The Journal of Institute of Public Enterprise
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The Journal of Institute of Public Enterprise Vol : 41 July – December, 2018 No : 3 & 4 Content Research Papers ★ Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India Niranjan Mandal & Arup Chattopadhyay............................................ 1 ★ Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance Ram Pratap Sinha .............................................................................. 25 ★ Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market R.P. Prakash & Prakash Basanna ..................................................... 46 ★ Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment Sunil Kumar Yadav ............................................................................ 63 ★ Managing Women Talent in Indian Central Public Sector Enterprises Priyanka Mishra & Shulagna Sarkar................................................ 74 Perspectives ★ Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective J.P.Dash & Devinder Kumar.............................................................. 92 ★ Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad Shreshtha Dabral & Samik Shome.................................................. 116 The Journal of Institute of Public Enterprise Advertisement Tariff Details Particulars Deliverables a) A two page write-up about the sponsoring 3.5 lakhs valid for organization in six issues of the journal 3 years (6 Issues) b) Multi-coloured advertisement in the inner cover page in six issues of the journal c) 20 copies of the journal for three years free of cost. 1.5 lakhs valid a) Advertisement (Back side cover page – for 1 year Multi-colour in two issues ) b) A two page write-up about the sponsoring organization in two issues of the journal c) 10 copies of the journal for one year free of cost Issue-wise Details 75,000/- Backside Cover page in Multi-colour 65,000/- Inner Cover page in Multi-colour Enquiries about corporate advertisements and appropriate art work should be sent to : The Editor, The Journal of Institute of Public Enterprise, Institute of Public Enterprise, Hyderabad – 500 007. The Journal of InstituteOperating of Public Leverage Enterprise, and Profitability July-December, : An Empirical Vol. 41, No. Study 3&4 of Select PublicISSN Sector : 0971-1864, Enterprises © in 2018.India Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India Niranjan Mandal* & Arup Chattopadhyay** In this research article, an attempt has been made to explore the ideas embedded in the concept of operating leverage and profitability of firm. An endeavour has also been made to analyse the impact of operating leverage on profitability of the sampled PSEs under different industries during the period 1999-2000 to 2009-2010 by using the relevant financial data available in the published Annual Reports of the firms concerned. In such an analysis the relationship between operating leverage and profitability has been tried to establish with the application of different statistical tools and techniques. After the analysis of data from different angles some important findings have been extracted, which are the essence of this study for deriving the managerial implications in the way of policy formulation of the management of different firms, which are ultimately helpful to the economic well being of the country as a whole. The entire study has been divided into four sections besides the introductory part. Section-I deals with the theoretical framework of the variables concerned and Section-II covers the Literature Review, Objectives and Methodology. The analyses and findings are presented in Section-III and Section-IV explores the conclusion of the study. Keywords : Operating Leverage, Profitabily, Bottom Line, Sales Elasticity, Return on Capital Employed, Sampled PSEs Regression Analysis, Correlation Analysis. Introduction leads to rapid economic growth and development. A large number of PSEs It is now widely recognized that in the in India have been incurring losses due developing countries the trap of low per to their inefficient utilization of exist- capita income can be removed by a bold ing productive capacity as well as the intervention of the government in problems behind modernization of public sector enterprises (PSEs). The PSEs * Dr.Niranjan Mandal, Principal, Burdwan are regarded as powerful instruments Raj College, Aftav House, Frazer Avenue, for attaining the goal of socio-economic Rajbati, Purba Bardhaman, West Bengal, development of a country. In a mixed Pin-713104. economy, like India, the efficient and ** Dr.Arup Chattopadhyay, Professor, Department of Economics, The University of Burdwan, effective implementation of socio- Rajbati, Purba Bardhaman, West Bengal, economic model of industrial policy Pin-713104. 1 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise their transformation module to cope decision). So, it can be said that up with the changes that has already operating leverage is independent of the been taken place in the technological capital structure of a firm. subsystem of the society. The judicious Meaning and Definition of Operating blending of fixed cost and variable cost in the cost structure of a firm through Leverage suitable substitution of capital for The business enterprises having huge labour (which have already been exces- quantum of investment in technology sively deployed) raising its fixed cost and (i.e. in fixed assets) are associated with simultaneously reducing the variable the large amount of fixed operating cost per unit ensures greater amount of costs, such as salaries, rent, depreciation, profit with higher quantum of business insurance, etc. in their cost structure risk in terms of enhancing degree of which leads to high operating leve-rage operating leverage at its disposal. for them. If the business firm sub- Obviously, operating leverage has a stitutes capital for labour thereby raising great impact on profitability of a firm. its fixed cost, it will simultaneously Section-1 reduce the variable cost per unit. The large amount of fixed cost coupled with Operating Leverage and Profita- the small proportion of variable cost bility : The Theoretical Framework to sales revenue ratio will have a great The concept of operating leverage is not impact on Earnings Before Interests and a new one. It was originally developed Taxes (EBIT) even there is a slight for the purpose of taking capital bud- change in sales revenue. It is argued that geting decision. The mutually exclusive “if a high percentage of firm’s total cost projects involving alternative methods is fixed, the firm is said to have a high of production may have different values degree of operating leverage (Brigham, of operating leverage which result in 1971 : 426). Obviously, the firms having different Break-Even-Points (BEPs) lower amount of fixed operating cost with different degrees of risk. Opera- at their disposal are observing lower ting leverage is highly dependent on the operating leverage. Therefore, if the use of technology of the firms under ratio of fixed cost to total cost is very an industry. Obviously, it is closely high and does not decline when demand associated with how the fund has been falls, this will accelerate the firm’s busi- invested (i.e. the investment decision ness risk. This factor is technically of the firm) but not related with how known as operating leverage. To this the fund has been raised (i.e. financing direction, it may be argued that the 2 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India firms will have some control over their percentage change in operating income operating leverage in the way of taking (EBIT) due to a given percentage change their capital budgeting decision. in units sold. It reveals how a given change in volume affects EBIT. Thus, Operating leverage may clearly be defi- it can be expressed as follows : ned as the firm’s state of being able to use fixed operating expenses to enlarge DOL = the effect of changes in sales revenue Percentage change in EBIT (i.e.π ) = on its EBIT. Other factors remaining Percentage change in units sold (i.e., q) unaltered, a high operating leverage sig- .....(1) nifies that a relatively slight change in ∆EBIT sales revenue brings about a big change ×100 ∆×EBIT q in EBIT and the Return on Equity (ROE). ⇒=DOL EBIT = ∆q ×∆ ×100 EBIT q Schuttz and Shultz (1972) in their text- q book argued that, “since a fixed expense ∆−×qp() v q qp()− v is being compared to an amount which ⇒=DOL = [(qp−− v ) f ] ×∆ q qp()−− v f is a function of a fluctuating base (sales), Profit-and-loss-results will not bear a .....(1a) proportionate relationship to that base. Where, DOL = Degree of Operating These results, in fact, will be subject to Leverage magnification, the degree of which depends on the relative size of fixed EBIT = Earnings Before Interest & costs vis-à-vis the potential range of sales Taxes volume. This entire subject is referred to as operating leverage.”. The higher f = Fixed operating cost during the the proportion of fixed cost to total period cost, the higher will be the operating p = Selling price per unit which is fixed leverage of the firm