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InFocus

Stocks

Outstanding show
Small caps dominate the list of companies to have grown
their profit year after year for the past five years
Sentiments drive the stock market. It discounts every bit of information, including
economics and politics, domestic or international. Investors from all walks of life
absorb the news, draw their conclusions,
and trade accordingly. For novices, the
functioning of the market may appear absurd and irrational and the volatility could
be frightening.
Though the stock market moves on sentiments in the short term, it is far more sensible and rational in the medium to long term.
Indeed, the market knows better and it is
known to discount future well in advance.
The market rewards quality stocks
over medium to long term. It is conscious
about superior corporate governance
norms followed by companies. Companies with resilient business models and
strengths developed over the years are respected. Those with strong brands, distribution network, technology and expertise get premium discounting.
Over the last two decades, at different
points in time, the stock market has seen
unprecedented rallies in specific sectors such
as financial services, cement, pharmaceuticals, information technology, and media. The
surge took stocks belonging to these industries to abnormally high valuations. How-

18

ever, such rallies were short-lived. Eventually, good sense prevailed.


It is clear that the market recognises
performance of companies. Thus, it is better to explore equities with medium- to longterm perspective. At the end, fundamentals
and robust financial track record delivers
good return to investors with patience. With
this premise, Capital Market has made an
attempt to spot companies that have outperformed in terms of profitability year after year. Ultimately, what matter is whether
a firm makes profit. Besides, consistency in
reporting profit is an important factors.
Of the over 3,000 companies listed on
the Bombay Stock Exchange (BSE), frequently traded and liquid stocks were selected. Subsequently, companies with market capitalisation of less than Rs 50 crore
were removed. Consolidated profit was used
wherever available. Companies to have reported losses during any of the last five financial years were eliminated. Besides companies reporting profit in the latest trailing
12 months (TTM) and the corresponding
TTM of the previous year were taken into
consideration.
The change in profit year on year was
determined for the last five years including
the latest TTM. Next, the median of the

change in profit was determined. The median is the middle in a list of sorted numbers. The median is better over average as
the average can be influenced by extreme
values and can provide misleading picture.
After calculating the median value of
growth in profit over the last fives years,
companies to have outperformed the set of
companies in each financial year over the
last five years were selected. Thus, at the
end, 34 companies emerged (see table: Superior profit).
Of these, 14 are from the small-cap category, 11 from the mid-cap space, and the
balance nine are large caps. Small caps have
market value of less than Rs 1000 crore, mid
caps between Rs 1000 crore and Rs 10000
crore, and large caps above Rs 10000 crore.
Firms from verticals such as banking and
non-banking financial services (NBFCs)
dominate the list of outperformers. There
are eight NBFCs involved in business activities such as housing finance, investment,
general finance, term lending, and so on. The
four banks featuring in this include ING
Vysya Bank, IndusInd Bank, Axis Bank, and
HDFC Bank.
As a large number of companies that have
emerged after applying various selection criteria are from the small-cap category, investors can rely on additional filters to pick
strong stocks from these outperfomers. For
instance, history of payment of dividend to
ensure that profit is real. Except for one company, all the remaining 33 selected companies have paid dividend in the latest financial year. Solar Industries India, a mid-sized
firm with market cap of Rs 1711 crore, has

