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.
An exclusive licensee of Jockey in India, Page Industries dominates the men and women premium innerwear segment with a market share of 21% and 12% respectively. It has a network of 470 distributors and 50,000 retail outlets in India. Its revenue and PAT have doubled over five years to 28,522 million and 3,939 million in FY19, respectively. Last fiscal, despite subdued consumption due to the generally weaker market and footfalls, Jockey’s revenue grew 11.71% with volumes increasing 5.63%. To meet growing market demand and support aggressive growth plans, Page Industries is working towards doubling its installed capacity from the existing 260 million pieces over the next five years. It expanded its retail presence too by adding 150 stores in FY19, taking the total store count to 620 exclusive brand outlets (EBOs). Going ahead, kids’ wear would be the company’s focus area, for which it has set up a separate team. While the going has been good so far, the company faces risks from continued slowdown in consumer discretionary spends, losing market share to both organised and unorganised segment, and rising cost of raw materials. Factoring risks, its stock currently trades at a premium of 43.8x its FY21 earnings.
Founded in 1946, PI Industries is among the leading players in crop protection industry. It has two main business verticals – agriculture inputs and custom synthesis and contract manufacturing (CSM). Over the years, the company has established a stronghold in these segments, which contribute 39% and 61% to its net sales of 28.40 billion in FY19. Over the past five years, profit has more than doubled from 1.8 billion in FY14 to 4.1 billion in FY19. Whereas sales have also seen a stellar increase from 15.9 billion to 28.4 billion over the same period.
What separates PI from its peers is its focused product strategy. It launches value-added niche products every year instead of generics. Thus, even with a smaller product portfolio, it offers a strong differentiation. Its presence in global markets has come in handy at a time when the domestic agrochemical market faces a slowdown, owing to inconsistent rainfall during rabi season in the previous year. The current order book stands at $1.3 billion and the company plans to leverage the CSM growth opportunity further. PI Industries has commissioned the construction of two new multi-product plants with a capex of 4-4.5 billion in FY20 through internal accruals. This would be in addition to the three manufacturing facilities it has in Gujarat.
Favourable monsoon and superior product mix coupled with strong order book and balance sheet are expected to drive profitability going forward. Over the next two years, net sales are expected to grow by about 20%. Consistent performance and improving profitability mean that the stock will continue to find favour among investors with valuations of 21.6x its FY21 earnings.
A differentiated lending strategy and an early mover advantage enabled Gruh Finance to carve a clear niche for itself over the years. The company has focused on lending to low-income homebuyers, including those with no regular income.
From creating its own model to assess credit risk to following a decentralised decision-making strategy, Gruh Finance has stuck to basics and consistently been an outperformer in the segment. Its decision to steer clear of big-ticket loans has reflected positively in its financial performance. Its net NPA remains negligible at 0.35% compared to nil in FY15, while in the same period, its PAT doubled to 4.47 billion from 2.03 billion. Consequent to its strong performance, the stock has grown at 30.7% CAGR since FY14.
While urbanisation and affordable housing offer a mega lending opportunity, presence in rural housing finance helps Gruh avail cheaper National Housing Bank funds, thereby aiding spreads. After HDFC Bank exited from its majority stake in early 2019, Gruh became a part of the Bandhan Bank family. While Bandhan Bank benefits in the way of increased secured loans share, Gruh gets access to a stable source of funding. But some analysts believe that their functions will overlap, hence diluting the synergies from the merger. Others have also raised concerns over the valuation of the deal. Since the announcement, the stock price of Gruh has sharply corrected, yet it trades at 12.64x P/BV on a 12-month trailing basis.
Real estate stocks have been on a tear since the start of 2019, but the shadow of regulatory concerns and high unsold inventory still haunt the sector. Amidst all these challenges, there has been one company that has consistently led the charge with robust growth year after year and gained scale without deploying excessive capital — Godrej Properties.
