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.
A Navratna public sector entity, NBCC India has emerged as a strong leader in the construction sector by following an asset-light model. The company subcontracts construction work to other companies and merely monitors and conceptualises the project.
Besides being nimble-footed, the infra company is in top position to bag government projects because of its Public Works Organisation status. The dual advantage has helped the company scale new heights. It has been one of the major beneficiaries of the government’s focus on the infrastructure sector with the company’s order book expanding at 39% CAGR to Rs.800 billion over the past five years. Even in FY19, the company managed to bag orders worth Rs.125 billion and has guided order inflows of Rs.150 billion in FY20. While a strong order book provides high revenue visibility, the company has huge opportunity to tap into redevelopment of old government colonies in Rajasthan, Delhi and Odisha. However, delay in key redevelopment projects, uncertainty over Jaypee Infra deal and government’s push to take over sick infra companies pose risk to the company’s performance. Despite the headwind, execution of orders worth Rs.320 billion is currently underway, owing to which analysts expect revenue to grow at 27% CAGR to Rs.15,972 crore in FY19-21E. A stellar performance in the past has made the company’s stock an outperformer, delivering returns of 44.50% over the past five years. And despite the rally in the stock price, it still trades at an inexpensive valuation of 9.8x EV/Ebitda, making it a compelling bet.
22. Solar Industries
The state-run telecom equipment maker, ITI, has undergone several tranches of budgetary support over the past five years to keep the company running. Having played a major role in telecom network expansion in the country in the past, the company faced intense competition from players such as ZTE, Huawei, Alcatel-Lucent, Nokia, Ericsson, Siemens and others. This has led to declining topline and increasing losses. But with state support, ITI is recovering and diversifying into other areas.
Despite intense competition, ITI’s revenue has more than doubled over the past five years, from Rs.7 billion in FY14 to Rs.17 billion in FY19. From a loss of Rs.2.9 billion in FY15, the company registered a profit of Rs.920 million in FY19. The market has also remained optimistic on the stock, growing at 42% CAGR since FY14.
ITI has been a part of government projects including National Population Register, Socio Economic & Caste Census. With thrust towards services through digital means, there are opportunities for ITI to provide e-governance applications and services at central and state government levels. It is also trying to tap other business opportunities in the field of defence electronics and communications, solar power solutions and energy storage products.
ITI is trying its luck in business verticals such as smart energy metres, ICT-IoT, mini PC manufacturing, data center hosting services, manufacturing of Rupay and Mastercards with focus on design and development of indigenous products and technologies.
Earlier known for being the biggest gold loan lender in the country, Manappuram Finance is now also a leading NBFC, which caters to multiple sectors including vehicle financing, housing and micro finance. While gold loans still account for 77% of the total assets under management (AUM) of the company, non-gold credit is gaining traction, especially since the acquisition of Asirvad Microfinance.
Constituting the remaining 33% of the overall Rs.194 billion AUM, the non-gold product has driven growth and helped Manappuram de-risk its business. The decision to offer non-gold products also helped the NBFC to tap into a new customer-base and expand its loan book. Leveraging strong brand equity and network of 4,351 branches, the company has been able to scale up the new business segment. The company has launched short tenure gold loan products (3 months) to hedge against unpredictable movement of gold prices by starting an online platform. Here, customers can directly avail loan against gold. The online segment accounts for 36% of the total gold loan book. Manappuram has managed to keep its asset quality under control at net NPA of 0.7%.
Analysts remain upbeat on its future prospects on the back of operational efficiency and stable asset quality. They estimate RoE and RoA of 21% and 5% respectively for FY21. They believe the stock trades at reasonable price-to-book value of 1.8x FY21 even after the recent rally.
The world’s second largest terry towel producer in the world, Welspun India exports 94% of its home textile products to more than 50 countries. A part of the $3 billion Welspun Group, the textile company has made its mark globally over the past three decades. At a market cap of nearly Rs.60 billion, the stock has seen stellar returns over the past five years, growing at CAGR of %42%. Meanwhile, its profit has grown 3x over the past five years, from Rs.800 million in FY14 to Rs.2.3 billion in FY19.
