The Outperformers (81-90)

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.

Blue Star

What started out as a company that reconditions air conditioners and refrigerators is today the de facto name in commercial refrigeration and air conditioning and one of the top three players in the market. The company hit the $1 billion turnover mark in FY19, and its market capitalisation stands at Rs.65.32 billion.

Blue Star ventured into the residential segment in 2011, rather late for a cooling solutions company. Nevertheless, the company currently has outperformed the industry by bagging 12.3% market share in the space. In 2018, the brand forayed into the water purifiers segment. It plans to capture 15% of the market share by 2021. The company recently introduced 100 new products into its portfolio, including smart domestic ACs equipped with voice command control tech.

Analysts remain optimistic about the company’s growth prospects on the back of healthy guidance and robust performance in Electro Mechanical & Project Services (EMPS) segment. Over the next five years, Blue Star management has ambitious plan of growing revenue by 20% CAGR and profitability by 25% CAGR. Trading at a P/E of 21.7x for FY21E, a Nirmal Bang report says that rising return ratios, healthy free cash flow, lean working capital cycle and a comfortable leverage position will aid the AC maker’s valuation.

P&G Hygiene

A leader in the FMCG industry, P&G Hygiene and Health (PGHH) can expect sustainable and balanced growth from trends such as higher disposable income and consumer spending, and growing population of youngsters. P&G remains the dominant player in the feminine hygiene category with over 56% market share, which contributed to 70% of its sales in FY19. With steady double-digit growth in both sales at 19% and PAT at 23% over five years, the company has remained competitive in the industry with volume growth. It has aggressively increased its ad spends, distribution network and new launches, even while taking price cuts wherever required. This has reflected in its stock return CAGR of 28% over five years. PGHH managed potentially huge margin gains of 23.4% in FY19 from premiumisation in feminine hygiene. The stock currently trades at a premium of 47.6x its FY21 earnings.

Kajaria Ceramics

“Yeh tiles mere desh ki mitti se bani hai,” says Akshay Kumar in Kajaria Tiles’ TV commercial. India’s largest manufacturer of ceramic/vitrified tiles roped in a Bollywood A-class star to promote a product of which we have not seen too many endorsements in the past. This is its new marketing strategy to connect with the consumer for a non-sexy product.

Relying on such unconventional strategies, over the past five years, the company’s stock has grown at an impressive CAGR of 27.95%. The stock’s performance is reflective of the strong potential of Kajaria Tiles. In a challenging real estate environment, its net sales has risen to Rs.29.56 billion in FY19 from Rs.21.86 billion in FY15. Alongside, net profit has increased from Rs.1.75 billion to Rs.2.26 billion in the same period.

In this Rs.270-billion industry, in which national brands service less than 50%, Kajaria has cornered the highest market share of 9% by transforming itself into a well known brand instead of a commoditised product. Per capita consumption of tiles (sq m) continues to be a dismal 0.59 in India compared with 3.95 in China, 3.39 in Brazil, and 4.40 in Vietnam. This provides Kajaria Tiles much headroom to grow.

Kajaria has been consistently increasing its capacity from 36.0 million square metre (MSM) in FY12 to 68.4 MSM in FY18 (at a CAGR of 11.3%). The company has primarily focused on adding new capacities in the vitrified tiles segment as the margins and realisations are much higher. The ceramic tiles capacity has remained stagnant during the past three to four years. The company has positioned itself as a premium brand with higher realisations (12-15%).

The company is also expanding in the faucet and sanitary ware market, which is currently dominated by Jaguar, Cera and Hindware Sanitaryware and Industries (HSIL). This business vertical is growing well with a revenue growth of 33% YoY.

Perhaps, a large part of its success in rolling out new products also lies in its strong distribution network. It has 1,400 dealers, 5,000 sale points across the country and 34 display centers. The company’s good relationship with its business partners reflects in its cash conversion cycle of just 35 days compared to Somany Ceramics (47 days) and Asian Granito (91 days).

With the National Green Tribunal’s ban on coal gasifier and stricter compliance after GST, Kajaria as a leading organised player could be a prime beneficiary of market share gains. Thus, analysts expect revenues and PAT to grow at 16.8% and 28.3% CAGR respectively to Rs.40.33 billion and Rs.3.72 billion in FY19-21E. 

Yes Bank

Before the run-in with the central bank and reporting its first ever loss of 15 billion in Q4FY19, Yes Bank was a on a scintillating run. Under its former CEO and promoter Rana Kapoor, the company’s total assets grew at a CAGR of 34% over the last ten years. At the same time, lender’s interest earned rose from Rs.99.81 billion in FY14 to Rs.296.23 billion in FY19. The fast pace of growth in assets and earnings is attributed to Kapoor’s strategy of giving loans to companies which are under stress for a high interest rate.

