer, Grasim, Dr Reddy’s Laboratories, Jaiprakash Associates, Nicholas Piramal, HCL Tech, Punj Lloyd, TCS, Tata Motors, Crisil, Idea Cellular and Wipro.

The study, which analysed results of 610 companies for which standalone and consolidated data are available, shows that aggregate net sales on a consolidated basis grew 30.6% compared with 26.2% on a standalone basis. Profit after tax, on a consolidated basis, shot up 44.6% compared with 38.1% on a standalone basis for the parent company.

Total net sales for the sample companies stood at Rs 14,85,931 crore on a consolidated basis compared with Rs 12,78,394 crore on a standalone basis, as per the Capitaline database. The consolidated PAT was Rs 1,64,653 compared with Rs 1,42,235 crore on a standalone basis.

The data show that while the parent companies accounted for a major chunk (about 86%) of the total net sales and profits, the subsidiary companies grew at a faster clip. The fact that subsidiaries are performing better than their parents comes at a time when Indian companies are on an overseas acquisition binge.

Some of the companies that reported better performance on a standalone basis compared to the consolidated figures for both net sales and profit include Ambuja Cement, Kotak Mahindra Bank, Mahindra Gesco, Adlabs, Polaris Software, Zee Entertainment, Indian Hotels and iGate. Of the total sample, the subsidiaries of 314 companies zipped ahead their parents in net sales growth while it was just the opposite for 228 companies. The rest had equal sales growth on both consolidated and standalone basis.

There were 311 companies where the subsidiaries performed better than their parents in profit growth while 287 companies reported better bottom line growth on a standalone basis compared to their consolidated figures. This shows that more companies outperformed their subsidiaries in generating profits as against building revenues.

Three factors could be working behind this: the subsidiaries are newly formed and hence loss making, or they represent the loss-making operations of an acquired company, or there are cases where the subsidiaries are clearly underperforming.