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.
For most retailers, quick geographical expansion would be an important barometer for success. But not for Noel Tata, chairman, Trent, which operates departmental store Westside. Under his leadership, Tata’s retail arm added just about three to four stores per annum. The idea was to perfect the store format, get the right product mix and achieve store-level profitability before opening more stores. Not only did he expand slowly, but also focused on developing private labels across various product categories – apparel, cosmetics, bags and lingerie.
This two-pronged strategy, of slow expansion and focus on private labels, has allowed Trent to clock impressive growth numbers consistently. The company has consistently garnered gross margin of around 60% over the past five years, while its profit margin rose from 3.16% to 8.66%. The company’s strong performance reflected in its stock market run as well. Over FY14-FY19, the stock grew at a CAGR of 28.75%.
Having perfected the Westside format, Trent has now switched to a more aggressive expansion model over the past few years. Analysts expect that the healthy store addition coupled with steady same store sales growth (in high single digit) will drive Trent’s revenue.
While Westside contributes a lion’s share to Trent’s business (about 92%), the other verticals are also fast scaling up. Their JV with Spanish retail firm Inditex to run Zara and Massimo Dutti stores in the country allows Trent to also cater to the premium audience. They have hit a sweet spot with Star Market, a refreshed avatar of their struggling hypermarket format Star Bazaar. By rightsizing their stores and launching more private labels, the company has been able to trim losses under this format. It has also entered the fast fashion market with Zudio, which offers value with the same private label focus. While Zudio is a lower gross margin business than Westside, it offers higher volume. Analysts expect consolidated revenue to grow at a CAGR of 20% in FY19-21 driven by aggressive store addition. The stock currently trades at a premium 49.7x its FY21 earnings. But Tata’s business acumen coupled with Trent’s unique business model and historical performance makes the premium seem justified.
Gujarat Fluorochemicals is a perfect example of a well-diversified company. The group has businesses ranging from chemicals and wind turbine manufacturing to cinema exhibition and wind power generation. Together, these entities have helped the group clock impressive growth over the years. Between FY14-19, its total income rose by CAGR of 11% to Rs.56.98 billion, while profit rose by 43% CAGR to Rs.13.49 billion. In the same period, its stock has grown at a CAGR of 28.74%.
The company has carved a strong niche for itself in each of these segments. While it is the largest manufacturer of polytetrafluoroethylene (Teflon) in the country, its cinema business Inox is present across 67 cities with 583 screens. Meanwhile, the fastest growth was witnessed in the wind turbine manufacturing business, where revenue rose by 200% and PAT by 79% in FY19.
The company plans to ramp up capacity utilisation, improve realisation and implement cost reduction schemes. It will look at value addition by diversifying into fluoro-speciality chemicals as well as other fluoro-polymers. Overall, the company has already incurred capex of about Rs.20 billion to build up the current capacities and integrated value chain, but it expects capex cost to be marginal.
Despite a capital-intensive operation and volatility in film exhibition business, analysts expect robust performance for Gujarat Fluoro. Net sales and PAT for the company are expected to grow at a CAGR of 23% and 35% respectively, from FY18-21 and its stock trades at an EV/Ebitda of 8.49x for FY21.
Kotak Mahindra Bank
Kotak Mahindra Bank’s performance over the past five years has been defined by a two-pronged strategy of stable asset quality and steady growth. Following its acquisition of ING Vysya Bank in 2014, Kotak has become the fourth largest bank in the country and has more than 1450 branches to increase its footprints in the retail segment.
While the interest earned has gone up from Rs.133.18 billion in FY15 to Rs.299.34 billion in FY19, the lender managed to keep the bad loan under control. Net NPA has declined steadily over the years to 0.75% in FY19.
The bank has a diversified loan book with corporate loans accounting for 30% of the overall lending. The lender also doles out loans to a range of sectors like agriculture, housing, small businesses and auto consumers. It has also been able to maintain net interest margin near 4% for the last five years because of the stable asset quality and high interest advances like housing and car loans. The profitability has also increased sharply growing at a CAGR of 23% to Rs.72.04 billion because of requirement of lower provisioning and strong performance of subsidiaries. The lender’s insurance and mutual funds arms reported strong profit growth of 21% and 91% in FY19. With adequate capital and CASA ratio of around 52%, the bank is poised for further growth. The management estimates that in FY20 the loan book will grow by 20% with sharp focus on lending to retail and good rated corporates. A strong performance across key parameters justifies Kotak Mahindra Bank’s hefty valuations of 3.5x price-to-book-value for FY21E. However, the lender’s tussle with Reserve Bank of India over promoter holdings remains a major drag on the stock.
A mid-cap IT company, Tata Elxsi provides design solutions to automotive, broadcast and communication companies. The Tata company remains well-diversified, in terms of segments and geographies. Over 50% of its revenue comes from the North American market and the auto sector is its most important vertical. China is an area of opportunity for Tata Elxsi with 200 brands as several OEMs are looking to expand sales outside China. Healthcare (~6% of total revenue) is the company’s fastest growing segment as it provides medical devices engineering Quality & Regulatory compliance support services.
