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.
Indraprastha Gas
The company, a joint venture of GAIL (India), Bharat Petroleum & Delhi government showed tremendous growth, as its stocks grew at 39% CAGR over the past five years. This growth was led by IGL’s deep reach in existing areas of operations. In FY18, the company also started supply of CNG and PNG domestic in Rewari district of Haryana. It has also started building infrastructure in the earmarked area of Gurugram and geographical area of Karnal. Recently, the company received a letter of intent from PNGRB for grant of authorization for development of CGD network in the geographical area of Meerut, Muzaffarnagar & Shamli Districts in Uttar Pradesh.
IGL’S net profit grew from Rs.6,063 million in FY17 to Rs.8,739 million in FY19 and is expected to reach Rs.11,994 million in FY21. In FY19, net sales was Rs.63.61 billion and profit, Rs.7.86 billion. In this period, sales volume increased from 1,891 million standard cubic metre (scm) in FY18 to 2,155 million scm. IGL, which retails CNG to automobiles in the national capital and adjoining cities, saw sales volume increase by 13% and PNG sales volume increase by 15% last fiscal. Product wise, CNG recorded sales turnover of Rs.47.61 billion, registering a growth of 24%, and PNG recorded sales turnover of Rs.15.76 billion with 35% increase over the previous year. IGL trades at 17.7 P/Ex FY21E.
Cholamandalam Investment & Finance Company
After strengthening its roots in vehicle financing (81% of the overall loan book), Cholamandalam Investment has now diversified its portfolio by doling out loans to MSMEs and homebuyers, including loan against property. Such diversified loan book has helped the company weather commercial vehicle slowdown and muted real estate sales in the past.
Despite another slowdown that the CV industry is facing, analysts believe that Cholamandalam Investment will manage to navigate safely through these uncertain times. Strong growth in other segments such as home equity is expected to provide some cushion. Overall, the company has assets under management worth Rs.543 billion and a wide network of 900 branches. The company’s net profit has grown at 25% CAGR over the past five years and during the same period. The company also has a strong coverage ratio of 49.8%. The NBFC has strong loan disbursal and default uncovering practices, which has helped in keeping bad loans under control. With a robust market positioning, diversified loan book and decent growth in home equity segment, the valuation of 2.7x price-to-book value for FY21 is sustainable, according to analysts.
Relaxo Footwear
In a segment that is over 80% unorganised, Relaxo Footwear has held its ground and maintained its leadership position, after Bata, with consistent double-digit volume growth quarter after quarter. Every user of its footwear range — Sparx, Flite, Schoolmate and Bahamas — will agree that the brand means ‘comfort’ and ‘value for money’. In fact, the company’s strategy is a good mixture of volume and value along with product mix and profitability.
At five-year CAGR of 39%, the stock price has surged over 4x in the past five years alone and given investors over 30x return since its listing. The stock price is justified in its robust financials with five-year sales CAGR of 14%, ending FY19 with net sales at Rs.22.92 billion as against Rs.12.12 billion in FY14. Meanwhile, its net profit grew from Rs.656.3 million to Rs.1,754 million over the same period. To boost its top-line, the company is expanding its reach in southern and western India. According to an investor presentation, Relaxo claims it is well positioned for the next phase of growth. Streamlining distribution network, especially in underpenetrated markets and increasing exports are some of the focus points. They see an improvement in Ebitda margin on the back of softening raw material prices. They also maintain that capex will remain steady at Rs.800 million in FY20 and FY21.
Surely, Relaxo Footwear is on many brokerages’ buy list. Currently trading at 61.3x P/E TTM, the stock is valued at 41.6x and 34.8x for FY20 and FY21.
Piramal Enterprises
The flagship company of Piramal Group — Piramal Enterprises — has a strong presence in finance and pharma sectors. With focus on wholesale lending, especially real estate financing, the financial arm of Piramal Enterprise has built a loan book of Rs.566 billion and has AUM of over Rs.100 billion. The company has been able to build a profitable franchise on the back of stringent loan disbursal practice.
While real estate financing accounts for a large portion of loan book, Piramal Enterprises has diversified its presence by giving credit to corporate finance groups, emerging corporate, hospitality and construction financing. While asset quality remains robust at 0.9% gross NPA, the provisioning accounts for 1.93% of the loan book. It has a strong presence in pharma segment too, with branded generic products, and this segment accounts for 36% of the total revenue. It has a pan-India network and is one of the leading over-the-counter players.
