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.
City Union Bank
Being a niche player – geographically and in terms of customer base and product offerings – City Union Bank (CUB) has consistently registered strong growth. It has never reported a loss and regularly announced dividend in its 115 years. The growth story continues with its loan advances growing to Rs.282 billion from Rs.181 billion between FY15-19. Its current account to savings account (CASA) ratio has grown to 25.22% from 19.23% , and net interest margin (NIM) to 4.32% from 3.44%, in the same period.
The Tamil Nadu-headquartered bank largely lends to MSMEs and traders (51% of loan book) and has diversified by lending to agriculture, large industries and retail. Besides hedging its bet, the bank has also done right by ensuring higher collateralisation to lower credit risk. The small-ticket secured lending backed by adequate collateral has helped in restricting bad loans and improving NPA recoveries. Negligible or no exposure to stressed corporates such as IL&FS and low proportion of loans to NBFC sector (at 0.8% of credit) has led to good asset quality. Also recoveries from written off accounts almost doubled to Rs.380 million in Q4FY19 This is expected to improve NPA to 1.4% by FY21 from 1.6% in FY19.
Even while cleaning up its revenue stream, the bank is working to cut costs by increasing the share of non-branch channels in transaction to about 90%, up from 60% a few years ago.
Analysts expect the loan growth to accelerate to 18% over FY19-21E as CUB looks to capitalise on the space vacated by capital strapped PSBs and cash strapped NBFCs. NIM, meanwhile, is expected to slightly dip to 4.1% over FY19-21 owing to competitive pressure and changing industry dynamics. So far, their approach, though conservative, has paid off and the trend is likely to continue. As the bank is expected to clock high growth numbers in core parameters, the P/B of 2.3x looks sustainable.
DCM Shriram
DCM Shriram Ltd is a more-than-a-hundred-years-old, Delhi based, commodities conglomerate. The chemicals-to-sugar company fared impressively in a challenging environment in the past five years. Its topline rose from Rs 56.39 billion to Rs. 77.71 billion between FY15 and FY19. But the real deal has been company’s bottomline, which increased more than 4x from Rs. 2.05 billion in FY15 to Rs. 10.92 billion in FY19. The stock registered a decent 27% CAGR over the same period.
Being a commodities player, DCM Shriram’s management built most of its strategic initiatives around scale, cost control, and integration. It has also invested a massive Rs 16.2 billion in capex over the past three years to beef up capacity across verticals. Capacity addition of 563 + 332 TPD in Chlor Alkali, 60 TPD in Aluminium Chloride at Bharuch plant, and 168 TPD chlor alkali at Kota plant boosted its chemicals topline to Rs 25 billion. The company is planning another Rs 16 billion investment in the next 18 months.
DCM has has also invested in developing additional revenue streams, mainly by adopting both forward and backward integration. Meanwhile, its cost cutting efforts are also bearing fruit. It reduced power consumption in its alkali plant from 2,650 units per tonne to 2,000 units per tonne over five years.
Being disciplined towards its balance sheet provides a positive cushion to this commodities major, but the still troubled sugar sector and cyclical nature of chemicals demand, pose a risk.
Asahi India Glass
According to the Society of Indian Automobile Manufacturers (SIAM), India’s automotive industry produced 4.026 million passenger vehicles in FY 2018-19. A hefty 77% of all automotive glass used in this segment came from Asahi India Glass. It started out by producing toughened glass for Maruti Suzuki. However, it now also caters to brands such as Toyota, Hyundai, Honda, Tata Motors, Volkswagen, Volvo, and Ashok Leyland.
Between FY15-19, Asahi India’s stock has shown strong growth at a CAGR of 35.20%, and as of March 2019, commands a market capitalisation of Rs.63.59 billion. The company posted consolidated revenue of Rs.29.32 billion in FY19, against Rs.27.03 billion in the previous fiscal.
Asahi India’s core competence — the auto sector— is wading troubled waters, the company remains positive in its outlook. For instance, the brand is counting on the Automotive Mission Plan 2026, wherein the government and Indian automotive players aim to triple industry revenue to $300 billion and boost exports seven-fold to $80 billion. Another growth driver is the emergence of electric vehicles. As a result of these factors, the brand expects robust growth from the automotive and allied industries, including the glass industry.
Further, the real-estate segment is coming to terms with the implementation of the RERA Act and GST. As per the company, this resulted in residential demand and supply picking up in 2018. The government also aims to promote affordable housing via measures such as interest subsidy, tax rebates, and ease in FDI in the real estate and construction sector. Glass is a crucial component in construction and real estate, and the projected growth in this sector only works in favour of the company.
