Special Feature     29-Jan-19
Stocks: Courting confidence
Businesses that to have a game plan to tackle disruptions in a time-bound manner get better discounting than the market and peers
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The past of a company may be glorious but what matters for the stock market is future. Investors expect the business to prosper so that the earnings improve. The process takes years. In an ideal situation, companies set internal targets, announce these goals and make visible attempts to achieve them. Once reached, new objectives are formulated. The process creates significant wealth for investors. Here, the methods adopted to scale the milestones in a set timeframe become important.

Companies continuously interacting with the minority shareholders about their performance and plans inspire trust. The dialogue is in various formats such as annual reports, quarterly results, periodic presentations, conference calls, analyst meets, press releases, annual general meetings or plant visits. Besides these direct interfaces, the shareholders are addressed through interviews to the electronic and print media.

Among these platforms, the prime source of data is the annual report. A section called management discussion and analysis (MDA) is generally rich with insights. The MDA covers a range of issues such as the state of the domestic and global economy, overseas and local industry dynamics, growth drivers and challenges, outlook, regulatory developments and strength-weakness-opportunities-and-threats analysis. Besides, segment- or division-wise breakup of numbers is offered.

Apart from an overview of past performance, the commentary encompasses efforts to increase market share and enhance client base by mergers and acquisitions, acquiring advance technologies to improve product quality and improving presence in international markets.

Also, mitigation backups are mentioned. These comprise de-risking by entering untapped geographies, broadening the asset base, leveraging the existing business network, diversification within sector, debt reduction, adoption of asset-light model to reduce capital commitment, thrust on value-added products, ramping up the operating profit margins (OPM), shedding non-core assets, expanding distribution, restructuring and undertaking rural forays.

Over the last two decades, the quality of disclosures has improved. The annual reports of at least frontline companies are rich in content. In fact, several small and mid caps present meaningful information. The trend underlines the increased sensitivity of the promoters to the concerns of the minority shareholders.

Accountability, transparency and responsibility are the cornerstones of governance. Software solution providers such as Infosys and Wipro have raised the standards of sharing significantly. The Tata group of companies, too, score for the amount of insights made available in their annual reports. However, a balance should be maintained between being open about the operations and protecting intellectual property.

Companies believing in revealing appropriate information with the shareholders are likely to command premium valuation compared with those that are opaque. Businesses carry multiple risks such as industry, market, political, competitive, regulatory and operational. Those that are seen to have a game plan to tackle these sorts of disruptions in a time-bound manner score by getting a better discounting than the market and peers.

Eventually, investors have to take a call on the capability of the company to realize its intentions. They have to monitor what has been said in the past and what have been delivered to determine the credibility of the management and promoters. Scrutiny of the annual reports of the past several years can offer clues.

Some companies talk big but deliver little. At the same time, companies can fall short, not for lack of trying but due to circumstances beyond their control. To weed out dubious companies with grand plans, check their profit and loss account, balance sheets, dividend payout and cash-flows. Also, a glance at the holding of institutional investors such as mutual funds, insurers and foreign portfolio investors can help in deciding the seriousness of their purpose.

Capital Market tracked companies that have disclosed concrete plans for future. Various sources of information including annual reports, presentations, conference call transcripts, filings with the stock exchanges, speeches at the annual general meetings, research reports and media interviews were scanned. Emphasis was on annual reports and direct communication from the companies to various sections of the shareholders. Only initiatives with some data points or supportive information were selected. The attempt was not just seeking out revenue guidance but to track several other issues. Generic statements were skipped. Public sector undertakings (PSUs) were avoided as their grand promises are to please the government. Besides, they face hurdles in the execution of the projects. Companies with mutual fund presence were preferred

For Corporate India to perform and deliver on its promises, the most critical ingredient is economic growth. Over the last decade, the Indian economy expanded at a compounded annual growth rate (CAGR) of 7% and is projected to report a similar sort of growth in the next few years, one of the major comfort factors for India Inc. Considering major countries, India is among the fastest-growing economies in the world.Several growth drivers are in place. The biggest is the population of over 1.25 billion. Others include increasing per capita income, the government's infrastructure push, low-cost manufacturing capabilities in certain industries, demographic benefits such as a large number of young and working-age population, rapid urbanization, changing needs and aspirations, preference for branded products, improving standards of living and focus on rural development.

