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.
Natco Pharma
With Indian pharma companies facing pricing pressure in the US market, Natco Pharma has turned to other geographies. The company is now making deeper inroads into the domestic market and has strengthened its presence in Brazil and Canada. In 2017, Natco Pharma forayed into chronic therapeutic areas such as cardiology and diabetology in India. These segments are expected to scale up in the next two to three years.
While it looks to de-risk the business and reduces dependence on the US market, Natco Pharma’s performance over the past five years throws light on a well-crafted strategy, which made it an outperformer. The company’s PAT and revenue have growth at a CAGR of 44% and 23% respectively, between FY14 and FY19.
The company’s stellar performance has been due to strong growth in the domestic Hepatitis C (liver infection) franchise and robust sales of gDoxil (used for the treatment of breast and advanced ovarian cancer), gTamiflu (for influenza) and gCopaxone (for multiple sclerosis).
Similar to its strategy in the US market, Natco Pharma has adopted a niche expansion model in India. It chose to increase its presence in specific areas (such as with gCopaxone), rather than chasing all products in the generic drugs space, because the competition is less.
Today, it’s a market leader with a 20% share in the oncology segment, and there is further room for growth. India’s under-penetrated oncology segment provides a massive opportunity for a market leader like Natco Pharma to solidify its presence. With a strong balance sheet, firm roots in its domestic business and an increasing presence in other geographies, Natco Pharma offer a good risk-reward ratio for investors with the stock trading at a P/E of 13x for FY21.
Grindwell Norton
Saint-Gobain, the construction material maker, has two parts to its operations in India: Saint-Gobain India and Grindwell Norton (GNO). The former takes care of manufacturing glass, ceramics, concrete, electricals and electronics and the latter manufactures grinding wheels, abrasives, high-performance plastics, and silicon carbide.
Grindwell Norton bagged the title of India’s top abrasives company in 2015. That was also the year the company’s stock began its steady rally, seeing 33.05% CAGR till FY19. The company has also been reporting good revenue growth, from Rs.9.65 billion in FY14 to Rs.16 billion in FY19. Its operating revenue stood at Rs.2.54 billion in FY19.
While optimistic for the long haul, the company remains skeptical about its short-term growth prospects. It claims to have witnessed a decline in growth in recent months on account of weak demand for investment, softening consumer demand, stressed bank balance sheets and rising input costs. On the upside, there are hopes that the government will attempt to revive growth. That said, Grindwell Norton estimates FY20 to be similar to the previous fiscal — stable with moderate growth.
ICICI Direct expects all three segments of the company — abrasives, ceramics and ‘new initiatives’ to continue consistent performances. The report calls Grindwell Norton a quality play on the back of robust cash balance and debt-free status, and values the stock at 35x FY21E earnings.
Chambal Fertilisers
One of the largest private sector fertiliser producers in India, Chambal Fertilisers is a major urea producer, a product subsidised by the state for farmers. Dependent on commodity cycles, the company saw weak revenue in FY16 and FY17. But, it made a comeback in the subsequent years on the back of healthy operating performance with robust production and energy efficiency levels. It also added capacity while exiting from non-core businesses, for example, shipping.
In FY19, Chambal crossed the Rs.100 billion mark in revenue and profit more than doubled from Rs.3 billion in FY14 to Rs.5.8 billion in FY19. The stock market has responded positively to this performance with 32% CAGR in the past five years. Profitability saw a peak in FY19 as the company also increased its greenfield and brownfield capacity during the past five years.
Analysts expect the company to generate a healthy free cash flow in FY20 at Rs.9 billion due to its latest commissioned capacity — Gadepan-III. Healthy free cash flow generation is likely to help Chambal pare down its debt. The company is targeting Rs.4.20 billion debt reduction for FY20E and FY21E. This, coupled with faster recognition in subsidy receivables is expected to fasten debt reduction.
But analysts remain slightly cautious due to certain risks. The company imports a substantial portion of its urea requirement from China, and there has been a drop in supply due to closure of factories owing to stricter environmental laws in the country. Meanwhile, rising gas prices and a depreciating rupee can strain margin in the urea segment. Analysts value Chambal at 9.5x FY21 EPS.
Abbott India
While there are over 40 multinational companies in the Indian Pharma Market (IPM), it is only Abbott that has been able to register double-digit growth over a four-year period. Other Indian MNCs such as Pfizer, GSK and Sanofi are often constrained to launch only the parent’s products in India, but Abbott provides freedom to the Indian entity to launch innovative and niche generic products. As a result, it has launched 66 products over the last five years, with highest concentration in gastro and nutra therapies. Five brands launched since FY15 have reached Rs.50 million in revenue already.
Over FY15-19, its sales rose to Rs.36.79 billion from Rs.2,2.37 billion and profits to Rs.4.48 billion from Rs.2.28 billion.