However, the strategy seems to be unravelling now. The net NPA has gone up from 0.05% in FY14 to 1.86% FY19. The total provisioning has increased nine-folds from Rs.1,5.54 billion in FY18 to Rs.57.77 billion in FY19 as the bank has taken cover on big defaulting names like Jet Airways and IL&FS. However despite such spike in provisioning, the credit cost is expected to rise further. With standard exposure of 10,000 crore to NBFCs, real estate and infrastructure, credit cost is expected to grow by 209 bps. The company’s CASA ratio declined by 20 bps to 33.1%, of which 40% deposit is wholesale. And with the stock in freefall, raising capital will only prove to be costly.  

The Reserve Bank of India (RBI) has appointed ex-deputy governor Rama Gandhi on Yes Bank’s board for tenure of two years, which has further raised concerns about the asset quality of the bank. As the uncertainty looms large over the bank and earnings get battered due to rise of credit cost, Yes Bank’s stock currently trades at 0.8x for FY20.

Gillette

Gillette India has ensured that not only is its customers happy with its choices but so are the investors. The personal care and grooming firm has been a popular choice amongst the consumers because of its wide product portfolio that caters to a large audience. According to a Nirmal Bang report, Gillette’s category development, premiumisation and strong distribution network have worked in its favour. Despite this, the last few years have seen the company give a mixed performance with the annual sales and profit numbers fluctuating. In FY19, the sales and net profit fell by 6.23% and 9.50% to Rs.16.76 billion and Rs.2.29 billion respectively.

The revenues, especially that of the grooming business grew only by 8%, falling short of the 10% expectations. In the oral hygiene segment as well, a 24% growth has been below expectations, substantially because of decreased consumption in the rural market.

But investors continue to repose faith in the company. Analysts say the firm’s premium products Gillette Guard and Venus are healthy bets for the investors to push the growth northwards whereas product innovations such as Neem and Cavity Defense Black have seen an encouraging response in the market.

Over the last four quarters, Gillette has seen increasing sales figures with a minor dip in Q4FY19. However, on a YoY basis, it increased by 3.09%. To maintain its growth, the company will focus on retaining its rural customers and establish itself again across all markets. Analysts say Gillette should clock healthy Ebitda growth of Rs.5,492 million in FY20, up from Rs.3,816 million in FY17. It trades at 57x P/E FY21E.

Marico

Homegrown FMCG major Marico is often credited with creating brands across personal grooming and processed food that have become household names in India. Founded by the Mariwala family, the company owns Parachute, Nihar, Livon, Set Wet, Mediker, Saffola, Revive and so on. With its strong brand portfolio, its sales and profit increased to Rs.73 billion and Rs.11 billion, from Rs.46.8 billion and Rs.4.85 billion over FY14-19. It has reported a five-year stock return CAGR of 27%.

Marico’s strength comes partly from its ability to adapt with the times and venture into new areas while keeping pace with competitors. Another factor that has worked in its favour is the company’s massive distribution network. The falling copra price, which forms a substantial part of Marico’s raw material costs, and government’s push for rural development have been added bonuses.

Loss of ground at the bottom of the VAHO segment and sustained volume pressure for Saffola have dimmed expectations. In FY19, while value added hair oils (VAHO) made up 25% of the company’s revenue, Saffola (refined edible oil) contributed 17%. Additionally, launches in 2019, such as Saffola FITTIFY Gourmet and Set Wet Global edition, have seen a poor success rate.

The stock is trading at a P/E of 30.8x for FY21E, as per an HDFC Securities report. And as Saugata Gupta expressed in the Q4FY19 earnings conference call, Marico expects to deliver 8% to 10% volume growth annually in India and a double-digit constant currency growth in the international market in the coming year.

Wabco India

A leading auto ancillary manufacturer, Wabco India, has been on the fast lane over the past five years. While it has been a dominant player with a strong focus on braking solutions to commercial vehicle (CV) manufacturers, the company has outmatched the industry’s growth due to an increase in the share of wallet product. The company reported sales CAGR of around 20.6% between FY15 and FY19 against CV industry’s CAGR of 13.1% in the same period. With government’s focus on infrastructure, decent monsoons and increase in mining activities, CV sales were on rise. And being the leading supplier of braking and advance safety solutions to CV manufacturers, Wabco India delivered strong performance. 