Finolex Cables
After learning the importance of diversification the hard way in the 1990s, Finolex Cables, today, is India's leading manufacturer of electrical and telecommunication cables with over Rs.30 billion topline. Besides a wide variety of Wires & Cables, the company also manufactures lighting products, electrical accessories, switchgear, fans and water heaters. It has manufacturing facilities in Pune, Goa and Uttarakhand.
The domestic wires and cables market is estimated to be worth Rs.240 billion with top 10 players making up 55% of the market. Both Finolex and Havells have a market share of 9% next to the overall industry leader Polycab (market share of 17%).
The cables player had a good run on the bourses in the past five years with a CAGR of 34.4%. It’s topline jumped from Rs.24.78 billion to Rs.32.72 billion between FY14 and FY19 and net profit increased 1.5x from Rs.1.98 billion to Rs.3.44 billion.
The growth story of Finolex cables is one of - continued capacity expansion, market share gain, excellent working capital management with a cash-n-carry revenue model in a highly commoditised business. That has also helped Finolex turn cash-rich from being debt-ridden over the last decade.
Managing costs is crucial in this price-sensitive industry, which has over 200 small and medium-sized producers ready to sell 10-20% cheaper. But with a lot of spending on marketing and launches in the consumer appliances category, the organised players have been able to consolidate their position owing to a shift in the consumer’s preference towards branded products.
Analysts do see a few risk factors in the near future. A slower order finalisation in communication-cable business along with a delay in scaling up the consumer durables business would continue to limit revenue growth during FY20-FY21.
KEC International
A major player in transmission and distribution EPC (engineering procurement construction) in the country, KEC International has also made its mark across 68 other countries.
While T&D continues to be a major contributor, KEC has diversified into new businesses such as railways, cables, solar, civil, smart infra and others. This has helped the company deliver robust revenue growth, from Rs.68 billion in FY15 to Rs.101 billion in FY19. Its profit also jumped from Rs.1.1 billion to nearly Rs.5 billion over the same period. The strong performance has reflected in its stock price, with a return CAGR of 34.27% over the past five years.
Government’s spending push in power T&D and railways and large order wins across geographies have also aided KEC’s growth. The company remains well positioned to capitalise on increased domestic spending in these sectors. Stabilisation of new verticals and completion of loss-making legacy orders have boosted its margin growth.
The stock currently trades at 14x FY20E EPS of Rs.22.56 and 11.6x FY21E EPS of Rs.27.25.
Titan
Three decades since inception, the collaboration between the Tamil Nadu Government and the Tatas has come a long way from being a watch company. Titan’s forays into jewellery with Tanishq, eyewear with Eye+, fragrances with Skinn and sarees with Taneira have proved immensely fruitful, even to the extent that jewellery is now the brand’s bread and butter.
The company’s diversification strategy is simple: scout for unorganised markets with few big brands, and capitalise. It helped that the brand was a Tata product; trust was easy to build. However, Motilal Oswal Securities believes that the scale and ambition of Titan’s planning followed by brilliant execution are what set Titan apart.
Customers and stake-holders appreciate how the brand’s revenue grew at a CAGR of 33.89% over the past five years while competition grappled with GST and demonetisation. Furthermore, Titan’s strategy to focus on exchange gold for up to 40% of its supply of the yellow metal has reduced its dependence on imported gold.
Analysts from Reliance and Prabhudas Lilladhar concur that the brand’s newer verticals such as eyewear, fragrance and sarees will grow. However, Tanishq will remain the topline driver for Titan; the brand’s focus on higher-carat, studded jewellery is likely to give good dividends.
But, challenges lie ahead. Analysts predict that if local players up their game to adapt to the new gold hallmarking regulations, Titan may lose market share. The general slowdown in the global economy may also throw a spanner in the works for the company. As a result, near-term upside in stock prices is limited. However, in the long run, one can’t go wrong by investing in Titan.
Biocon
An early entrant in the biosimilar segment, Biocon is one of the largest fully-integrated, innovation-led biopharmaceutical companies in the country today. With a rich pipeline of differentiated molecules as well as novel biologics, the company has a presence across 120 countries. Analysts believe that Biocon is well poised to reap the benefits of first wave of Biosimilar commercialisation.
The growth in biologics business is complemented by robust performance in its research services subsidiary – Syngene – which offers R&D programmes ranging from lead generation to clinical supplies to leading global firms such as Bristol-Myers Squibb, Zoetis, GSK and Abbott. Meanwhile, the small molecule business, which comprises APIs has also maintained steady growth. Its sales have grown at a steady CAGR of 14% over the past five years, and the robust financials are aptly reflected in its stock performance, that has seen 34% CAGR since FY14.