From being a loss-making company in FY14, Piramal Enterprises reported a net profit of Rs.14.7 billion in FY19. According to analysts, both the businesses of Piramal Enterprises are poised for growth. While loan book growth has moderated, overall business remains stable and even the pharma business continues to clock high single-digit growth. With a steady performance across segments, the stock trades at reasonable valuation of 14.2x PE for FY21.
Astral Poly Technik
Since its establishment in 1996, Astral Poly Technik has operated on a simple mantra: constant innovation, timely diversification and strong execution. As a result, the company has not just entrenched its position as the market leader in the niche CPVC pipes and fittings segment in India, but also has a presence in other segments like adhesives and corrugated pipes.
Both businesses have grown at a rapid pace over the past five years. In FY18, the company posted the highest-ever Ebitda margin of 15.4% aided by backward integration of CPVC compounding, logistics advantage due to scale-up of operations at the South India facility, launch of high-margin products and efficient procurement of PVC resin.
At the same time, its adhesive business was strengthened by a spate of acquisitions, registering sales CAGR of 24% and Ebitda CAGR of 33% between FY15-18. Its healthy growth trend continued in FY19, with sales growth of 21% to Rs.25.07 billion and profit grew by 14% to Rs.1.97 billion. At present, its pipes & fittings business accounts for about 76% of its sales and the rest is contributed by the adhesive business. By FY21, analysts expect the share of pipes & fittings to reduce to 68%, resulting in an increase in the share of adhesive and corrugated sewage pipes business.
While fluctuating raw material prices, forex movement and competition continue to remain key risks, analysts expect Astral to continue its growth momentum with sales CAGR of 15%, Ebitda CAGR of 19% and PAT CAGR of 29% over FY19-21. Over the past five years, the stock has delivered handsome returns for its investors. It trades at a relatively cheaper valuation of 36x for FY21 compared to 50x in FY20 and 73x on 12-month trailing basis.
UPL
United Phosphorus, which started as a manufacturer of red phosphorus used in safety matches in 1969, has transformed into the fifth largest agrochem player in the world with a presence in over 130 countries and more than 13,000 product registrations. UPL’s growth has been fuelled by a diverse product mix as well as key acquisitions – about 41 – made at the right price, without entering into a bidding war. The acquisitions create synergies, which the company ably leverages to meet the needs of local farmers and drive revenue.
The most recent acquisition, which made waves internationally, was when UPL acquired investor Bill Ackman’s Arysta LifeScience for more than $4 billion. The acquisition makes UPL among the most profitable agrochemical companies globally and the largest post-patents, getting access to new markets such as eastern Europe, Russia, Africa and growing in Europe and Latin America.
What’s also unique about the company is its unwavering focus on the overseas markets, which contribute about 87% of their total revenue. Also, despite the popularity of an asset-light model, UPL continued to invest time and money in building manufacturing capabilities globally. It has 33 manufacturing facilities in 11 countries. The company has also invested in building its own sales and distribution team, which provided them with market knowledge on the ground. To cater to global markets, UPL created a full suite of crop protection solution, including seeds, which have turned out to be a winning proposition for the company.
The intricately crafted growth strategy has resulted in strong growth for the company, even amidst headwinds such as US-China trade war, droughts and irregular rainfall. For FY19, revenue grew 14% to Rs.198.7 billion, with margin expanding 60 bps to 20.8% and PAT increasing 17% to Rs.26.1 billion. While the Arysta acquisition led to net debt/Ebitda increasing from 1.0x in FY18 to 6.3x in FY19, analysts expect this ratio to be lower at 1.59x by FY21 due to improved earnings and cash flows. Revenue is expected to grow at a CAGR of 32.8% over FY19-21 and PAT at a CAGR of 31.5% in the same period. The stock is trading at 14x its FY21 earnings, and analysts attribute the rich valuations to UPL’s strong global footing in a consolidating market, leading to potentially higher market share and improving margins.
TVS Motor
TVS Motor Company has zoomed past its competitors over the past five years, with the company’s stock growing at an impressive CAGR of 38%. Even last year, when two-wheeler manufacturers faced a slowdown, the company’s consolidated revenue from operations for FY19 stood at Rs.182.27 billion, 20% more than FY18 while PAT rose to Rs.6.70 billion from Rs.6.62 billion.
The company registered sales of 3.76 million units of two-wheelers in FY19, way ahead of the industry numbers, growing by 11.6% over the previous fiscal. Sale of motorcycles grew by 15% and scooters by 14.6%. The company also has a strategic partnership with BMW Motorrad to develop and manufacture sub-500cc bikes both for domestic and global markets. TVS’ three-wheeler sales too saw an impressive growth of 30% in FY19 and its export saw an extraordinary 70.3% growth in the same period.
