In Outlook Business’ third edition of The Outperformers, these are the companies that have managed to beat the market over a five-year period, creating significant value for their shareholders. 
Honeywell Automation
As an automation and software solutions company, Honeywell Automation (HAIL), over the years has employed its technological expertise in various industries, be it safety and surveillance products for aircrafts, parking management or fire prevention in the upcoming smart city projects. It has successfully managed to look beyond its home turf — the oil and gas industry. In 2017, it also ventured into the B2C sphere by launching an air purifier.
This adaptability is paying off well. Its revenue CAGR over FY14-19 was 13%, while its profit CAGR was 25.73% during the same period. The strong performance has rewarded its shareholders too. Over these five years, the stock return has been 49%.
With the automation sector witnessing growth from the increasing investments, HAIL is at an advantage since it is a leader in industrial automation and IoT. It also has a strong network, reaching over 20 cities directly and around 35 cities through distributors.
Analysts maintain ‘buy’ on the stock with a target price of Rs.27,450 valuing the stock at 45x its FY21E earnings. As of June 28, 2019, the stock closed at Rs.24,823.
Britannia Industries
Even as Britannia engages in an intense battle for expanding its market share in the biscuits segment, it is also eyeing transformation into a total foods company. To accomplish its mission, the firm has been adding more variants in biscuits, fixing product gaps in cake portfolio and making strong inroads in newer categories like dairy beverages, cream wafers and salty snacks. The company expects to take the contribution from product innovation to 7.5%-8% in FY20, which stood near 5% in FY19.
Besides diversification in the product mix, the company has also focused on expanding its geographical footprint. It directly reaches 2.10 million outlets as of March 2019 and has seen an increase in rural distribution channel to almost 18,100 shops (growing in double digits). In addition, the Hindi belt (UP, MP, Rajasthan and Gujarat) is highly underpenetrated and has huge potential to grow, according to analysts. At the same time, the company has focused on its cost savings program, which has further supported in reinvesting in its brands.
These efforts have paid off, with Britannia constantly gaining share from market leader Parle and also registering deeper penetration in newer categories. Net sales rose from Rs.78 billion in FY15 to Rs.110 billion in FY19, while PAT rose from Rs.6.88 billion to Rs.11.56 billion. In FY19 as well, despite a slowdown in consumption, Britannia delivered modest growth. Revenues and volume grew at 12% and 10% year-on-year due to new launches and distribution expansion. Ebitda remained flat owing to higher marketing expense and commissioning of new manufacturing lines at Ranjangaon. But analysts believe that the innovation, strong product pipeline and distribution expansion are creating strong building blocks for growth and Ebitda margin expansion. The stock is currently trading at rich valuations of 48x its FY21 earnings.
SRF
SRF’s decision to shift focus to chemicals and polymer in 2007 has augured well for the company that was a specialist in technical textiles business. Over the past five years, the company’s revenue CAGR has grown by 13.56% while its profit grew at a CAGR of 31.62%. The strong fundamentals have boosted the company’s stock price, growing at a remarkable CAGR of 47.31% over the same period.
This growth has been largely driven by the newer verticals, which provide higher volumes and better margins. Chemical business grew by a whopping 51% to Rs.24.46 billion in FY19 on the back of higher sales from chloromethanes, increased volume and realisation from refrigerants and resurgence of demand in the agrochemical industry. Meanwhile, the packaging business grew by 62% to Rs.17.57 billion, driven by increased capacities and better margins.
Analysts opine that SRF’s success can also be attributed to its focus on research and development. An Edelweiss report notes that the company has filed 145 patents so far for R&D and technology, of which, 19 have been granted. The company is also planning a capex of Rs.11 billion in FY20. This, coupled with strong innovation and product mix, is expected to result in sustained growth momentum for SRF over FY19-21. Analysts peg revenue and PAT to grow at 15% and 26% CAGR during this period. With a strong performance on the cards, the stock valuation of P/E of 14.5x — way below its five-year average — is a compelling bet.
