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.
Our cars are getting more electric, safety and aesthetic components than ever. This is good news for one company — Minda Industries (MIL).Traditionally, a switching, lighting and acoustics parts supplier to marquee OEMs in India, this auto-components company has found success in consolidating various verticals and diversifying its businesses. Its stock return was a stunning 91.62% over FY15-19. Its sales went up from 13.89 billion to 21.46 billion and profits from 530 million to 1.45 billion, in the same period, with CAGRs of 28% and 126% respectively.
The components player has been a pioneer in localisation through joint ventures and associations, but that also resulted in a fragmented corporate structure, which had to be consolidated. Between July 2015 and July 2018, a total of nine companies including new ones have been brought under the MIL umbrella. It led to unlocking of value, improving its topline and bottomline.
A host of new business lines have been introduced in the past five years: alloy wheels, speakers, airbags, car parking assistance devices, aluminium die casting and moulding parts. While some of these bets were made based on emerging market trends, others were in response to the changing regulatory environment. There has been significant change in automotive safety and emissions regulations in India over the past five years, and the company responded to these very quickly.
In Q4FY19, MIL’s consolidated revenue grew modestly by 8.4% YoY, impacted by depressed OEM sales. But BS-VI norms, which are to be implemented by April 2020, will generate strong demand for certain products such as engine-related sensors, advanced filtration, seat belt reminders and increasing premiumisation through LEDs, alloy wheels and so on. MIL is strongly positioned to benefit from these changes as these products have higher margins and hence drive up earnings growth. Analyst value the stock at 18.9XFY21E earnings.
From being non-banking financial company (NBFC) which predominantly catered to infrastructure sector, Bajaj Finance has pivoted towards retail lending since 2011. The company offers loans to a range of segments like small and medium enterprises (SMEs), commercial and rural market and consumer financing. The NBFC’s decision to play on India’s consumption story has turned it into one of the fastest growing NBFCs and the biggest wealth creator. Over the last five years, the company’s AUM and PAT have grown at a CAGR of 33% and the stock has given a return of 76% CAGR. The company’s USP has been its strong presence in the consumer financing business, which accounts for 39% of overall AUM. The consumer financing lending helps the company maintain high margins and is less risky because of its small-ticket size. The asset quality is stable because of Bajaj Finance’s strong focus on small-ticket loans and prudent lending practices. The company has been leveraging technology like analytics to examine the credit history of a customer and lend loans at a fast pace. A customer can avail loan up to 3 lakh in 30 seconds on Bajaj Finance’s EMI-finance app Experia. S/he only has to upload PAN or Aadhar details to get a loan. However, analysts state that it would be difficult for Bajaj Finance to justify its expensive valuation of 5.4x for FY21 as India’s consumption sector is showing clear signs of slowdown.
With consistent growth over the years, Aarti Industries is not just a leading domestic player today, but also has a global footprint across 60 countries (constituting 45% of revenue). About 75% of its products rank in the top four, with 25-40% market share globally. Its profit growth has more than tripled over the past five years, from 1.52 billion in FY14 to 5 billion in FY19, while its sales have grown from 25.98 billion to 50 billion over the same period.
Aarti Industries’ focus on high-margin products has benefited the company. Of its total revenue of 50.14 billion in FY19, close to 80% comes from specialty chemicals with a well-diversified revenue mix. It is also the only domestic firm capable of producing the entire value chain of Benzene up to the 6th derivative, with the production currently functioning at 90% utilisation. Analysts expect its specialty chemicals division to be a cash cow, and clock 13% CAGR (excluding long-term contracts) over FY19-21.
The company’s second-largest revenue driver is pharmaceuticals, with 15% contribution, expected to maintain 15% CAGR over FY19-21. It plans to invest 15-17 billion over the next two years to add capacity. On the back of Aarti’s technical expertise, wide product range and large base of end-use industries, analysts expect the company to post revenue CAGR of 23% and profit at 27% over FY18-FY21. They are also of the view that at P/E of 15.5x, its FY21 earnings looks justified.
HEG manufactures graphite electrodes that are primarily used in making steel using the electric arc furnace (EAF), which is an environment-friendly technology. Every tonne of steel consumes about 2-2.5 kg of graphite electrode. So, the fortunes of this company are tied to the global demand for the steel and price of crude, which is used as raw material to manufacture steel.
HEG’s stock gave a 59.92% return over the last five years. The reason for such an impressive return was the turnaround of the company in 2018, after three years of poor demand. The topline went up from 12.28 billion in FY15 to 65.92 billion in FY19 while the bottomline went up from 390 million to 30.50 billion.
A reduction in supply from China and an increase in steel production, primarily through the EAF route, raised the price of graphite electrodes, which led to the company’s strong performance in FY19. Currently its capacity utilisation is well above 80%; HEG has the largest single site facility in the world with a capacity of 80,000 tonnes per annum.
It exports approximately 70% of its production to about 30 countries around the world. The company has a diversified customer portfolio, supplying a large share of its volumes to top 20 steel companies of the world.
But analysts believe that HEG’s growth cannot be maintained mainly because there is a slowdown in China, the number one consumer of steel. So, the requirement of graphite electrode has dipped. On the domestic front, India has removed antidumping duties on graphite electrodes imported from China since September 2018. This has led to increased imports, further bringing down the price of domestic goods. Analysts value the stock at 6x FY21E EPS.