In dollar terms, it has consistently seen high single-digit or double-digit revenue growth over the past five years. The company reported revenue of Rs.16 billion in FY19, doubled from Rs.8 billion in FY14, at a CAGR of 13%. Its stock has also rewarded its investors with 28% return CAGR over the same period.
Despite slowdown in global automotive R&D, analysts believe that opportunities for the company include – shifts within R&D allocation, underpenetrated product engineering R&D outsourcing market and scale differentiation versus large peers. HDFC Securities has factored in 9% and 6% dollar revenue and EPS growth respectively over FY19-21E, with limited growth visibility and near-term growth challenges. Analysts see the stock trading at 18x FY21 EPS, at 25% discount to its historical valuations.
Ms Sitharaman’s maiden budget specified a portly investment of “Rs.100 trillion for infrastructure over the next five years.” That should be music for infra firms, and that holds just as true for JK Cement.
The second largest producer of grey cement (8.37 million tonne) and white cement (1.26 million tonne) registered a turnover of Rs.491.91 million. That accounted for a 4.45% growth over 2017-2018. Profits came to Rs.66.8 million, a 6.7% hike during the same period last year. Meanwhile, JK Cement’s Ebitda increased to Rs.81.012 million in FY19 compared to Rs.76.066 million in FY18 (growth of 6.5%).
As per CRISIL, cement demand is expected to grow at 7% for 2019-2020. Chief drivers here will include housing (accounts for 60-65% of the demand), 125,000 km of roads that the Finance Minister aims to upgrade by 2024, development of smart cities, and metro-rail projects.
To cater to the impending bump in demand, the company plans to boost grey cement by 4.2 million tonne per annum with 2.8 million clinker production line at its plant in Mangrol, Rajasthan. Expansion plans also include amping up cement grinding at Nimbahera, Rajasthan by one million tonne along with two split grinding units of 1.5 million tonne at Aligarh (Uttar Pradesh) and 0.7 million tonnes at Balasinor (Gujarat). The capacity expansions are scheduled to be completed by March 2020.
By 2022, JK Cement has a more ambitious plan to expand combined capacity at its plant in Panna, Madhya Pradesh to 18 million tonne per annum. The plant currently has a capacity of 3-3.5 million tonne.
Maruti Suzuki India
A popular adage says that staying at the top is much more difficult than getting there. And Maruti Suzuki’s journey in India is a clear validation of this. The automaker, who has consistently held more than 50% market share in the passenger vehicle segment in India, has adopted a nimble yet sure-footed approach to build their business and retain leadership.
The company constantly launches newer models to fill gaps while continuing to build on well-established variants. They were also at the forefront of adopting and introducing newer technologies in their models – be it introducing cars with automatic transmission or BS-VI compliant vehicle launches (Baleno and Alto models) or now jumping onto the electric vehicle bandwagon. The company has also been proactive in realizing the high cost of upgrading diesel engines to BS-VI norms, and has decided to stop manufacturing diesel vehicles from April 1, 2020. They instead plan to focus on CNG and hybrid technology driven vehicles. While enjoying a leadership position, Maruti doesn’t shy away from building synergies with peers to bolster growth and expand presence. Its recent alliance with Toyota, to share models, platforms and new-age technologies, is a step in this direction.
The consistent performer hit a speed bump last year, when the auto industry faced headwinds including increase in fuel, insurance as well as finance costs and liquidity crunch. Maruti’s net sales grew at a tepid pace, with 3.35% growth to Rs.830.38 billion while PAT fell by about 3% to Rs.74.94 billion YoY. Margins contracted to 12.78% from 14.70% in the same period.
However, analysts remain bullish on the firm. For one, the domestic PV industry is expected to improve from 3% in FY19 to 3-5% in FY20. Maruti is expected to outpace the industry growth: sales and PAT to grow at a CAGR of 9.3% & 8.2%, respectively, between FY19-21. Also, volumes are expected to rise at a CAGR of 5.7% and Ebitda margin to remain at 12.5-13% over FY19-21. The margins are likely to expand owing to ramp-up of the Gujarat plant, royalty rate reduction, lower discounts and cost-cutting initiatives. These coupled with Maruti’s broad based product portfolio and diversified geographic presence make it a stock worthy of high valuations, trading at 23.7x its FY21 earnings.
If the southern film industry has given India some of the biggest superstars, its cement industry has too. Case in point: The Ramco Cement Limited (TRCL), the flagship company of the Ramco group.
During FY14 to FY19, the company’s stock grew at an impressive CAGR of 27.90%. In the same period, its net sales rose to Rs.50.60 billion from Rs.36.04 billion and net profit doubled to Rs.5.07 billion from Rs.2.43 billion.