KRBL
KRBL has been in existence for more than 120 years. It is the world’s largest rice miller and exporter, with its flagship brand ‘India Gate’, a market leader in several countries. It exports to 73 countries.
The basmati major’s stock gave a 47.26% return over the past five years. The company increased its topline from Rs.32.14 billion in FY15 to Rs.44.20 billion in FY19. In the same period, its bottomline jumped from Rs.2.8 billion to Rs.5.03 billion. Its debt-to-equity ratio improved from 0.80 to 0.52 in these five years.
Company’s continual investments in brand, scouting for new buyers and rising incomes in India have driven its growth. KRBL has spent around Rs.2 billion on marketing and brand building over the past decade, and today 90% of the company’s revenue comes from the branded rice. It has a 25% share in branded basmati rice exports and more than 30% share in the domestic branded market.
Historically, it was only in the 1970s that India became a rice surplus country and the company started restructuring itself to focus on the rice business. In 1992, KRBL spent Rs.2.5 million on installing a basmati-processing plant in Ghaziabad with a capacity of 45 metric tonnes (MT)/hour, exclusively for exports, hence moving up the value chain. KRBL then went public in 1993 raising Rs.600 million at Rs.25 a share.
In 1999, it started branding its rice as ‘India Gate’. The brand notched up sales worth Rs.120 million in its first year in the domestic market; in FY19, the brand has captured a 35% share in the domestic market.
With its cross-media marketing campaigns in FY19, the company claims to have achieved a 47% increase in retail penetration for India Gate Classic. The variety’s monthly billing increased by a whopping 125% through 6,000 outlets, and its sales increased by 70% in the secondary market.
The global demand for basmati rice had seen a downturn between FY14 and FY18, but it has picked up again in FY19. Basmati rice production too in 2017-18 recovered to 9.0 million metric tonnes (MMT) compared to 8.0 MMT in the previous year. This bodes well for KRBL. Analysts value the stock at 19x FY20E EPS.
Spicejet
While airlines have been facing a turbulent time over the past few years, there’s one high flier that seems to have weathered the storm. Making it to the Outperformers’ list, Spicejet’s stock has grown at a CAGR of 47% over the past five years. The company went back in black in its latest Q1 FY20 report, with profit of Rs. 2.62 billion. It has also seen robust growth in its revenue, from Rs. 63 billion in FY14 to Rs. 89 billion in FY19.
The airline has plans to increase its capacity by 80% in FY20 by adding over 50 aircraft to its fleet, according to the MD Ajay Singh. It currently has over 92 aircraft in its fleet. The company is eyeing an aggressive expansion plan across both its domestic and international network. With the shutdown of Jet Airways and promoter issues at Indigo, Spicejet is enjoying a strong market share. It has secured the position of country’s third-largest domestic carrier behind IndiGo and Air India, within 15 years since it was founded. During April, it carried over 140,000 passengers, registering a market share of 13.1%.
Whirlpool India
US-based consumer durable company, Whirlpool entered India in the 80s, focusing on only one product category — washing machines. It was not until the buyout of Kelvinator India in 1995 that Whirlpool thought of venturing into refrigerators — a product that brings them the most brand recall today in Indian households. As of December 2018, around 57% of its revenue comes from refrigerators. Washing machines account for 21% and air conditioners 9%.
But their sales have largely been in the mid-range refrigerators, with the high-end range contributing little to the revenue. Over the past few years, the company has attempted to change this by launching a number of SKUs across segments to compete with peers such as LG and Samsung. One of the innovations was to introduce capillary cooling technology, which could retain cooling for 12 hours. The company’s net sales then saw a steady growth from Rs.32.93 billion in FY15 to Rs.53.97 billion in FY19. The stock return was an impressive 46% CAGR over this period.
Analysts believe that Whirlpool will be focusing on improving revenue through exports, which was merely 3.4% of the FY18 revenue of Rs.48.32 billion.