Besides launches by the Indian arm, Abbott also benefits from the strong pharma pipeline of the parent company. The key therapy areas for Abbott include hormones (with 14.6% market share in that segment), anti-diabetic (11.3%), gastro (6.6%), gynaecology (6.1%), neuro/CNS (5.2%) and nutra (1.5%). In addition, Abbott sees a strong growth opportunity in the vaccines segment and plans to launch a few products over the next two years. It manufactures key products at its manufacturing facility in Goa which operates at 98% utilisation, signaling high level of efficiency.
What also helps the firm are its strategic partnerships and timely tapping of newer markets. For instance, it has struck a distribution deal with Novo Nordisk for its insulin portfolio, which records sales of Rs.1.40 billion. Similarly, after seeing strong growth opportunity in the vaccines segment, it has entered into a licensing agreement with Hyderabad-based Bharat Biotech to market four vaccines in the immunology segment. Its robust distribution network comprises 40 third-party manufacturers, 25 carry-and-forwarding service providers, 3,000 stockists, 175,000 retailers and 2,500 medical representatives. This coupled with an allocated marketing expense of Rs.900 million annually have created a strong brand recall.
Despite a high base, Abbott’s revenue steadily grew by 11.23% to Rs.36.78 billion in FY19 while PAT expanded by 12.24% to Rs.4.50 billion. Analysts expect 13% revenue CAGR over FY19-21E from scaling up in existing products and new launches. Margins are expected to expand by 60bps over FY19-21E. The stock is currently trading at a 13% discount to MNC peers, at 25x FY21 despite a consistent performance and strong future prospects.
Pidilite Industries
Finding a need gap, innovating and then backing it with a generous dose of marketing to turn the product into a strong brand – like Fevicol, Fevicryl and Dr Fixit. This simple modus operandi of Pidilite has shown phenomenal results for the company and its investors. The company today has a presence in a wide range of categories including paint chemicals, automotive chemicals, art materials and stationery, fabric care, maintenance chemicals, industrial adhesives. These are sold in 80 countries across the world.
The family-owned, professionally-run company is known as much for its products as it is for its strong corporate governance and focus on delivering consistent returns. Also, the secret sauce to its success is the strong relationship that it has established with carpenters – whom the company identifies as major influencers. This grassroots strategy has helped Pidilite make inroads into an erstwhile unorganised segment and promote the usage of their branded product.
The strong brand equity and recall have translated into robust performance for Pidilite. In most of these categories, Pidilite enjoys a leadership position or even market dominance – for M-Seal and Fevicol – with 70% market share. Market leadership in turn gives Pidilite the pricing power. The company’s net sales has risen to Rs.70.78 billion in FY19 from Rs.48.20 billion in FY15. In the same period, its PAT rose to Rs.9.24 billion from Rs.5.08 billion and margins have remained stable at about 20%. The stock has grown at a CAGR of 32.39% over the past five years, and currently has a market cap of Rs.631.08 billion.
In the past year, high input cost impacted the performance of Pidilite, with margins contracting to 19.3% in FY19 from its peak of 22.4% in FY17. Further there was lower offtake by dealers due to recent price hikes, leading to tepid volume growth. But analysts expect the company to bounce back to the growth track with benign raw material prices and operating leverage supported by sustained demand. Volume is expected to grow at a CAGR of 12% from FY19-21, led by a recovery in demand due to better monsoon and higher government spending in rural areas. CAGR of sales and Ebitda margin during the period is expected to be at 16% and 22% respectively.
Revival in performance coupled with a strong balance sheet, healthy return ratios and efficient deployment of cash for inorganic expansion justify the relatively rich valuation multiples of 42.2x its FY21 earnings.
Ashok Leyland
Ashok Leyland has many feathers in its cap. It is the second largest manufacturer of commercial vehicles in India. It brought the first compressed natural gas (CNG) bus in India in 1997 and the first double-decker in 1967. The company had a sluggish growth a few years ago due to slowdown in the mining industry. The sales of M&HCVs in the agriculture and infrastructure sectors, however, have played a major role in its recovery over the past three years and have taken it back to its growing revenue figures. This reflects in the P/E ratio that was 12x in 2006-13, and has increased to 19x over the last three years. In FY15-FY19, Ashok doubled its revenue from Rs.135.62 billion to Rs.290.54 billion and increased its PAT exponentially from Rs.3.34 billion to Rs.21.83 billion.
However, analysts believe that in future, the margins will at best remain flat due to rising cost and competitive intensity. Deriving its profits mainly from M&HCVs, the company got a major blow in July 2018 when the Ministry of Road Transport & Highways increased the rated load-capacity of the M&HCVs by 14-17%, which led to an increase in its manufacturing cost.
Although there was a slowdown in the second half of FY19 due to a mediocre growth in the industrial and agricultural sector, the company is hoping to revive its sales in FY20 ahead of the April 2020 enforcement of the Bharat Stage VI norms. It will encourage the sellers to give discounts and customers to go on a pre-buying spree, resulting in an inflated demand, although with lower margins. The P/E is expected to grow by 14x and EV/Ebitda by 7.2x in FY20.