The company’s net profit more than doubled over the past five years – going up from Rs.1.20 billion in FY15 to Rs.2.82 billion in FY19. But its growth temporarily slowed down on the back of muted CV sales growth in FY19. Wabco India is expected to mirror the double digit CV sales growth which will be led by pre-buying ahead of implementation of BS-VI norms. The growth could again slow down to single digits in FY21 and the CV industry will have to heavily depend on government’s infra thrust and scrappage policy to get back to double-digit growth. All the tailwinds and growth expectations have been already factored into the stock, which trades at a handsome valuation of 35x FY21 EPS. Meanwhile, the company will be in transition mode. The parent company of Wabco India (Wabco) — Wabco Holdings Inc — is all set to merge with ZF group.

AIA Engineering

Founded in 1979, Bhadresh K Shah’s Ahmedabad Induction Alloy (AIA) Engineering originally started as a manufacturer of alloys and iron castings for power plants. Over the years, it has transformed into a key player in manufacturing and supply of products used as wearing parts in crushing (or grinding) operations in cement, mining and thermal power plants (or mills). Its clientele include ACC, Gujarat Ambuja Cement, Kudremukh Iron Ore Company, Hindustan Zinc, Bharat Aluminium Company as well as thermal power plants and OEMs.

The strength of the company lies in its ability to sniff out opportunities and diversify at the right time. For instance, after garnering a lion's share (about 90% in domestic and 25% in global market excluding China) in cement space in 2010, AIA forayed into the supply of HCMI to miners. This strategy, of identifying white space and pursuing it vigorously, has helped it ramp up net sales to Rs.29.67 billion in FY19, from Rs.21.07 billion in FY15. In the same period, its profits increased to Rs.5.13 billion from Rs.4.30 billion, with 20% margin growth.

The company continues to remain bullish on the mining replacement market and has entered into a technical collaboration agreement with US-based EE Mill this year. Analysts expect net sales and profit to grow at a CAGR of 14.5% and 12% respectively over FY19-21. Ebitda margins have contracted from 34% in FY17 to 25% in FY19, largely due to increase in operating costs. But analysts believe that the margins will stabilise from FY20 onwards due to increase in revenue from mining segment and focus on building in-house power capabilities.

The stock, which has grown at a CAGR of 26.77% over the last five years, currently trades at a P/E of 25.7x for FY21.

Shree Cement

One of the leading cement manufacturers in North and Central India, Shree Cement has established itself with robust volume growth at 13% in FY19. Its stock has seen  five-year CAGR of 26.71%, providing investors with healthy returns. The firm’s subsidiaries – Shree Power and Shree Mega Power provide a substantial push to its growth.

The firm’s plants across six states in north and eastern India have helped boost sales to Rs.119.67 billion in FY19. It has been expanding its capacity and after a lull in March and April, the sales are expected to pick up once again in the second quarter of FY20. 

Shree Cement MD, HM Bangur, believes that the demand for cement will increase with an increase in the country’s GDP. Shree Cement’s Jharkhand plant has recently started operations and another new plant in Orissa is expected to commence operations in September, further pushing up the production capacity and sales. The firm has also entered the South Indian market with a new plant, which is currently being underutilised, but its production will gradually increase as per the market scenario. The union government’s plans to provide affordable housing for all is further set to push the narrative for Shree Cement. The stock currently trades at 41.8x P/E FY21.

PVR 

As urban India moves from single screens to multiplexes, PVR has been at the center of the transformation. Starting with a single cinema in 1997, the multiplex chain today has 763 screens, across 164 properties, in 65 cities across India. It had a market share of 22% in the Bollywood segment and 29% in the Hollywood (including Hollywood dubbed) segment. In fact, it is the largest Indian distributor for independent Hollywood films.

The company’s annual report calls FY19 a “historical year” wherein “all parts of the business delivered robust results led by strong box office performance”. The net box office revenue increased 31% from Rs.12.47 billion in FY18 to Rs.16.35 billion in FY19 with 13 movies crossing Rs.1 billion in collection.

On the bourses, the exhibitor registered a 26.59% CAGR in the past five years and the company’s total income grew from Rs.13.48 billion in FY14 to Rs.23.34 billion in FY19. According to the annual report, revenue growth was backed by double-digit growth in income from sales of movie tickets at 31%, food and beverages at 37% and advertisement income at 19%.

The organic development of multiplexes can be a slow process owing to limited availability of prime real estate across cities. PVR however, has managed to grow, acquiring Cinemax in 2012, DT Cinemas in 2016 and south-based SPI Cinemas in 2018. The latter is expected to help PVR gain a greater foothold in the southern market, thus giving them greater bargaining power with content producers and distributors.

While OTT players could pose a challenge in the future, analysts remain optimistic. With GST on movie tickets being reduced (from 28% to 18% for tickets above Rs. 100, and 18% to 12% for tickets up to Rs.100) and the public outcry over higher F&B prices fading, PVR’s prospects look bright. Its stock currently trades at a P/E of 30x for FY21E.