Some businesses never go out of fashion — liquor, for example. Irrespective of whether times are good or bad they will pull in money by the carton loads. You want to celebrate? Drain that bottle. Mourn a heartbreak? Make that a double. That is why we were half expecting a liquor company to top our list of fastest growing companies. More so, because during the period under consideration — FY07 to FY11 — the world fell apart more than once… and it still might. Imagine our surprise when a road developer came out tops followed by a mobile phone maker with a price warrior image.
Fast and steady
Nearly half the companies in the list have maintained growth upward of 40%
Of course, in a way the outcome was a result of what we put our sample set through. We started with a universe of 586 companies obtained by combining the BSE & NSE 500. Banking and financial companies were eliminated and so were companies that had a debt twice their equity or had incurred a loss in any of the years under consideration. Apart from being a drag on profitability, high debt affects the ability of companies to invest and improve its growth prospects.
For the companies that were still left we ran a growth filter of 25% compounded for both net sales and profits. Finally, a composite rank was created by combining their sales and profit ranks. Additionally, we also marked out companies that are particularly exciting from an investor’s perspective. These are companies that delivered a return of capital employed of over 15%, every year over the past five years between FY07 and FY11 (FY12 figures are still awaited).
The result of this exercise is an eclectic mix of companies from consumer, healthcare, software, industrial and infrastructure. In fact, infrastructure is now a segment where companies are struggling to grow profits, bogged down by high debt, rising input costs and bureaucratic delays. Interestingly, as an affirmation of the India growth story, more than a third of the companies are consumer businesses.
There are 16 of them in the list, right from Jubilant FoodWorks (which runs pizza chain Dominos) to Titan Industries to Eros Entertainment. Many of them like Delta Corporation (casinos), Lovable Lingerie, Page Industries (sells innerwear brand Jockey) and Gitanjali Gems are all plays on rising affluence. With a silent slowdown in our midst, one needs to watch if flagging consumer spending will impact these companies.
Whether these companies will be there in our fastest list in the coming years is a billion dollar question, but many of them have a good chance of making it because they have been clocking high growth rates. Of the 40 companies, 11 clocked more than 40% growth in sales in the past five years, while 19 of them grew profits at the same pace (See: Fast and steady).
To give you an idea of what that scorching growth means — in five years, at the rate of 40% & 60% annual compounding, Rs.100 will grow to Rs.538 and Rs.1,048 respectively. But trees don’t grow to the sky and most companies will see their growth moderate with the overall economy.
Consumer is king
Despite the slowdown consumables dominate the list
At high risk of plateauing growth in the coming years are probably Jindal Steel and Power, Engineers India and BGR Energy. They could fall prey to falling commodity prices as well as sluggish industrial activity.
Then again, some companies like IRB Infrastructure, which builds roads and highways on build-operate-transfer (BOT) basis may continue to show high growth in profits, but what we need to watch out for is where they can deliver good return on equity, so as to make them worthwhile investments from a shareholder perspective.
While there are enough projects coming up for grabs, margins are wafer thin and infra companies need to keep raising capital to take on new business making them less lucrative investment bets.
Another thing to watch out for is how mid-sized companies, which had a good run till now, shape up. Zydus Wellness, being a prime example. It did create a profitable niche for itself but is now being hit by falling demand and increasing competition. How it goes about defending and growing its niche will make for a story in itself. For now, you can turn the page and read about how Zydus — and the other companies in the list — grew at the pace it did over the years.