Balkrishna Industries
Mumbai-based Balkrishna Industries (BIL) is an off-highway tire (OHT) manufacturer focusing on agricultural, construction and industrial vehicles used for earthmoving, port and mining, ATV and gardening. Currently, the company enjoys a 6% market share in OHT manufacturing globally.
Its sales has grown from Rs.37.71 billion in FY14 to Rs.52.10 billion in FY19, and its profit from Rs.4.88 billion to Rs.7.82 billion in the same period, at a CAGR of 6.68% and 9.89% respectively.
BIL has largely focused on exports, starting from 1995. It had opened its first plant in 1988 in Aurangabad, manufacturing tyres for two-wheeler and three-wheeler vehicles. But, 13 years later, the company started off OHT manufacturing for international markets from the same plant. Today, around 82% of its revenue comes through exports from key markets in Europe and America. This worked well except that there were frequent fluctuations in annual sales figures.
Even in H2 FY18, the demand in agri-segment globally was hit by trade war, production cut at a large client and unexpected weather patterns such as the heat wave in Europe. In Q3FY19, the revenue dipped marginally revenue to Rs.12.1 billion from Rs.13.3 billion in Q2.
Thankfully, three years back, the company began to woo the domestic market as a buffer against such volatile demand. BIL seems optimistic about the growth prospects in FY20, even expanding production capacities at various plants.
Analysts expect that although the industry might suffer flat to negative growth this year, BIL can manage to modestly outperform peers. The stock has corrected in recent quarters and trades at 15.1x for FY21.
Voltas
On the back of innovation and solid execution, Voltas has managed to retain the number one position in the air-conditioning market in India. Constituting nearly 23% share in the segment, the Tata company has consistently grown faster than the market, driven by a robust distribution network, after-sales service and competitive pricing.
The other two verticals it is present in are engineering products and services, where it sells textile machinery and electro-mechanical projects and services to execute complex projects. With an execution cycle of 12-18 months, the current order book of Rs.50 billion indicates revenue visibility for the next two years.
While EMPS and EP businesses are capital-intensive, Voltas has relied on an asset-light model for its cooling segment products, by outsourcing most of the manufacturing. Meanwhile, strategic investments and diversification (Arcelik acquisition) have helped the company in weathering tough market conditions such as liquidity crisis and higher raw material prices. These external factors have hurt the company’s profit marginally in FY19, even as over the past five years, the amount has almost tripled to Rs.5.1 billion. Its sales have also seen a stellar growth, from Rs.52.66 billion in FY14 to Rs.70.84 billion in FY19.
Analysts believe that the company’s focus on mass-premium segment and deep distribution will be positive for the company. Additionally, entry in other categories (via the Volt-Beko JV) only bolsters the multi-year growth story at Voltas. Not surprisingly, the persistent market leader’s stock currently trades at 26.5x its FY21 earnings.
Berger Paints
The second largest decorative paints company of India, Berger Paints managed a stock return CAGR of 32% over five years. Its domestic performance has been strong across regions; while rural grew a tad above the urban market. The company doubled its sales from Rs.38,697 million to Rs.60,619 million over five years with a CAGR of 9%. Berger’s focus on premium products over the past few years has paid rich dividends, amply reflected in gross-margin expansion. That said, the company’s growth narrative has largely been driven by sustained product development and distribution aggression. Last fiscal, it boosted its paint-production capacity by 5,000 kilolitre per month. However, analysts say that benign real-estate demand and government programmes such as Housing For All and Swachh Bharat Abhiyan will continue to act as headwinds for domestic decorative demand in the near term. The stock currently trades at a premium of 40.2x its FY21 earnings, factoring in strong growth momentum and the risks to come.
Kansai Nerolac
The largest industrial paint company of India, Kansai Nerolac is a subsidiary of Kansai Plant of Japan and has a market share of 15.4% in the Indian paint industry. Over the past four years, it has increased its net revenue from Rs.35.49 billion to Rs.51.38 billion and margin from Rs.2.71 billion to Rs.4.47 billion.
Both the industrial and decorative segments showed a double-digit growth in 2017, but the recent slowdown in the auto sector has hurt Nerolac’s operating margins. Its biggest client, Maruti Suzuki India announced production cuts amid dismal sales. There was similar slackening of demand in other OEM segments. Poor revenue growth in key business segments, volatility in crude oil prices and the exchange rates have also hurt Nerolac’s operating margins, which fell from 16.51% in FY18 to 13.87% in FY19.
However, the management expects a good growth in infrastructure and real estate, which is likely to have a positive effect on the overall demand for paint. Moreover, pre-buying of paints ahead of Bharat Stage VI norms in April 2020 may boost a near-term demand. In this context, its net revenue target of Rs.58.62 billion for FY20 seems justified.
