The analysis done by the agency point out that the enterprises in the manufacturing sector were better able to prevent erosion of their return on equity (RoE) as compared to those in the service and trading sectors. R0E is profit after tax divided by tangible net worth.
This comes on the heels of a gloomy outlook towards the country’s industrial output. The RoE in the manufacturing sector improved from 16.96 per cent in 2009-10 to 17.86percent in 2010-11 and remained at 17.63 per cent in 2011-12. RoE in the services sector diminished from 18.77 per cent in 2009-10 to 15.30 per cent in 2011-12. In the trading sector, RoE showed some improvement by increasing to 22.88 per cent in 2010-11 from 21.18 per cent in 2009-10, but declined to 19.72 per cent in 2011-12.
CRISIL’s fortnightly report credits this trend of diminished returns to intensive competition in services and trading. This is because of a higher RoE and smaller asset bases as compared to the more capital-intensive manufacturing sector. Another reason for the decreasing trend may be the admittance of higher rate of depreciation on assets like computer hardware and software. These two power the service sector and the sharp depreciation is bound to affect RoE.