Tata Power including its subsidiaries has around 32% of the 3,042-MW capacity in clean and green generation sources: hydro 447 MW, wind 932 MW, solar 1,288 MW and waste heat recovery 375 MW. The target is to take the share of non-fossil fuel-based generation sources to 40-50% of the total generation capacity by fiscal year ending March 2025 (FY 2025). In this direction, 400 MW of renewal assets are under construction and 400 MW in the pipeline. Importantly, the focus on renewables is without compromising on returns.

Incorporated in 1919, one of the largest integrated power producers in the country, with overall capacity of 10,327 MW, is present across the power industry value-chain consisting of generation, transmission, distribution, power trading, power services, coal mines and logistics, solar photovoltaic manufacturing and associated engineering- procurement-and-construction services. Around 530 MW of the operating capacities are located overseas, in Bhutan, Georgia, South Africa and Zambia.

Deleveraging of the balance sheet and shift from asset-heavy to asset-light model will be the key business goals. The plan is to acquire thermal, hydel and transmission assets in India, under the platform Resurgent Power, and provide strategic, operational and financial advice. In the process to monetize non-core investments, divestments worth Rs 4700 crore have been finalized and Rs 2500 crore realized.

Supreme Industries plans to enhance the existing capacity to seven lakh tonnes per annum (tpa), by undertaking capital expenditure of Rs 1200 to 1300 crore, by FY 2020. Apart from product diversification, the thrust will be on technological innovations and designs to enhance the overall contribution of value-added products. Increasing channel partners and widening as well as deepening the distribution network are components of the program. The aim is to achieve value CAGR of 12% to 15%, volume CAGR of 10% to 12% and maintain the operating profit margins at 15% to 15.5% between FY 2018 and FY 2021.

One of the largest plastic processors in India, with sales of over four lakh tpa, processes polymers and resins into finished plastic products. Operations are in five segments of plastic pipes, consumer products, packaging products, industrial products and composite products. The second-largest player in the plastic molded furniture market, with processing capacity of 30,000 tpa, services a diverse set of industries comprising agriculture, infrastructure, housing, packaged foods, sports goods, potable water supply and sanitation, auto, electronics, horticulture and floriculture.

The 25 plants across the country add up to an asset base of over Rs 2500 crore. Currently, multiple brown-field expansion projects, worth about Rs 350 crore to Rs 400 crore, are under execution. A 29.99% equity stake is held in listed Supreme Petrochem, a manufacturer of polystyrene, expanded polystyrene and extruded polystyrene foam.

Welspun India's Vision 2022 aims for revenues of US$ 2 billion by FY 2022. Consolidated turnover was Rs 6050 crore in FY 2018. Other targets include becoming a zero-debt company, increasing the contribution of branded and innovative products to 50% from 17% and enhance the share in the domestic market to 20% from 7% in FY 2018. Debt stood at Rs 3280.7 crore, with a debt-to-equity ratio of 1.32 times end March 2018.

The largest exporter of home textile products from India is the world's largest home textile player with presence in bed, bath and flooring segments. With a distribution network in over 50 countries and manufacturing facilities in India, supplies go to 17 of the top 30 global retailers, with every fifth towel and every 10th bed sheet sold in the US.

India is considered as one of the most promising markets. Europe, the Middle East, Far East and Australia will be tapped to bolster growth. Sales will be driven by the new products such as flooring solutions, advanced textiles, smart textiles and bedding products. New product lines are entered into every few years to boost the top line and reduce product concentration risks. The foray into flooring solutions is with a planned investment of Rs 1100 crore. The facility to manufacture area rugs, carpet tiles and other flooring solutions will be located in Telangana. Mutual funds owned 9.64% equity stake end September 2018.

RBL Bank has set measurable and precise targets to achieve Vision 2020. These are 30-35% CAGR in advances, 0.75% to 1% increase in the current-account-savings-account (Casa) ratio in each year, other income to be one-third of the net total income, a cost-to-income ratio of around 51-52% and return on assets of 1.5% by FY 2020. In FY 2018, advances were up 37%, Casa was up 24.3% from 22% in FY 2017, the other income-to-net total income ratio was 37.7%, the cost-to-income ratio was 53% as against 53.5% and the return on assets improved to 1.21% from 1.08%.