Jul 08 21, 2013 CAPITAL MARKET

InFocus
not paid dividend in the latest financial year.
However, it has paid dividend in the earlier
five years.
There are some interesting companies
among these outperformers. IndusInd Bank
is one such firm. The stock has delivered
consistent growth in the bottom line over
the lat six years. Profit grew 32.2% in the
fiscal ended March 2013 (FY 2013) compared with 39% in FY 2012, 64.8% in FY
2011 and 136.2% in FY 2010.
Compared with profit of Rs 75.1 crore
in FY 2008, IndusInd Bank reported a bottom line of Rs 1061.2 crore in FY 2013,
jump of over 14 times. Earlier in FY 2006
and FY 2005, it was in red. Over the last six
years, that is since June 2007, the stock has
appreciated over nine times. The company
witnessed re-rating since Romesh Sobti
joined the bank as Managing Director and
CEO in February 2008.
Of these 34 firms, 16 have achieved yearon-year growth in profit over the last one
decade. These include Muthoot Capital Services, Intec Capital, Manjushree
Technopack, Supreme Infrastructure,
Vivimed Labs, Dhanuka Agritech, Ajanta
Pharma, TTK Prestige, Gruh Finance, Supreme Industries, Shriram City Union Finance, Mahindra & Mahindra Financial Services, Godrej Consumer Products, Adani
Ports & Special Economic Zone, Axis Bank,
and HDFC Bank.
Apollo Hospitals Enterprise has
achieved extraordinary balance of business
and bottomline growth. The company has
opted for organic expansion over the years.
From owned bed strength of 1,500 end FY
2000, its total bed strength touched 8,420
end FY 2013. This includes 6,382 owned
beds and 2,038 managed beds. This entitles growth of 5.6 times over the last 13
years. Considering the fact that India is an
under-penetrated healthcare market, with
per capita expenditure of Rs 6200 as
against Chinas Rs 17350 and Brazils Rs
46050, Apollo could continue to add capacities in coming years.
Three companies Kwality Dairy (India), Vivimed Labs and Rural Electrification
Corporation reported their 52-week lows
in June 2013. TTK Prestige is another stock
to have reported yearly low in April 2013.
As against this, a higher numbers of firms
are trading close to their 52-week highs including Manjushree Technopack, Dhanuka
Agritech, Kajaria Ceramics, ING Vysya Bank,
Intec Capital, Supreme Industries, TCPL

Jul 08 21, 2013 CAPITAL MARKET

IndusInd Bank rerated on new MD and CEO


Packaging, Suprajit Engineering, M&M Financial Services, and Mayur Uniquoters.
A rural focused and dedicated business
model seems to be the success mantra for
Mahindra & Mahindra Financial Services
(M&M Finance). The M&M group company
has an impressive track record with over 13
times jump in profit and in turnover as well.
This is a classic example of profitable growth.
The company is primarily in the business of
financing purchase of new and pre-owned
auto and utility vehicles, tractors, cars, commercial vehicles and construction equipment.
M&M Finance derives a significant portion
of its revenue from business provided by its
parent, M&M. M&M Finance is a 51% subsidiary of M&M. The company has an extensive branch network with presence in 25
states and four Union Territories through 657
offices end FY 2013 compared with 151 in
FY 2002. Going forward, the geographical
expansion will remain its key strategy to expand its market share.
Among the large- and mid-cap counters,
those available at reasonable valuation by
price to earning (P/E) multiple are Axis Bank
(11.3) and Rural Electrification Corporation
(REC) (4.8). REC also looks attractive in
terms of dividend yield, which is at 4%.
Other companies with dividend yield above
4% include Caplin Point Laboratories,
Muthoot Capital Services, TCPL Packaging, and Ganesha Ecosphere.
Over the last one decade, Godrej Consumer Products achieved growth of over
10 times in turnover and even better 13.5
times jump in the bottomline. Indeed, Godrej
joined the US$ 1-billion turnover club in FY

