DESPITE ALL THE talk about new economy, it is the old economy which continues to rake in big bucks. The top three slots in terms of profits of ET500 companies are all occupied by oil & gas companies, with metal companies having put up a good show among the top 10. Critics may argue that the profits earned by companies in these sectors are largely volume-driven and that these sectors lag behind other sectors in terms of profit margins and return on capital employed (RoCE). But that always holds true for these sectors, given that they are highly capital-intensive and require huge recurring investments to keep their factories humming. Most of the industries are also energy guzzlers and their operational costs are fixed.

This hurts during a downturn as production costs can't be cut to match lower commodity prices; in periods of high commodity prices, however, they become cash machines. Every incremental increase in commodity price adds disproportionately to their profits. So, if steel prices increase from say Rs 20,000/tonne to Rs 22,000/tonne, while net sales rise by 10%, operating profits may rise by more than 50% as costs are fixed. This is also the case in cement, non-ferrous metals, oil & gas production, petrochemicals, paper and sugar sectors, among others. It also creates entry barriers for new-comers - it's not child's play to fork out Rs 10,000 crore to set up a new integrated steel plant. Hence, established players can reap the gains without bothering about competition. And that's what we witness in this edition of ET500.

The top three firms by net profit - ONGC, Reliance Industries (RIL) and IndianOil (IOC) - together account for 17% of the aggregate net profit of ET500 companies. While first two have benefited from high oil prices, IOC moved up to third place with profit growth of 52.58%, driven by an increase in sales volume and issuance of oil bonds by the government. There are two new entries in this list of top 10 companies by net profit - the Anil Agarwal-controlled Hindustan Zinc (HZL) and Sterlite Industries, both of which have outperformed Infosys Technologies and Gail. HZL's net profit nearly tripled, primarily due to the steep increase in zinc prices.

While old economy companies dominate the list in terms of net profit, new economy firms score in terms of net profit margin (NPM). However, NPM is not a great measure to compare companies in different industries with separate capital and cost structures. Though, we must concede that it's the most easily understood term.

The top 10 list in terms of NPM has undergone a dramatic change. Hinduja TMT has the highest return on sales, at 237%. Real estate companies such as DLF, HDIL and Unitech figure on this list as well. The primary reason behind their growth is an increase in real estate prices. HZL is the only company that features in the top 10 list, both in terms of net profit and NPM. In the past one year, HZL's net profit has tripled and is now equal to half its sales.

A much better way to compare companies across sectors is RoCE. Every business needs capital - land & building, plant & machinery and working capital - to generate revenues and profits. Greater the profit per unit of capital employed, better is the company. So, a company in a capital-intensive industry will need to earn more profit to earn the same RoCE, compared to asset-light sectors such as FMCG, IT, general manufacturing and other services.

Not surprisingly, real estate and FMCG companies generate the best RoCE in the business. FMCG companies, which no longer find favour with the market, have bagged the top three slots in terms of RoCE. Nestle leads the list with RoCE of 133.7%. This means the company earns a profit (before interest and taxes) of Rs 133.7 for every

Rs 100 invested by it in business. The banking sector has put up a strong show too, with Bank of Rajasthan, South Indian Bank and Allahabad Bank generating returns over 80%. HDIL and National Mineral Development Corporation are the only two companies which feature in the top 10 list of firms based on NPM and RoCE. On the whole, it's clear that being profitable does need not necessarily imply optimum utilisation of resources.

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