After conquering the global market, Welspun India is now turning its focus to the domestic market where it sees high growth opportunity. It also expects to achieve revenue of $2 billion and become debt-free by 2022. Currently, it has total debt worth Rs.33 billion, with stable debt to equity ratio over the years near 1.26x.
The company is still reeling from the setback it faced in 2016, when Target announced it was snapping all ties with Welspun India due to substantial material being offered in the name of Egyptian cotton. Since then Welspun has moved most of the processes of producing yarn and fabrics in-house. That incident wiped off 50% of its market cap over the next few months. But the company is recovering gradually, and its operating profit increased by 22% YoY in Q1FY20.
What links popular healthcare names such as Seven Seas Cod, and vitamin supplements Polybion, Neurobion and Femibion? Until May 2019, the correct answer would have been Merck Group, the German multinational pharmaceutical brand that spearheaded mass-production of morphine. Now, however, you’ll find Procter & Gamble Health printed on their back labels. The name change is a result of P&G acquiring Merck’s global consumer health business in December 2018. P&G owns 51.81% of Merck Limited, while the remaining share is listed on the BSE and NSE.
A rival to pharma brands such as Dr Reddy, Lupin, and Sun Pharma, Merck commenced its pharmaceuticals and chemicals business in India in 1967. The company has manufacturing facilities in Goa, Mumbai, and Bangalore. It is also the first of Merck’s global subsidiaries to have gone public (1981).
On 29th March, 2019, Merck’s market capitalisation stood at Rs 60.89 billion. The brand has grown at a strong 41.35% CAGR from 2015-19. However, the figure that made the headlines in February 2019 is Rs 440. That is the dividend per equity share the company declared for its financial year that ended on 31st December 2018. Merck also announced a one-time special dividend of Rs 416 per equity share. As per the company, this bonus comes on account of business transfer to P&G.
During the Financial Year ended December 31, 2018, the company achieved a turnover of Rs 8.49 billion, a 19.3% growth over the previous financial Year. Revenues for the first quarter that ended on 31st March 2019 stand at Rs 2.31 billion. This marks 11.66% boost over the company’s first quarter revenues in 2018.
As per P&G Health’s annual report, its growth is in line with the Indian pharmaceuticals market. The latter grew by 11.7% in 2017-18 to achieve a turnover of Rs 1,123 billion. The company is also betting big on its export operations, which hit Rs 1.040 billion on 31st December 2018, a growth of 49.8% over the previous year. P&G Health unquestionably exhibits strong fundamentals. However, given the tepid growth prospects, it remains to be seen how the brand and the pharma industry fare in the coming year.
Vinati Organics is one of the few chemicals players in India that enjoys global leadership in two specialty chemicals, with a market share of 70% and 80% in each.
The company’s stock saw 41.24% CAGR in the last five years. The revenue went up from Rs.7.8 billion in FY15 to Rs.11.58 billion in FY19, while net profit went up from Rs.11.5 billion to Rs.2.82 billion. The growth was led by positive demand environment, investment in capacity and better operating performance.
US-based Lubrizol’s exit from one of the key products has eased competition for Vinati Organics. At the same time, the product saw an increase in demand leading to better pricing power.
Company’s operating margin increased by 828 bps to 35.1% in Q4FY19. Vinati Organics is now the world’s largest producer of this specialty chemical with production capacity at 26,000 tonnes per annum (TPA).
One policy that has kept the company at strong numbers despite volatile crude oil prices is that it charges a fixed margin from its clients. This helps it to methodically transfer the higher costs of fluctuating raw materials to customers.
The stock currently trades at 31.7x FY19e EPS Rs.56.22. According to analysts, the company faces huge product concentration risk. In an attempt to overcome this challenge, the company is coming up with a series of new products to widen its portfolio. Analysts expect earnings to grow by 19% CAGR over FY19-21E.