Experts suggest that Whirlpool’s next phase of growth can come from air conditioners. With growing income levels and improving lifestyles, ACs are expected to sell the most, while refrigerators would continue to be a one-appliance-in-a-household product.
Analysts estimate Whirlpool’s Ebitda margin to rise 40 bps over FY19-FY21E to 12.3%, backed by strong focus on managing costs, disciplined capital allocation and focus on premiumisation of products.
V-GUARD Industries
From wires, inverters and IoT-enabled water geysers to fans, rice cookers and gas stoves, V-Guard Industries is one of the largest electrical appliances manufacturers in the country with a market cap of Rs.104.18 billion. With over 40,000-retailer network, the company is focusing on expanding its presence in its non-South markets.
The company has consistently beaten Nifty mid-cap 100 index returns over the past five years with stock return CAGR of a whopping 46%. Its net sales have also soared from Rs.15.17 billion in FY14 to Rs.25.94 billion in FY19, with sales CAGR of 11%. The company remains confident of maintaining growth as it remains on the lookout for inorganic opportunities and have a strong leverage in the form of a healthy balance sheet.
Currently trading at 38x FY21E, analysts remain slightly cautious, but believe its fundamentals will remain intact. HDFC Securities maintains ‘buy’, with target at Rs.250.
3M India
3M India began its journey in 1998 as Birla 3M, a joint venture between the US-based 3M Company and the Birla Group, selling a few products from 3M’s portfolio, including telecommunication connectors and special tapes for hospital. Today, the company sells over 10,000 products in India, which are used across healthcare, automotive, electronics and consumer segments.
3M’s strength lies in its innovation for everyday products in the local market. It has a range of floor cleaning and infection-prevention products, tamper-proof labels and stationery. The company’s total sales in India increased from Rs.17.42 billion in FY14 to Rs.30.16 billion in FY19. This high revenue trajectory of the company comes from the automotive, healthcare and infrastructure sectors.
The management believes that 3M’s products for road infrastructure — reflectors, markers and signages –- have immense potential as the length of roads being laid has increased from a rate of 8km a day in 2013 to 22km in 2017, and is expected to be at 41km this year. The newly-appointed MD Ramesh Ramadurai plans to align the company’s expansion in the upcoming years with the emerging opportunities out of ‘Make in India’ and ‘Smart Cities’. With a slim debt/equity(x) average of 0.01 and PAT of Rs.3,662 million from Rs.430 million over the past five years, the company’s projections for the next few years look promising.
Escorts
Over the past thirty years, Escorts Group has dipped its toe into several sectors including telecom and healthcare. That hurt the company’s strong balance sheet and escalated its debt woes. However, the changes made by Nikhil Nanda and his team to pull the tractor-maker out of the quagmire, have paid off. Riding on the wave of mechanisation of farms, Escorts has scripted a turnaround story by focusing on its core business of manufacturing tractors. This segment accounts for 76% of its revenue, and has seen strong growth over the past three years.
The company today sells around 64,000 tractors each year and holds around 12% market share. Between FY16 and FY19, Escorts managed to outpace the industry with 23% CAGR. The company ruled the fields due to its focus on providing efficient and high-quality Farmtrac and Powertrac tractors. The company also improved its distribution network and marketing strategy to connect with dealers and customers. At the same time, it continues to innovate. It has launched the Escort Corp Solution platform to tap into the market for small, medium and marginal farmers who can’t afford to make heavy investment in farm equipment. Escorts will provide services to them on a pay-per-acre or pay-per-hour basis. Apart from tractors, the company also manufactures equipment for railways and construction, which account for 24% of the overall revenue. The revenue from construction and railways also witnessed strong growth of 35% and 37% respectively, driven by strong order book in FY19.
However, the pace of growth is expected to falter in FY20 due to slowdown in tractor sales, below par monsoon and subdued farm gate prices (product price at the farm). The expectation of muted sales numbers is weighing on the stock, which is trading near its 52-week low at a PE of 13x FY21E.
