HDFC bankIn 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.
With a geographically diverse profile, NIIT Technologies features among the top 20 Indian software exporters. The tech company’s revenue rose from 23 billion in FY14 to 37 billion in FY19, while its bottomline outpaced its topline growth rate — from 2 billion in FY14 to 4.22 billion in FY19.
Over the past five years, acquisitions have helped the company strengthen its position in existing verticals or have supported foray into new ones, besides expanding the client base and reducing client concentration.
It has created a strong standing for itself in the BFSI vertical, which contributes 44% to its revenue. Transportation sector contributes 27% while manufacturing and others make up 29%.
For a year now, NIIT Tech has been following a four-fold growth strategy. It includes: scaling & growing US business, carving out infrastructure management services (IMS) as a separate unit for large deal wins, maintaining leadership position in travel & transport vertical and more emphasis on digital business. It has an orderbook worth $390 million, which is executable over the next 12 months. The company also added 11 new customers (six in the US and five in rest of the world) in the last fiscal.
Amongst the risks the company faces, the primary one is that it is a medium-scale Tier-II player in the Indian software industry. NIIT has a scale disadvantage vis-à-vis that of larger players in the industry. Analysts value the stock at P/E of 16.0x FY21 EPS.
With a sharp focus on retail lending, private lender HDFC Bank has managed to register strong results over the last five years. Interest earned has zoomed at 5-year CAGR of 19% to 989.72 billion and at the same time the net NPA has remained marginal, increasing from 0.27% in FY15 to 0.39 in FY19. A stable lending record and strategy of doling out retail loan, which command high interest rates, has made sure that net interest margin is consistently above 4% mark. It’s not only about the decision to stick to retail loans, but the bank’s strategy to not lend to high-risk cyclical sectors like infrastructure and aviation has also paid dividends. Risk-averse approach meant it managed to keep its wholesale lending portfolio stable.
With 43 million customers and more than 88,000 employees, the bank has built a strong brand and trust. And hence it enjoys a CASA ratio of 42.38%. It has also managed to consistently deliver strong operating efficiency with profit per employee at 2 million. The digitalisation thrust will further boost operating efficiency and subsequently cost-to-income ratio is expected to drop.
HDFC Bank is also touted to gain market share in the retail segment due to well-entrenched network in urban and rural India. High liquidity and strong capitalisation should help the bank to maintain a steady and consistent growth. Analysts believe that the bank will be able to maintain stable asset quality because of strong monitoring framework. As the bank continues to deliver on key metric (NPA, NIM and CASA), an all-round performance justifies the hefty valuation of 3.8x adjusted book value for FY21.
Info Edge (India)
One of the few profitable pure play internet companies in India, Info Edge, crossed the total income figure of 10 billion for the first time in FY18. The company’s businesses, Naukri and 99acres among others, are market leaders in their segments. Naukri, InfoEdge’s only money making segment accounted for over 71% of total revenue of Q4FY19. Being India’s premier online classifieds company in recruitment, matrimony and real estate, Info Edge’s revenue has grown at a steady CAGR of 25.1% over the past five years. The Indian internet giant has invested in more than 20 start-ups with attractive evaluations. Among these, the strong performers are Zomato, PolicyBazaar, Meritnation and Happily Unmarried.
The company expects macroeconomic conditions to improve in FY20 and therefore has deployed AI, big data and machine learning across platforms. At the end of FY19, the company’s net sales stood at 10.98 billion, up by 20% YoY. With the company’s core businesses on par to run well, Info Edge trades at 60.6x P/E FY21e.
When the auto industry is facing a slowdown, how does Schaeffler India retain its mojo? The answer lies in the company’s strategy to have a diversified portfolio, which insulates it from adverse macro conditions in one sector.
So while the automotive segment constitutes 51% of its revenue, 39% comes from the industrial segment and the rest is made up of exports of auto components. Even amidst concerns such as rise in crude prices, credit crunch and rise in insurance cost, Schaeffler India registered a healthy consolidated sales YoY growth of 11.27% in CY18 at 45.61 billion.
Besides diversification, the company also boasts of a strong clientele across verticals. From Bajaj Auto and TVS Motors to Maruti Suzuki and Nissan, the company supplies auto components to almost all major players in two-wheeler, passenger car, SUV, truck and tractor segments.
Innovation is another cornerstone of Schaeffler’s success, as they focus on developing products which add value to vehicles. The company is already readying itself for an electrification wave, by announcing plans to install an electric vehicles’ engineering unit in India and is developing components that would be required for electric vehicles and to follow compliance of BS-VI norms.
Analysts are bullish about the company’s growth prospects. They expect net sales to grow at a CAGR of 14.30% from 53.15 billion in 2019 to 69.45 billion in 2021. Margins in the same period are expected to improve from 17.7% to 18.3%. While the stock has already grown at a CAGR of 24.40% over the past five years, Schaeffler India seems all set for further acceleration. The stock rightly trades at higher valuations of P/E of 23.4x for CY20.
Bayer CropScience is the Indian arm of German pharmaceutical and chemical major Bayer. In India, it has built a well-diversified business — crop protection products, environmental science products such as herbicides and insecticides; and hybrid seeds. This strategy has helped the company maintain steady growth.
Over FY15-19, its sales decreased to 26.85 billion from 36.15 billion, and PAT fell to 2.37 billion from 3.83 billion due to erratic monsoon and slower offtake of its products. However, investors remained bullish on the company and its stock, with the stock delivering stellar CAGR return of 24.23% in the same period.
