BEST SMALL CAP COMPANY
In an economic downturn, a company’s cash-flow capabilities become increasingly important as its margins and profitability are squeezed. Bharat Forge demonstrated this importance.
The auto maker managed to improve both its cash flow and the margins of its business, according to Atul Joshi, head of India ratings for Fitch.
“If ability to handle an economic downturn is one of the more important attributes of a good management, then this company would easily be in the top pile,” he says.
“The Ebitda (earnings before interest, tax, depreciation and amortisation) margins and FFO (fund flow from operations) margins have not been impacted despite the fact that the company supplies to the commercial vehicle industry, which may continue to face stress in the next 12 to 18 months.”
One of the main reasons the company is able to manage this stress is that over the past three years it has increased its focus on geographical diversification – it has factories across India, China and Europe.
Bharat Forge’s positive June quarter results were driven by a 27.6% jump in exports volume. This led shares to rise by 16.62%.
“Purely from an exports point of view, it’s one of the few companies that have managed to establish a good footprint on the automotive component side. It’s has done very well in the last one to two years despite the fact that the global auto industry is not doing well,” says a Mumbai based analyst.
BEST MEDIUM CAP COMPANY
There are often several outstanding contenders in the mid-cap category, particularly in a country as large as India.
Auto component company Motherson Sumi Systems, for example, was championed by several analysts for its success in turning around its overseas acquisitions in Germany and Europe as well as its plans to expand into Hungary.
While Motherson is one to watch for the future, Shree Cement is already at the top of its game. Its Ebitda margins and funds-from-operations margins – at 27.9 and 23 as of December 2012 – are higher than for most pan-India companies.
It is one of the most efficient power and energy users in the India cement space. The fact that it can consistently maintain its credit metrics and generate good cash flows is due to the management’s clear focus on profitable growth and efforts to reduce the cost structure of the business, according to Fitch’s Joshi.
Shree Cement is keen to keep growing. It has plans to increase capacity from 13 metric tonnes to around 24 metric tonnes by June 2016. This will be funded largely through internal accruals, as the company is likely to generate cash flow from operations of around INR68 billion between fiscal year 2014 to 2016. It had a net cash position of around INR14.4 billion as of June 2013, according to financial services firm Motilal Oswal.
Furthermore, despite the fact that Shree is one of the most cost efficient cement manufacturers globally and is very well positioned to manage a downturn in the cycle, it is rumoured to be looking to de-risk its business even further by diversifying into power. Given India’s economic troubles, it’s a sensible move.
BEST LARGE CAP COMPANY
Tata Consultancy Services (TCS)
“TCS has responded well to global challenges over the past few years, and is one of the very best companies in India in terms of management,” says Punit Srivastava, head of research at Daiwa in India.
The company posted a 17% rise in quarter-on-quarter profits for the first quarter this year, driven by its highest sales volume growth in seven quarters. This strength is likely to be reinforced by the nascent recovery in the US, which is the biggest market for India’s US$108 billion information technology (IT) sector.
“Even when demand was not that good for the global IT services sector, the company continued to grow very fast in terms of both revenues and volumes,” said an equity analyst in Mumbai.
“If you look at 2013 it has had 14% revenue growth in dollar terms against 5% or 6% at most of its competitors, so that is the level of difference we are looking at.”
The company has a market cap of almost US$60 million, but J.P. Morgan believes it could reach US$100 billion. The investment bank stated in an August 20 note that this would be achieved if TCS continues to grow its revenues at a compound annual growth rate of 15% over the next five years while holding margins and return on equity at current multiples.
In order to do so the IT company will need to focus on core strengths such as scale, and technology expertise, while continuing to invest and innovate across the globe. Analysts have no concerns that it will be able to do this.
“Ultimately this business is all about management. A team of over 270,000 employees requires an incredible amount of leadership, and TCS has 1,065 clients on top of that. It is executing at an extremely high level,” said the Mumbai-based analyst.
Aditya Puri, chief executive of HDFC Bank
India’s US$1.26 trillion banking sector is under severe stress. The rupee is depreciating, having reached an historical high of INR65 to the US dollar at the time of going to press.
GDP growth has fallen to below 5% and non-performing loans (NPLs) are likely to rise to 4.4% by fiscal year 2015, according to Standard and Poor’s (S&P). This sounds like a lot of bad news for India’s banks, but one institution is unlikely to be too worried: HDFC.
“It has some of the best parameters – perhaps in the world – that one can imagine for a housing finance. It has managed to maintain NPL levels of less than 1% on a net basis for the last few decades,” said the equity analyst in Mumbai.
“The management of HDFC is unparalleled. This is always reflected in the overall performance, as the company has been delivering 20% on growth across the cycle over the last few years,” said Srivastava.
Puri has led the operations since the 1994 and has installed risk management systems that will come to the fore over the next couple of years and protect the bank against the lending and bad debt problems being increasingly faced across the industry.
He achieves this by maintaining a conservative approach towards lending, with a focus on working capital loans as well as the retail banking sector. “Even in the downturn he has managed asset quality and kept it intact, which is a big achievement,” said one analyst at a domestic securities house.
Puri is likely to benefit from his focus on developing a broad reach over the retail market.
His aggressive expansion strategy grew the bank’s network from 1,986 branches in 2011 to more than 3,000 branches today, and analysts expect these new branches to become profitable in the next few years, further adding to the bank’s ability to target its target market segment.