Hitting an all time high of 1,005 recently, the stock has seen a stellar rally this year alone, at over 47% till June 28. The stock has seen a return CAGR of 30.21% over the past five years. Its good parentage and strong fundamentals have kept positive sentiment towards the company intact. Its net sales have more than doubled from 11.79 billion in FY14 to 28.17 billion in FY19 at a five-year CAGR of 19%, while the PAT increased from 1.59 billion to 2.53 billion. During five years of share price growth, the company achieved earnings per share (EPS) CAGR of 7%.
According to the management, the company saw its best performance in Q4 FY19 and has lined up 18 new projects for the current fiscal, with focus on NCR, Mumbai, Pune and Bengaluru. To fund the projects, Godrej Properties is also raising funds worth 25 billion via QIP. While net debt to equity ratio may be a concern at 1.66x, it is still around management’s guided range. Godrej Properties trades at 8.66x P/B value for FY20 with a P/E of 109.8x, and brokerages such as JP Morgan believe the risk-reward is negatively skewed.
Hatsun Agro Products
If you had an ice-cream in South India to battle the sweltering heat last summer, it’s very likely that it came from India’s largest private dairy company — Hatsun Agro Products. Arun Icecreams and Arokya Milk, marketed by the Chennai-based company, have become popular across households in the southern part of India. It has a market share of 65% in Tamil Nadu and 35% in South India in this segment.
From being a small ice-cream manufacturing firm in the 1970s, Hatsun Agro has come a long way and currently commands a market cap of 115.89 billion (as of June 28, 2019). Today, the company has evolved into an integrated dairy player, selling milk and milk products such as paneer, ghee and curd. It procures milk from 400,000 farmers has an output of 30 million litres daily. Around 90% of its revenue comes from milk and milk products, while 10% comes from ice-cream.
Procuring milk at a reasonable price directly from farmers has helped Hatsun Agro maintain a high quality, and consequently build a strong brand and customer trust. The company has also put in several quality checks in place, such as milk chilling centres, which weigh up the quality of milk through the use of technology. It also provides animal husbandry services to farmers.
With a focus on value-added products, the company has launched new flavours in the ice-cream segment, which is expected to support margins and growth. Although dairy mills had a tough FY19 due to falling milk prices led by election season and high supply, Hatsun Agro defied market expectation. The company registered sales and PAT of 10.97% and 26.43% at 47.6 billion and 1.14 billion respectively. With a strong performance, the stock currently trades at 98.22x P/E on a trailing basis.
It’s all about the bling for Muthoot Finance, India’s largest gold financier. With 169 tonnes of gold kept as security, the company’s growth is not restricted to its healthy loan book. Muthoot Finance has also rewarded its investors handsomely, with the stock growing at 29.63% CAGR over the past five years.
Despite liquidity crisis and consumption slowdown, the company saw stellar performance in FY19. Gross loan assets of the company grew 18% to 342 billion in FY19 while net interest margin grew 3% to 12.2 billion. Gold loans ticket size also grew from 38,000 in FY18 to 41,000 in FY19. This segment contributes 88% of the company’s total loan book. The rest is constituted by subsidiaries including Muthoot Homefin, Belstar Investment and Finance, Muthoot Money, Asia Asset Finance and Muthoot Insurance Brokers.
Analysts observe that the inherent strength of the gold lending business has helped the company maintain its growth momentum in tough economic environment. Further, favourable regulatory policies and stable gold prices have positively impacted the company’s growth. However, stage 3 assets (NPA) ratio increased to 2.72% as of Q4FY19 compared with 1.96% in the previous quarter, primarily because the lender allows customers extra time to repay loans, if in default. The management believes that this strategy helps them retain customers, instead of seeking collateral auctions.
As the company utilises excess provision (created under earlier accounting standard), credit cost for the next two years will be miniscule, enabling it to deliver RoA of 5% and RoE of 20-22% on a consistent basis, according to analysts. While NII is expected to grow by 9.9% and 10.6% in FY20 and FY21, PAT is seen growing by 0.3% in both the years. With strong growth projections, the stock currently trades at P/BV of 1.7x for FY21.