Biocon benefits not just from a diverse portfolio, but also a steady pipeline of launches. It also invests heavily in R&D, as well as expanding capacities.
Analysts expect margin expansion going forward, especially with increase in contribution from the biologics business, aided by the launch of Pegfilgrastim (chemotherapy drug) in the US and other launches in emerging markets. Biologics and research verticals are expected to grow at revenue CAGR of 50% and 22% respectively. The stock, which has delivered consistent returns to shareholders, currently trades at a valuation of 31x for FY21.
Havells
Incorporated in 1983, Havells India is one of the largest electrical equipment companies in the country, present in 45 cities. With its 13 plants, it manufactures more than 90% of its products in-house.
Today, Havells is hot on the trail of innovation and has come up with products such as IOT-enabled connected devices, IPS (Indoor positioning system), OLED and Li-Fi. It has also focused on increasing its green footprint and around 6% of the energy used by the company comes from renewable sources.
The company’s call on taking new roads seems to have paid off. Its net sales and profit grew to Rs.100 billion and Rs.8 billion in FY19, from Rs.71 billion and Rs.4.4 billion in FY14, with a CAGR of 7% and 12% respectively. Its robust financials have been reflected in its market performance with a five-year CAGR of 33%.
Last fiscal was difficult with delay in price hikes and product releases, which led to declining margin. According to the company’s annual report, huge investments in power and infrastructure sector especially in rural electrification and low-costing housing, and implementation of GST have helped their cable business grow in revenue and margin. Analysts opine that recovery in liquidity as well as having a stable government at the Centre will help Havells.
The stock is trading at a P/E of 35.5x for FY21E, as per an HDFC Securities report. According to the same report, net revenue for FY21E is Rs.135.73 billion. It is likely to retain a premium valuation, given the company’s strong brand recall, expanding retail touch points and a strong balance sheet. In the near future, the company aims to expand reach in Tier-II and Tier-III cities and rural market to reach 1,00,000+ active retailers.
HPCL
Despite volatile crude prices and rupee depreciation, net sales for state-run Hindustan Petroleum (HPCL) during FY19 amounted to Rs.2,959 billion. HPCL achieved Ebitda of Rs.130.77 billion in FY19 as compared to Rs.125.22 billion a year before. In these difficult times, the company’s growth is attributed to increased throughput at refinery, higher sales volume and better operational efficiency.
HPCL refineries at Mumbai and Visakhapatnam during FY19 pumped out the highest-ever combined refining throughput of 18.44 million metric tonnes (MMT) with capacity utilisation of 117%; a year ago it was 18.28 MMT, and recorded the highest ever combined GRM of $7.40/bbl. HPCL achieved production targets of LPG (896 thousand metric tonnes), bitumen (1,267 TMT) and lube oil base stock (474 TMT). The company continues to be India’s largest lube marketer for the sixth consecutive year.
HPCL’s strategic strides have enabled it to retain its spot as India’s second largest LPG marketer. Last year, HPCL set up a fully owned subsidiary at Dubai Airport for marketing of lubricants and other petroleum products in the Middle East and Africa. HPCL trades at 7.24 P/Ex FY21E.
Jubilant Life Sciences
A well-diversified pharma and life science ingredients company, Jubilant Life Sciences serves customers across 100 countries. The Rs.80 billion company in market cap has identified its niche areas, and that’s where its strength lies.
Riding on its presence in generics and specialty pharma, besides contract manufacturing of sterile injections and API, Jubilant reports higher than pharma industry’s average Ebitda margin. On the other hand, the Life Sciences division brings in lower margin due to its commodity nature in segments such as specialty ingredients, nutrition products and life science chemicals. Both segments contribute 55% and 45% to the turnover and fluctuations in one are offset by strong growth in another. The company has also built an asset base closer to clients in North America — biggest revenue contributor — and invests about 5% of its revenue on R&D.
By selectively looking for opportunities and markets, the company has maintained healthy growth over the years. With a five-year CAGR of 33%, its net sales has risen to Rs.89.97 billion in FY19 from Rs.58 billion in FY14. Over the same period, it became a profitable entity from a loss-making one with PAT at Rs.5.7 billion in FY19.
Analysts expect Jubilant’s specialty pharma segment to maintain growth momentum at 20% CAGR in FY18-21. Growth in Life Sciences, which hinges upon global commodity cycle, is seen at 9% CAGR in FY18-21. Warning letter to its Roorkee facility and official action Indicated (OAI) status to Nanjangud API facility are expected to be stumbling blocks in Jubilant’s journey. But analysts remain bullish, especially at the current valuation of 7.8x for FY21.