Listed in August 2016, one of the fastest-growing banks offers specialized services under six business verticals: companies and institutional banking, commercial banking, branch and business banking, agribusiness banking, development banking and financial inclusion and treasury and financial markets operations. Currently, over 4.5 million customers are serviced through a network of 268 branches, 213 banking outlets and 382 ATMs spread across 20 states and Union Territories. There is tremendous scope to increase geographical presence and penetration. Deposits stood at Rs 45873 crore and advances Rs 47790 crore end September 2018. The gross non-performing assets (NPAs) were at 1.4% and the net NPAs at 0.74% in H1 of FY 2019. The capital adequacy ratio was at 13.7% end September 2018.

Watch and jewelry maker Titan Company aspires to reach 50 million customers and achieve revenues of Rs 50000 crore by FY 2023, that is, 3.1x times the revenues of Rs 16120 crore in FY 2018. The jewelry business is expected to grow to Rs 40000 crore or 2.5x FY 2018 revenues and achieve a market share of nearly 10% in the organized segment. The objective is to increase sale of new jewelry products to 45% by FY 2023 from 31% in FY 2018.

Geographical expansion is a key driver for business growth as the Tata group company plans to increase the number of stores to 400 across 250 towns over the next five years from 250 across 150 towns. Further, the aim is to strengthen presence in the wedding segment and increase contribution from 35% in FY 2018 to 50% by FY 2023, consolidate presence in the high-value diamond jewelry market by increasing contribution from 30% in FY 2018 to 50% by FY 2023, and boost the share of the gold exchange program from 40% in FY 2018 to 50% in FY 2023.

The focus of the watch division is on technology and products such as smart watches, wearable smart belts and wallets. The vision of the eyewear business, currently under brand Titan EyePlus, is to reach 10 million customers a year, achieve market leadership and emerge as the best solution provider for vision care. Flagship brands are Titan and Sonata in watches and Raga in women watches, Tanishq in jewelry, Fastrack in fashion accessories, and Skinn in fine fragrance.

Hindustan Zinc harbors the ambition of becoming the world's largest and most admired zinc, lead and silver producer. The board has approved phase I of expansion of the mined metal capacity to 1.35 million tones per annum (mtpa) from 1.2 mtpa, with matching smelting capacity, over the next three years at a capital expenditure of about Rs 4500 crore. Phase I will be executed concurrently with the ongoing mining expansion that is in the final stages, thereby pushing up the total annual ore production capacity to 20.4 mtpa by FY 2020 from 17.7 mtpa. Additionally, the ongoing debottlenecking of existing smelters will add to capacity.

FY 2018 saw an all-time high production and operating profit. Production of zinc and lead metal grew 19% to 960 kilo tonnes (kt), while that of silver was up 23% to 558 mt in FY 2018. The mined metal production was also an all-time high at 947 kt. Operating profit jumped 27% to the highest-ever Rs 12376 crore. Another record year of production is expected in FY 2019 in line with the objective of delivering 1.2 mt in FY 2020. The Vedanta group company, with 64.9% stake, is among the lowest cost producers of zinc in the world and is debt-free and cash-rich. The Central government owned 29.54% of the equity capital end December 2018.

Established in 2000, Asian Granito is among the largest ceramic makers in the country, with installed capacity of 33.3 million square meters (msm) per annum and over 1,400 stock-keeping units. The product portfolio comprises contemporary ceramic wall and floor tiles and digital, double-charged, polished and glazed vitrified tiles. Other offerings include marble and quartz, with an annual installed capacity of 1.25 msm. Mutual funds owned 4.94% equity stake in the small cap end September 2018.

The aim is to achieve a turnover of Rs 2000 crore by FY 2021 compared with Rs 1159 crore in FY 2018. At present, the network consists of 16 owned and operated stores, 231 exclusive stores, over 1,200 direct dealers and over 6,000 touch points. The plan is to increase the exclusive store count to 500 and ensure product presence in over 100 countries by FY 2021. Currently, exports go to around 55 countries.

The installed capacity is set to increase following an agreement with Paramshree Granito, a Gujarat-based company, to set up a green-field quartz stone facility at Aamodra in Gujarat. Amalgamation of Artistique Ceramics in FY 2016 helped in acquiring a majority stake in two other tiles manufacturers: Crystal Ceramic and Amazoone Ceramic. Thus, capacity and sales have gone up further.