While its peers like Sun Pharma, Lupin and Dr Reddy’s are grappling with generic drug price erosion in the US market, Torrent Pharma has been an outlier. The company’s decision to expand in India through focus on branded generic has played a pivotal role in its growth. The domestic business contributes around 42% to the topline today, whereas the US segment accounts for just 21% of the overall revenue. Brazil, another key contributor for the company, where it markets branded products, makes up for 13% of the revenue. A combination of strong focus on India and branded business means the company’s sales have grown at 13% CAGR to Rs 74.62 billion over the past five years while the EBITDA margin expanded from 21.92% to 25.86%. The robust profitability of the pharma giant has been driven by the specialty business of chronic and sub-chronic therapies – contributing 75% to the revenue. The branded specialty products give Torrent Pharma an edge because they have a higher brand recall and are also prescribed for a longer time frame as they deal with chronic ailments. The company has been able to implement annual price hikes in India, as 89% of its products are not in the National List of Essential Medicines. Through acquisition of Elder and Unichem, Torrent has further deepened its roots in the domestic business. The company has a strong distribution and marketing system with each medical representative selling products worth Rs 750 million in FY19.
Like most pharma companies, USFDA concerns loom over Torrent as well. Investors are worried about its Biopharm facility warning and Losartan recall, which have also been a drag on the profitability. But with more than three-fourth of revenue coming from regions other than the US, Torrent Pharma is well positioned to tide over turbulent times. Post correction, the stock trades at 22x for FY21, making Torrent Pharma a perfect long-term bet according to experts.
Over the past few years, India has been gradually migrating to an alternative fuel environment and natural gas is one of the top options right now. Several reports note that India's LNG demand is expected to double to 45 million tonnes annually till 2023. This will be fuelled by a glut in the global market and increasing demand from power and fertiliser sectors. And Petronet LNG, the largest logistic player for gas imports, is expected to be the biggest beneficiary. The company has delivered consistent growth over the past five years as profit more than tripled from 7.12 billion in FY14 to 21.55 billion in FY19.
To capitalise on the growing needs of an alternative fuel, the company plans to add two storage tanks at Dahej and a jetty in three to four years, which will boost the terminal’s capacity to 19.5 million metric tonne per annum. For this, the company has announced a capex of 6 billion in FY20 and 1.3 billion in FY21. Despite heavy capex, analysts expect the company to register 11% earnings CAGR over FY19-21 and PAT CAGR of 11%, along with robust RoE of 24-26%. They believe PLNG’s de-risked business model and earnings growth visibility, led by volume growth and improvement in re-gasification margins, make it a lucrative bet for investors. The stock, that has delivered CAGR of 29% to investors over the past five years, currently trades at 13.7x P/E for FY21.
After taking over the reigns in 2008, Romesh Sobti has turned IndusInd Bank into a strong lender with a well-diversified loan book and a stable asset quality. Today, the bank has 1,665 branches with 27,785 employees. Around 60% of its loan book accounts for corporate lending, with the remaining 40% coming from retail and consumer financing. This has helped the lender report a strong interest earned CAGR of 22% over the last five years. In the same period, the bank’s NIM has remained above the level of 3.50% because of high interest garnering retail and consumer assets.
And after the completion of merger with Bharat Financial Inclusion, IndusInd’s NIM is expected to further receive a boost. On the liability side, the lender has built a strong franchise with a CASA ratio of 43.19% in FY19 compared to 34.10% in FY15.
FY19 has also tested the lender’s resolve and asset quality practice. In the last financial year, Indusind Bank’s profit dropped by 9% YoY to 33.01 billion due to higher provisioning for exposure to bankrupt IL&FS. The bank also has exposure to stressed companies — Jet Airways, Reliance ADAG and Essel Group – which still haven’t been recognised as NPAs. Hence, the asset quality could further deteriorate. Currently, the net NPA stands at 1.21%, up from 0.31% in 2015. Sobti’s impending retirement in 2020 could further add to the lender’s woes in these turbulent times. Analysts expect slowdown in loan book growth to 22% in FY20 from 29% rise in FY19 because of deceleration of auto sales. With the company trading at an expensive valuation of 2.85x for FY21E, there is limited upside against the backdrop of deteriorating asset quality and slowdown in loan book growth.