The company’s strength lies in the fact that it has maintained highly efficient operations despite stiff competition in the south and east regions. The company has halved its debt-to-equity ratio to 0.28 in FY19 over the past five years. Even while steadily increasing capacity, it ensured its optimal utilisation. In FY19, the capacity utilisation stood at 74.2%, a steady rise from 70% in FY15.
At a time when the cement industry in India is facing a problem of plenty, Ramco Cement seems to be on a solid footing. Since cement is a geographical play, the glut in western, northern and central regions won’t drastically impact Ramco’s performance. The southern cement giant has cleverly avoided these markets and instead plans to strengthen its presence in the eastern territory. It plans to add a capacity of 4.5 metric tonnes (MT), which would take its total potential output to 21 MT, of which 2 MT will be installed in the eastern region and 2.5 MT in Andhra Pradesh.
The company’s stock has delivered stellar returns over the past five years and hence trades at EV/ Ebitda of 13x for FY21.
Eicher Motors is the parent company for Royal Enfield and has a joint venture with Volvo, called Volvo Eicher Commercial Vehicles. The company, which has a market cap of Rs.522.24 billion, has a five-year stock return CAGR of 28%.
Profit has increased around 4x in the last five years, and the company recorded net profit of Rs.2,202.73 crore in FY19. Total income has risen to Rs.97.17 billion in FY19 with 5-year CAGR of 7%. This is thanks to the loyal following for Royal Enfield and the company’s expansion into new markets.
The company tied-up with a local assembler to establish operations in Thailand, its first outside of India, and entered South Korea in April with a flagship store in Seoul. Subsequent stores were opened in Hanoi and Bogor. Additionally, the company also saw a change of guard with new Royal Enfield CEO Vinod Dasari.
While these are encouraging moves, analysts believe that the foreign foray is time-consuming and will deliver returns with a lag. Also, the company saw a difficult FY19, and VECV saw its revenue from operations fall 3% to Rs.32.09 billion in Q4.
A brand fatigue also seems to have set in, reflected in demand slowdown. Last year, plagued by a long labour strike at its facility in Tamil Nadu, it had cut its production target. Subsequently, this was further trimmed in response to high inventory and low demand. Buyer enthusiasm may have dimmed after revision in insurance cost and increase in prices on account of new safety norms. Against this backdrop, Jawa Motorcycles has emerged as a competitor for the brand. According to an HDFC Securities report, earnings growth is expected to fall to single digits over FY19-21E.
The company remains unperturbed, viewing the lull as a period to strengthen its product portfolio and discover strong dealerships. Eicher Motors is trading at a P/E of 19.9x for FY21E.
Bajaj Holdings & Investment
With two financially robust companies — Bajaj Auto and Bajaj Finserv Services — under its belt, Bajaj Holdings has been investors’ favourite over the past five years, giving a strong CAGR return of 27.77%.
The company has 39% stake in Bajaj Finserv and 33.43% stake in Bajaj Auto. Under Finserv, the company has Bajaj Finance and two other insurance units — the former is one of the biggest NBFCs in the country. Bajaj’s financial companies have consistently reported strong growth over the years by relying on a mix of technological innovation and operating efficiency. At the same time, Bajaj Auto is aggressively cutting prices, innovating and marketing to regain the market share lost over the past five years. But this focus on expanding market share is coming at the cost of margins, which have shrunk to 21.92% against 23.93% in FY18. Sharekhan expects Bajaj Auto’s topline to report healthy 13% CAGR over the next two years.
With the flagship companies expected to continue their upward growth trajectory, Bajaj Holdings and Investment is likely to be on investors’ shopping list. In fact, the brokerage, Sharekhan has also raised its target price for the company to Rs.4,548 from Rs.3,924.
Riding high on small-ticket, retail and agriculture loans, private lender DCB Bank has built a strong balance sheet and a solid asset portfolio. It typically lends to entrepreneurs, MSMEs, small businesses, restaurant of hotel owners and kiranas. The bank also has other retail product lines such as mortgage, CVs and gold loans.
With consistent loan growth of around 22-23% over the past ten years, the bank has seen stable NIM of over 3.5%. From a loss of Rs.100 million five years ago, it posted a net profit of Rs.3.25 billion in FY19. DCB Bank has been a complete outlier in terms of asset quality. While the net NPAs are at 0.65%, fresh slippages also declined to 1.6% in Q4FY19 against 2.5% in the previous quarter.
Motilal Oswal Financial Services expects loan growth of 24% CAGR over FY19-21 and believes credit cost will remain in control due to the higher proportion of secured loans.
Strong performance means the stock is not trading at a cheap valuation. Currently, it trades at 2.5x price-to-book value on a 12-month trailing basis and 1.8x for FY21. While the valuations are high, analysts believe it should be able to justify them at the current pace of loan growth and sound asset quality.