Jyothy Laboratories is a multi-brand and multi-product FMCG company, with pan-India operations. The foray in the premium consumer segment in FY 2011 was on the back of acquisition of Henkel India. The product portfolio consists of fabric care, dish wash, household insecticide, personal care, and laundry services. The different brands in the varied market segments are Ujala, Exo, Maxo, Henko, Margo and Pril. Mutual funds controlled 6.58% equity end December 2018.

The objective is to become debt-free by September 2019 or the second quarter of FY 2020. Debt was at Rs 544.1 crore, with a debt-to-equity ratio of 0.47 times, end March 2018. As per media reports in January 2019, a big-ticket buy is likely later in the year. Acquisition is for strategic fit and might be in core categories of household insecticides and personal and fabric care or even adjacencies such as hair care. The focus will be on products that can be placed in a mass distribution channel. Talks are going on with a few companies. An acquisition every five to six years will contribute to business growth. As proposed, deleveraging of the balance sheet will aid acquisition.

Established in 1981, Maruti Suzuki is the country's largest passenger vehicle manufacturer and the largest subsidiary by volume of production and sales for Japan-based parent Suzuki Motor Corporation. Manufacturing sites are at Gurugram and Manesar in Haryana and have a total capacity of 1.56 million vehicles per year. As many as 1.62 million vehicles were produced in FY 2018. Lifetime high sales of 1.78 million vehicles, including those manufactured by Suzuki Motor Gujarat on contract, were achieved in the last fiscal year.

The contract manufacturing arrangement with Suzuki Motors Gujarat, which is part of parent, is working satisfactorily. The first production line has been commissioned and the second line will begin early CY 2019. Work has started on the third line and the expected commissioning is early CY 2020. The target is to reach two million units in FY 2020 and three million cars a year by FY 2025. The cooperation agreement between the parent and Toyota Motor Corporation is a key step that is expected to benefit on the technology front.

New product launches continues to remain a key growth strategy. Two new products comprised the new Dzire and the new Swift. Also, S-Cross and Celerio were given a face lift. As many as 315 sales outlets including 150 sales outlets of the commercial channel and 203 services workshops have been added. Efforts have intensified to buy land parcels for sales and service outlets.

FMCG company Marico's healthy foods reported revenues of Rs 125 crore in FY 2018. The objective is to grow the franchise to
Rs 450-500 crore over the next four to five years on the back of innovations. The revenue growth target by volumes is 8-10% in FY 2019 and beyond. The push is to increase the market share based on increased investment in the core portfolio, aggressive thrust on premium products, new launches, expansion of distribution and judicious pricing.

The non-coconut oil portfolio of Bangladesh contributed 26% to the total revenues in FY 2018 compared with 10% in FY 2012. The non-coconut oil portfolio is likely to grow to 30-35% over the next two to three years. The projection is to ramp up presence in the value-added hair oils segment in Bangladesh to emerge as the largest player in the medium term as against second position at present.

One of the leading sellers of beauty and wellness products is present in 25 countries across the emerging markets of Asia and Africa. The basket consists of hair and skin care, edible oils, health foods, male grooming and fabric care. Key household brands are Parachute, Parachute Advansed, Saffola, Hair & Care, Nihar, Nihar Naturals, Livon, Set Wet, Mediker and Revive. The international business offerings comprise Parachute, HairCode, Fiancee, Caivil, Hercules, Black Chic, Isoplus, Code 10, Ingwe, X-Men and Thuan Phat. International brands are adapted to suit local tastes.

Consumer durables maker TTK Prestige has drawn up a long-range plan, with an ambitious target of doubling the revenues over the next five years. Investment of Rs 250 crore will be made to build additional capacities and facilities over the next two to three financial years. Post expansion, the capacity of cookers will increase to 8.5 million units from six million and of cookware to eight million units from six million.

The objective is to improve the OPM and return on capital employed. Key products are pressure cookers, cookware, kitchen electrical appliances, gas stoves, and home appliances. A foray was made into the cleaning solutions and other home requisites segments in FY 2017, with products such as water purifiers under the brand Tattva. The distribution network of 544 outlets covers 26 states and 315 towns. A total of 138 SKUs were introduced in FY 2018 and 95 new SKUs are on the anvil in the current fiscal year.