Sterlite Technologies is an integrated optical fiber solutions company with clients and manufacturing units spread across India and the world. Buoyed by its Indian expansion and rise in exports, the company has seen an impressive spike in topline from 30.74 billion to 48.76 billion and in bottomline from 840 million to 5.35 billion over the past five fiscals. The market rewarded this performance with a stock return of 56.9% between FY15-19. STL’s order book is at an all time high of 105.16 billion in FY19.
Over the last three years, STL managed to triple its revenue from exports. Today it earns 65% of its revenue from India, 24% from Europe and 11% from rest of the world.
Globally, there has been a rapid increase in the deployment of fiber optic cable. If it took Sterlite five years to deploy one billion fibre kilometer (fkm) between 2008 and 2013, it took only two years to deploy the same length between 2016 and 2018. This could be because of its investment in technology, with three innovation centres and 271 patents, and its elevation as partner of choice for telcos such as Reliance Jio.
What has also helped the company boost its margins is its complete control over the manufacturing value chain from cabling and fiber drawing to performance. They are present across the chain from manufacturing cables to laying fiber optic cables.
The company could see a favourable demand environment in future with 5G roll out across geographies expected to begin in 2020 and pick up pace in the next five years, increased spending by OTT players in the US on data centre interconnectivity and network modernisation initiatives by large enterprises such as defence, railways, oil & gas and power utilities.
Sterlite has faced recent challenges, such as the recent China mobile pricing fiasco, which has clouded sentiments a little. In the coming years, with the shift of business mix towards services, the company may face the burden on working capital and see thinner margins.
But even with these risks, which typically come with great demand and supply generation, STL seems to have a good future. Analyst value the stock at 14x FY21.
Part of TVS Group, Sundram Fasteners has created a strong niche for itself in the auto sector and, today, enjoys the trust of original equipment manufacturers (OEMs) in four-wheeler, farm equipment, commercial vehicle (CV) and two-wheeler segments. Focus on quality and diversity has turned the company into a global player, catering to customers in China, the United Kingdom, Italy, Germany and the US.
Along with manufacturing components for infrastructure, windmill and aviation sector, the company’s core capability lies in making specialised fasteners for big brands across auto segments. This diversity and creation of niche have helped the company to clock strong sales growth over the past five years despite slowdown in the auto sector in FY19. The company’s sales has grown at 10.36% CAGR over the past five years, while profit has grown at 30% CAGR of 30% due to constant improvement in value-added products. It is expected to maintain its growth trajectory due to the introduction of new products and an increase in market share in the existing products. With the company’s global subsidiaries witnessing reliable traction, the share of exports is expected to inch up to 40% by FY23 compared to 35% in FY19. An upbeat performance and strong growth potential mean the stock is trading at a hefty valuation of 21.4x for FY21.
Indian speciality firms — with a healthy product mix and global presence — have been on a stellar run, even as their counterparts in China face an unprecedented slowdown due to stringent anti-pollution measures. Integrated chemical company Atul, which is perfectly poised to benefit from the global tailwinds, has witnessed prolific growth over the last three financial years.
Along with being a major player in the Indian market, the company caters to customers in the US and Europe. This geographical diversification has de-risked the business and resulted in stable and robust growth.
The company’s net sales has risen from 28.33 billion in FY17 to 40.37 billion in FY19. A multi-fold increase in sales coupled with strong pricing in agro-chemical segment has led to margin expansion — from 15.49% in FY15 to 19.85% in FY19.
Atul’s well-diversified product mix is also one of the prime reasons it has been able to benefit at the expense of its Chinese peers. The firm manufactures value-added chemical products for a range of sectors including personal care, automobile, pharmaceutical, agriculture, construction and textile.
Analysts at Phillip Capital observe that by leveraging the supply disruption in China, ATLP (Atul) has developed various intermediates, in both pharma and agro-chemicals to ensure profitable growth in the near future.
With around 15 billion worth of capex being planned to take advantage of the disruption in China, Atul is forsaking its strategy of conservative expansion. Post weak Q4FY19 results, analysts have trimmed their earnings estimates by 5%, but yet the stock trades at 9.8x EV/Ebitda for FY21E with the potential for upside due to expansion in key segments.
Future Lifestyle Fashions
Future Lifestyle, owned by Future Group is making waves in the fashion retail industry through its two brands — Central and Brand Factory. While both formats operate in similar product categories, Central is a lifestyle retail brand for the discerning shopper and Brand Factory is a value-format that offers merchandise at heavy discount through the year. The company also houses a strong portfolio of in-house brands and international brands, in a bid to stay relevant across various consumer categories.
Its popularity is proof in its financials as Future Lifestyle’s revenue rose by 27.3% to 57.28 billion in FY19 and gross margin stands at 35.6%. Over the years, the company has been rightly focusing on expanding the contribution of Brand Factory. This format currently operates at lower margin of about 8% and lower ROCE of 14%, but analysts believe they have the potential to improve, supported by strong same-store-sales-growth (SSSG) and scale benefits. The company has also taken Brand Factory online, which is expected to aid in maintaining its 20% YoY growth estimate.
Despite rapid expansion, the company has maintained a healthy balance sheet. Its net debt/Ebitda has reduced to 1.4x from 1.6x in FY18. Analysts note that its operating cash flows have improved over the past three years owing to higher profitability and reduction in working capital. Meanwhile, ROCE improved from 11.7% to 13.9% YoY, and is expected to improve by another 300 bps by FY21. Analysts also expect the company to clock 22% CAGR net sales between FY20-21. Strong earnings projection coupled with an eclectic product mix and the promoter — Kishore Biyani’s business acumen make its premium valuations of 30.2x its FY21 earnings seem justified.