Bharat Financial Inclusion
As the name suggests, Bharat Financial Inclusion’s mission is to provide financial services to the economically weaker sections. The leading micro-finance company, which was renamed from SKS Microfinance to BFIL in 2016, has an 80% rural customer base and is present across 21 states covering 1,15,000 villages. Further, it has one of the lowest lending rates among NBFCs and MFIs of 19.75%, a healthy cost-to-income ratio of 39.3% as of FY19 and a marginal cost of borrowing of 9.1%.
While the company expanded its customer base in rural India, it remained focused on providing loans that begin at Rs.2,000 to Rs.12,000 to women to help them start and scale-up simple businesses. They also distribute and administer micro-insurance and loans to the poor for buying goods and services. They have struck partnerships with companies such as Bajaj Allianz, Nokia, Airtel and Metro to create an end-to-end support for the borrowers.
This has resulted in strong profitability. BFIL reported PAT of Rs.9.85 billion on assets under management (AUM) of Rs.200 billion in FY19. The company’s loan disbursements have grown to Rs.266.99 billion in FY19 from Rs.6,891 in FY15.
In the same period, its net interest income rose to Rs.21.01 billion from Rs.3.71 billion and its net NPAs marginally increased to 0.2% from 0.1%.
With a stable asset quality and robust loan growth, the stock trades at a P/BV of 2.88x on twelve month trailing basis. The valuations could be sustainable as vast geographical presence and a strong balance sheet indicate that BFIL will continue on its upward trajectory. The merger with IndusInd Bank, which will be completed this year, is expected to bolster the growth of the joint entity.
Part of TVS Motor’s automotive products division, Sundaram-Clayton began operations as a supplier of die cast aluminium parts for air-brakes system. Today, it caters to commercial and passenger vehicle segments, and supplies parts to brands such as Cummins, Daimler, Honda, Hyundai, Ford, ZF Tata Motors and TVS Motor.
The company has seen steady growth over the past five years, which is also reflected in its stock return CAGR of 39% since FY14. It recorded sales of Rs.17.4 billion in FY19 and 13.10% growth over FY18. Of the total sales, 54% came from domestic sales. As of March 2019, the company has a market capitalisation of Rs.58.62 billion. However, dark clouds loom ahead.
As per the Society of Indian Automotive Manufacturers (SIAM), the Indian auto industry grew by 6.45%. Headwinds such as high fuel prices, liquidity crunch, the floods in Kerala, and new taxation norms were hindrances to growth.
The near-term growth outlook is not positive either. With tighter BS-VI emission norms around the corner, the Union Budget proved less than optimistic for the auto sector. The automotive industry is in the middle of a global demand slowdown. No surprise that the company expects flat growth in FY20 for the automobiles and automotive-component sector.
However, medium to long-term outlook is positive. Increasingly stringent emission and fuel economy requirements are likely to push OEMs towards lightweighting. Here, aluminium components will play a strong role. The company is well placed to capitalise on the opportunity since it is already a supplier of aluminium castings to major domestic and international OEMs.
A Kolkata-based company from the KK Bangur Group, Graphite India manufactures and sells graphite electrodes, which are used in the manufacturing of steel. The fortunes of this company are tied to the global demand for steel and crude prices.
The company has had a dream run over the past two years, but the global scenario is changing once again. Global steel demand has been negatively impacted by an industrial slowdown due to a volatile geopolitical and economic environment. In China, slowdown in steel consumption has resulted in oversupply, negatively impacting both steel as well as graphite electrode prices. On the domestic front, India removed anti-dumping duties on graphite electrodes imported from China in September 2018. This led to increased imports.
Despite the cyclical nature of the business Graphite is in, its stock has given investors a steady return over the past five years at 39% CAGR. It witnessed a massive spurt in topline post FY18, when the demand for graphite electrodes rose after years of slowdown. Its revenue doubled to Rs.32.66 in FY18, and further jumped to Rs.79 billion in FY19. This was helped by lower supply from China and an increase in steel production.
While global graphite electrode prices have witnessed a softening trend; the uptick in prices of key raw material (needle coke) is likely to impact the company’s margin profile. Analysts believe that these factors may result in capacity utilisation going down in the near future, which is now at 100%. They value the stock at 6x FY21E EPS.