2013. If consistent organic growth did the


trick for Apollo Hospitals, inorganic growth
has allowed Godrej to achieve scale in quick
time. In FY 2013, Godrej derived 44% of its
revenue from international markets. The
company acquired several companies and
businesses over the years. The long list includes Keyline Brands (October 2005),
Rapidol (September 2006), Kinky, South
Africa (April 2008), Argentina-based Issue
Group (May 2010), Indonesia-based
Megasari Makmur group (May 2010),
Argencos, Argentina (June 2010), Tura, Nigeria (June 2010), Darling Group of Africa
(June 2011), and Cosmetica Nacional, Chile
(January 2012). Despite these acquisitions,
Godrej has remained profitable without
much debt on its balance sheet, with current
debt-to-equity ratio of less than 1.
Ajanta Pharma reported a remarkable
spurt in return on equity (ROE) and return
on net worth over the last one decade. From
2.6% in FY 2004, the companys ROE increased to 32.2% in FY 2013. Moreover, the
rise in ROE is consistent: there was improvement in ROE each and every year.
Other firms with high ROE include Gruh
Finance (33.3%), Kajaria Ceramics (31.5%),
Kwality Dairy (67.2%), Mayur Uniquote
(45.4%), Suprajit Engineering (34.7%), Supreme Industries (42.6%), Titan Industries
(48.4%), TTK Prestige (39.3%), Vinati Organics (33.1%), and Zydus Wellness (41.1%).
Over the last one decade, aggressive expansion of product portfolio is the secret of
TTK Prestiges success. The company
manufactures and markets a range of
kitchenware and related products which
cover four distant activities of preparation
before cooking, food preparation, kitchen
supplements and kitchen hardware. In FY
2013, the firms pressure cooker manufacturing capacities increased by over 100%. It
will be continuing its invest in expanding its
capacities with capital expenditure budget
of Rs 325 crore for FY 2011 to FY 2014.
Over the last five years, TTK Prestige reported growth of 4.2 times in turnover and
6.4 times in profit.
On the flip side, a few companies have
high debt on their balance sheet, which will
put pressure on profitability going forward.
Companies with high debt-to-equity ratio
include Adani Ports (0.93), Ganesha Ecosphere (1.18), Kwality Dairy (4),
Manjushree Technopack (1.3), Nakoda (3.2),
Supreme Infrastructure (1.84), TCPL Packaging (1.9), and Vivimed Labs (1.2).

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InFocus
Superior performance
Companies to have outperformed the median value of growth in profit in each financial year over the last five years

COMPANY

Adani Ports & SEZ


# Ajanta Pharma
Apollo Hospitals

CMP
(Rs)

MARKET
CAP
(Rs Cr)

52-WEEK
EQUITY DEBT-EQUITY ROCE RONW
CHG IN CHG IN
HIGH
LOW DIVIDEND
RATIO LATEST LATEST TTM SALES TTM PAT
(Rs)
(Rs) LATEST (%)
LATEST
(%)
(%)
(%)
(%)

P/E DY (%)

