Asset utilization ratio i.e., total sales divided by total assets is one of the key metric to measure the efficacy of assets for any company. However, it seems Indian companies are losing the game. As per an article in Business Standard, the asset utilization ratio for BSE 200 companies (excluding financial sector) in FY13 stood at 1.52x. This was the lowest in last 8 years. This reflects the slowdown in the economy. The decline in the ratio is not just because of lower sales realizations. Slowdown in demand and hence low capacity utilization is a key culprit behind a poor show by these companies. The key industries such as cement, steel, capital goods and power etc are facing pressure at the operating margin level. Some of the companies are forced to cut prices to generate enough sales that can recover their fixed costs.
Does this mean that investors should turn away from such stocks? We don't think so. In fact, this could be a good time to invest in some of the cyclical stocks. The adverse times have made it clear which companies are strong enough to survive the challenging times. As economic cycle takes a turn for the better, these companies are likely to witness benefits of high operating leverage and economies of scale. Now that most of the companies have already completed their capital spending programmes, significant upside is likely at the earnings and cash flow level once economy recovers.
Does this mean that investors should turn away from such stocks? We don't think so. In fact, this could be a good time to invest in some of the cyclical stocks. The adverse times have made it clear which companies are strong enough to survive the challenging times. As economic cycle takes a turn for the better, these companies are likely to witness benefits of high operating leverage and economies of scale. Now that most of the companies have already completed their capital spending programmes, significant upside is likely at the earnings and cash flow level once economy recovers.
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