In addition, innovation and a portfolio of specialty products also drive the company’s success. Moreover, Bayer hasn’t shied away from inorganic growth and has a list of lucrative acquisitions and mergers to its credit. These include LanXess, Merck’s consumer care business and, more recently, Monsanto.
The company, however, has found itself in troubled waters in the past year. Negative publicity around Glyphosate and its ban within a few states in India has also created short-term uncertainty. Further, in Q4 FY19, the company reported a drop in revenue of 57% YoY (due to high sales return) leading to Ebitda and loss.
But given the group’s global leadership in crop protection industry and professionally planned distribution network, the stock trades at 36.2x for FY21. With weakness in demand, analysts have cut their estimates. Despite the downgrade, the profit is expected to grow by 23% CAGR between FY19-21. Revenue is likely to grow at 11% CAGR during the same period aided by 50 new product launches by 2022. The management also expects 1.2 billion synergy benefits to accrue by FY22 from the merger of Bayer and Monsanto.
A focus on diversifying product mix and expanding geographical presence in order to insulate itself from over-dependence has been the key reason for Aurobindo Pharma’s success. The company has seen its net sales and PAT rise consistently, reaching 192 billion and 23.61 billion respectively in FY19. Buoyed by the strong performance, the stock has risen at a CAGR of 24.10% over the past five years.
The company currently has a presence across segments such as orals, injectables, OTC and dietary supplements and spends heavily on R&D. In FY19, R&D spends stood at 8.7 billion. During the year, it received approvals for eight injectables and launched 50 products. It also filed for 63 ANDAs (21 injectables), taking cumulative ANDAs pending for approval to 138. The company will file 18-20 oncology ANDAs in FY20 as well. Capex is expected to be at $200 million for FY20.
Aurobindo Pharma is also adept at acquiring companies to expand presence and strengthen product mix. In FY19, net debt for the company increased to $724 million due to the acquisition of Apotex and Spectrum. However, these are expected to boost sales in the long-term. The company is also working on specialised segments such as injectables including penam & microspheres, hormones, oncology, vaccines and others, which would improve margins due to complexity in the manufacturing and better pricing.
While the diversification and acquisition augur well for the company, the stock price has corrected sharply over the past few months owing to regulatory concerns related to three API/intermediate plants. The stock is currently trading at 9.2x its FY21 earnings, ~15% discount to its five-year historical average. However, analysts believe that the concerns are misplaced as only five to six products (out of 100+ pending) are dependent on these plants. New product launches are also expected to drive the stock price in the near term and analysts peg a 15% upside as the acquisition materialises, making it a good entry point for investors.
Over the past five years, Mukesh Ambani’s oil-to-telecom conglomerate has given investors many reasons to cheer. The stock grew at a CAGR of 23.73% from FY15 to FY19, moving up from 417.28 (on April 1st 2015) to 1,272 (on 24th July 2019). It is during the same period that RIL launched their mobile operator network, Jio, which went on to become the biggest disruptor in the telecom industry, leading to a continued price war and consolidation effort by incumbents. Deep pockets of the parent company ensured that within a short span, Jio’s user base surpassed 307 million with an average revenue per user of 131.
This growth naturally required persistent capex, cash burn and increasing debt. Its debt has doubled over five years to 2327 billion in FY19. To abate investor concerns, RIL re-engineered its balance sheet with transfer of fiber and tower assets to an InvIT SPV, shifting assets with book value of 1,250 billion.
Besides telecom, RIL has also been focused on establishing its might in the retail space. Spark Capital notes in its report that RIL, through its hallmark execution style of ‘scale with speed’ seems to have surpassed the hurdles of scale-profitability-capital efficiency comfortably with revenue growing at a CAGR of 38% and Ebitda growing by 70% over FY14-19. From hypermarket format Reliance Fresh, consumer durables store Reliance Digital and apparel retail brand Reliance Trends and Project Eve, the company has dabbled across all segments. It also retails marquee international brands, and recently acquired British toymaker Hamleys in an all-cash deal.
And while retail and telecom take off, RIL also enjoys a stronghold in refining and petrochemicals, which contribute 26% and 43% to its FY19 Ebitda of 872 billion. However, with macro headwinds including slowing global diesel demand and rising cost of crude, this segment is likely to witness a suppression in margins. This is expected to be offset by the telecom and retail division, which will witness strong growth over the next two years. Also, RIL is expected to be the biggest beneficiary of the IMO regulations, as it is the most complex refiner globally. The stock currently trades at an EV/Ebitda of 13.7 times its FY21 earnings, reflective of the company’s strong fundamentals and scope for deeper penetration in newer businesses.
Steel manufacturing major JSW Steel’s stock has been an outperformer despite challenging business environment. The stock grew at a five-year CAGR of 23.43%. The firm has faced a tough financial year due to multiple reasons – slowdown in manufacturing because of a production cut by auto companies; trade jitters between US and China; increased stress due to heavy capex expansion; and acquisition of the USA and Italy plants of Monnet Ispat and Bhushan Power. These acquisitions are expected to have an impact on the profitability for at least two more years.
The steel industry is set to continue witnessing slow growth for the next year as well, and that will have an impact on JSW, who has reported healthy sales of 824 billion in FY19, 15.63% increase on a YoY basis. The slowdown in the domestic market and the low realisations were offset by Q4FY19 exports, which increased by 12% QoQ.
The firm currently has three of the six iron ores operational, with the fourth mine set to begin operations soon, leading to expectation of a production of 5mn tons. The near future of JSW steel is not expected to be strong and its margin is likely to contract, owing to decline in demand to 3,000 per ton and increase in the coking coal cost by $10 per ton, as per a Motilal Oswal analyst report. JSW Steel’s stock currently trades at 9x P/E FY21.