It has hit a rough patch now with the industry facing restricted availability of retail finance, rising fuel prices, higher interest rates and insurance cost. Yet, the demand for two-wheelers from both rural and urban areas remains promising due to low penetration and rising disposable income. Two-wheeler sales is dependent on the rural market led by a good monsoon season and the government’s support to increase the minimum support price (MSP). At 26x P/E FY21e, analysts expect TVS’ stock to correct, along with an industry slowdown.
Kalpataru
One of the largest power transmission and distribution (T&D) lines manufacturers in the world, Kalpataru Power is focusing on timely closure of projects, conscious efforts to reduce debt and interest costs, and improving its orderbook. Owing to these measures, the company’s topline jumped from Rs.71 billion in FY14 to Rs.108 billion in FY19, while net profit tripled from Rs.1.4 billion to Rs.4.8 billion. The stock market gave a thumbs up to its good fundamentals and stock registered 36% CAGR over the same period. The company may be mainly known for transmission lines, but Kalpataru is also present in two other businesses: biomass energy and infrastructure.
And it has strategically diversified its business and geographic mix. The company consciously and strategically bid for projects with lower execution and receivables risk. It has also taken steps to reduce debt.
Reportedly, Kalpataru has entered into a binding agreement with CLP India to sell its stake in three power transmission assets for an enterprise valuation of Rs.32.75 billion. If approved, it will lead to significant debt reduction and help Kalpataru focus on strategic diversification within core business.
The expansion in regional transmission network in Africa, SAARC and CIS countries is likely to supplement domestic demand and present a large business opportunity. According to analysts, T&D spending in India is expected to be around Rs.2,300 billion over FY18-23E. The company has also scaled up the non-T&D segments (railways and oil and gas). Opportunity size remains high in the non-T&D segment to provide enough opportunity to ramp up its total order outstanding for the business.
Analysts expect the company to register 16.5% and 21.7% CAGR in revenue and net profit respectively during FY19-FY21 and the stock is valued at 17% EPS for FY21.
NCC
The second-largest listed construction company in terms of revenue, NCC continues to maintain a robust order book of nearly Rs.412 billion. Its revenue has almost doubled over the past five years, from Rs.74 billion in FY14 to Rs.129 billion in FY19 at a CAGR of 12%. Its strong financials and robust order book have also been rewarding for investors, with stock return CAGR of 36%. Its debt to equity ratio has also remained stable, currently at 0.3x. NCC has also reported margin as per its guidance between 11.5-12% in FY19.
Despite strong revenue visibility over the next two years, analysts are starting to worry due to external factors. The company has orders worth Rs.150 billion in Andhra Pradesh, where the new government has cancelled some infra projects that were sanctioned earlier. Since that does not include projects that have already been commenced, NCC claims only orders worth Rs.61 billion will be affected in the state. The company will still remain a key beneficiary of government’s focus on large infrastructure spending.
Analysts expect the company to continue delivering growth above 11% on the back of robust order backlog. Key risks that the company faces are slowdown in government capex, weak real estate monetisation and adverse ruling on ongoing arbitrations. The stock currently trades at 10.6x, much below its five-year average.
VIP Industries
Do names such as Skybags, Caprese, Carlton, Aristocrat and Alfa ring a bell? If you’re an Indian, you’ve probably got one of these stowed away in your loft. In this country, VIP is to luggage what Bata is to shoes.
The brand produced its first moulded-plastic suitcase at Nashik in 1971 and claims to have sold over 60 million pieces of luggage ever since. Yes, incomes have gone up, the country has gotten travel-savvy. Its revenue has gone up from Rs.9.72 billion to Rs.17.84 billion over FY14-19, while its profit has almost tripled from Rs.583 million to Rs.1452 million.
In 2019, the brand’s logo, positioning, and product line-up underwent an overhaul to appeal to the younger Indian. With over 55% of the market share in the personal luggage space, it is comfortably seated in the top spot. Nevertheless, VIP plans to push for formalisation in this highly unorganised industry with new vigour.
It recently made bought a manufacturing plant in Bangladesh where labour costs are low and the imports are duty-free. It has to take more aggressive decisions because of growing competition from domestic and Chinese players.
Volatility in foreign currency may also affect profitability since about 70% of VIP’s revenue comes through products imported from China. Analysts believe with a P/E of 25.3x FY21E, the valuation reflects the brand’s premium and size of opportunity.