Exceptional income of Rs 128.9 crore was accrued in FY 2018 on monetization of the development rights of a property located in Bangalore. A portion of the funds was used for buyback worth Rs 70 crore. The program was completed at Rs 7000 per share in FY 2018. Mutual funds owned 8.86% equity capital end December 2018 in the debt-free, cash rich mid cap.

V-Guard Industries is confident of growing 15% over the next few years by expanding into the non-south markets and introducing new product categories. Of the 3,000-5,000 retailers that will be appointed every year over the next five years, the highest additions will be in the non-south markets. New categories such as kitchen appliances, switches and switchgear and air coolers are expected to provide significant opportunities. Currently, products are available in over 30,000 outlets.

Operations are in the three segments of electronics comprising voltage stabilizers and digital and standalone uninterrupted power systems, electricals consisting of house wiring cables, pumps, switchgears and modular switches; and consumer durables including fans, water heaters, kitchen appliances and air coolers.

The second water heater unit of the established player in the segment, marketing both electric as well as solar water heaters, in Sikkim is getting fully operational and will provide significant cost advantages.

A judicious mix of in-house manufacturing and asset-light model, with 58% of the products outsourced from various vendors, enables optimization of capital expenditure and working capital. The debt-free status provides significant flexibility to the mid cap to pursue growth objectives. Mutual funds had 11.38% stake end September 2018.

By FY 2022, AU Small Finance Bank aspires to serve 10 million customers and accumulate US$ 10-billion assets. The gross assets under management grew 49% to Rs 16038 crore in FY 2018. The gross non-performing assets (NPAs) stood at 2% and the net NPAs 1.3%. The erstwhile non-banking financial services (NBFC) company commenced banking operations in April 2017, with over 200 branches and received scheduled bank status in November 2017. The reach has now expanded to nearly 500 customer touch points covering 377 branches including 71 bank correspondents, 97 asset centers, 23 offices and 292 ATMs. The initial public offer amounting to Rs 1913 crore was oversubscribed 54 times.

The distribution franchise is being leveraged for cross-selling. There are tie-ups with 17 asset management companies for distributing mutual funds and corporate agency agreements with Aditya Birla Health Insurance and Cholamandalam MS General Insurance for health and general insurance products and with Future Generali Life Insurance for life insurance products. New product lines are agri-small-medium-enterprise, gold, home and consumer durable loans.

Atul operates in the business segments of life science chemicals and performance and other chemicals. The life science chemicals segment consists of three sub-segments of crop protection, pharmaceuticals and intermediates and aromatics. About 900 products and 450 formulations are sold to 6,000 customers in 85 countries. There are 114 retail brands. The track record of uninterrupted dividend since commencement of operations in the calendar year 1952 was broken only once, in FY 2000.

In the near term, the zero-debt Lalbhai group company is working on three fronts. First, improving existing processes and institutionalizing new ones. Second, setting a target of sales of Rs 4000 crore without significant investments. The turnover was Rs 3295.8 crore in FY 2018. Last, debottle-necking of capacities and expanding existing products with high demand.

One of South Asia's largest hospitality providers Indian Hotels Company (IHCL) is driving transformation with a five-year growth map. Aspiration 2022 is based on a three-pronged strategy of re-structuring, re-engineering and re-imagining the portfolio. The strategy is to enhance margins and become the most iconic and profitable hotel company in South Asia.

The focus is on exploring new markets, expanding existing properties, monetizing non-core assets, optimizing costs and simplifying the group structure to grow the bottom line. Also the program includes leveraging digital channels to strengthen the brand and generate more revenue.

The portfolio comprises 165 hotels including under development have an aggregate inventory of over 20,000 rooms across 12 countries and 80 locations. As many as 10 hotels with 697 keys were opened in FY 2018. Popular brands are Taj, Vivanta, The Gateway and Ginger. Service retail outlets operate under brands Khazana (boutique), Jiva Wellness (spas) and Salon Beauty (salons).

Conclusion

Companies with no disclosed growth plans should not be excluded from the watch list. Some still prefer to keep their cards close to the chest for one reason or the other. It is necessary to dig deeper to find clues to their vision. Many provide significant hints about their game without spelling out concrete numbers.

Essentially, such stocks should be explored with a long-term horizon, based on individual risk-appetite. For instance, acquisitions are considered integral by several companies to expand their market share. It is a high-risk, high-return strategy that can backfire if integration fails and projections of synergies are off the mark. Therefore, checking promoters' and management's past record of delivering on targets is crucial.

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