149.8

30999

175

105.2

50

2.28

10.4

23.6

45

47.3 19.1

0.6

876

2053.3

1014.9

342

125

0.5

38.1

32.2

39.4

52.1 20.3

0.7

1038.6

14448.3

1096.2

605.3

80

0.4

12.4

9.5

18.5

33.8 46.7

0.4

# Axis Bank

1323.1

62031.2

1549

926.9

180

18.7

23.6

22.1

12

1.4

# Bajaj Finance

1376.4

6851.7

1591.2

850

150

4.33

14.5

21.9

46.5

45.5 11.6

1.1

47

71

97.9

24

20

0.3

34.4

29.1

16.2

131.2

656

140.6

88.6

110

0.34

29.3

29.7

10

^ Caplin Point Laboratories


Dhanuka Agritech
Ganesha Ecosphere

96

4.7

4.3

12.8 10.2

1.7

40

60.8

50.5

37.5

12

1.18

20.2

29.7

12.9

815.9

27765.1

936

558.2

475

0.84

19.7

25.7

31.7

# GRUH Finance

227.9

4087.6

249.7

141.4

125

9.97

12.4

33.3

24.6

21.2

28

1.1

# HDFC Bank

668.5 159647.8

727

542.5

275

20.5

25.9

30.2 23.7

0.8
0.6

# Godrej Consumer

16.5

2.5

9.5 34.9

0.6

# IndusInd Bank

466.3

24396.5

530.6

308

30

17.8

30.3

32.2

# ING Vysya Bank

603.8

9463.4

667

339

55

14.6

26.1

34.3 15.4

0.9

94

126.5

104

48.1

4.12

19

14.5

44

39.1

0.6

238.3

1753.5

261.4

161

150

0.88

31.6

31.8

22.8

29.2 16.8

1.3

24.1

488.7

48

23.8

10

4.01

23.4

67.9

62.5

71.8

0.4

Intec Capital
# Kajaria Ceramics
Kwality Dairy
# M&M Financial Services

23
9.6
4.1

259.9

14779

287.5

127.7

180

4.43

14.1

23.8

41.7

44.1 15.9

1.4

Manjushree Technopack

115.9

157

117.4

75

10

1.3

19.9

22.5

16.6

17.8

6.5

0.9

Mayur Uniquoters

434.9

471

505.1

265.1

135

0.08

64.5

45.4

18.8

30.7 10.8

1.6

88

109.7

138.9

61.1

35

3.04

18.5

26.8

57.3

40.2

10.1

248.2

15.2

7.2

3.98

6.2

13.3

14.7

18.9

3.9

Rural Electrification Corporation 200.5

35.5

5.2

3.7

Muthoot Capital Services


* Nakoda

19798.6

267.5

178.1

75

5.79

10.9

20.6

29.5

SE Investments

389.9

1581.2

469

313

10

1.23

17.8

19.5

7.3

9.1 22.3

0.3

Shriram City Union Finance

999.5

5539.2

1230

615.1

65

5.76

14

23

50.7

31.3 12.3

0.6

Solar Industries

14.9 14.5

929.4

1682.2

1099

749

0.58

28.2

28.4

15.8

Suprajit Engineering

34

408

39

21.8

65

0.66

34.2

35.2

8.9

^ Supreme Industries

337.6

4289.2

377

215

300

0.7

38

37.4

199.8

334.4

324

174

12.5

3.28

17.2

24.9

69.1

60.1

81.3

39.6

26.55

1.92

16.5

18.6

Supreme Infrastructure
# TCPL Packaging
Titan Industries
# TTK Prestige
Vinati Organics
Vivimed Labs
Zydus Wellness

18.3

8.7

1.9

17.8

33.6 15.5

1.8

31.9

19.4

3.1

0.6

31.7

75.5

4.4

3.8

224.3

19913.4

313.6

200

175

0.03

65.7

48.2

14.2

20.8 27.5

0.8

3165.6

3589.8

3996

2870

175

0.29

45.7

39.4

23.1

17.4

27

0.6

102.1

503.6

180

91.4

100

0.75

31.3

33.2

22.5

25.3

7.3

259

415.9

403.7

254.1

20

1.32

13.6

23

65.9

32.3

638.8

2495.6

748.7

385

50

49.8

41.6

15.8

43.5 25.7

0.8

CMP (current market price) is closing as on 28 June 2013. DY (dividend yield) is based on dividend paid in the latest financial year. Debt-to-equity ratio is for the latest financial year. P/E (price to earning) is based on
latest trailing 12 months (TTM). Financial year # ending March 2013 ending March 2012 ^ June 2012 * December 2012. TTM period ended March 2013, except for Kwality Dairy it is ending December 2012.
Change in TTM net sales and net profit is over the previous corresponding period.
Source: Capitaline Corporate Databases

On the other side, there are few zerodebt or near-zero-debt companies as well
including Zydus Wellness, Titan, and
Mayur Uniquote.
Conclusion
Past performance is no guarantee that these
companies would continue to deliver in future as well. However, the 34 companies

22

have managed to beat the average growth in


profit over the last five years. This is not a
mean feat. What is more, considering the
large base, the growth reported by certain
large-cap firms in profit is simply remarkable. Axis Bank reported median growth of
34.9% and HDFC Bank 31.4% over the
last one decade.
Besides, these firms have emerged out

of over thousand companies, making them


special. These outperformers can be explored for their ability to continue to outshine in future as well. This should be seen
in terms of the industry outlook and the
size of business opportunities. This is of
paramount importance as four out of 10
companies are from the small-cap category.
S Khedekar

Jul 08 21, 2013 CAPITAL MARKET

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