Key Value Creating Sectors

Dinesh Thakkar, CMD, Angel Broking tells us about the growth seen in the IT, oil & gas, metals & mining, FMCG, banking and auto sectors in India.

• Post the growth seen in traditional IT services, offshoring has now become the new engine of growth despite the overall market growing more slowly, with a focus on cost saving, high quality delivery, service excellence and vendor consolidation. Large-cap Indian IT companies have made a clear choice of going up the value chain and competing in the enterprise transformation space.
• The Indian automobile industry has been one of the biggest beneficiaries of economic growth in the country over the past two decades. While India's GDP expanded at a CAGR of ~7 per cent over FY1992-2012, the overall auto sales (ex. three-wheelers and tractors) grew by a robust ~12 per cent over the same period.
• The surge in personal disposable income (post liberalisation), higher aspirations of consumers leading to growth in consumption and changing consumer preferences have all lead to healthy financial performance of FMCG companies, which has resulted in an appreciation of stock prices and huge value creation.

IT Sector

The Indian IT sector was started two decades ago with an export of ~USD 100 million and 5000 employees (at the beginning of the 1990s), and has now grown to ~USD 70 billion and around 2.8 million employees. Over the past few years, the growth in the Indian IT sector as a percentage of the GDP has also been on the rise owing to various reasons such as corporates from developed markets coming up to create differentiated business value, and companies starting to focus simultaneously on managing IT costs and focussing IT investment on business processes that are sources of competitive advantage. As a proportion of the national GDP, the sector’s revenues have grown from 1.2 per cent in FY1998 to 7.5 per cent in FY2012.

Post the growth seen in traditional IT services, offshoring has now become the new engine of growth despite the overall market growing more slowly, with a focus on cost saving, high quality delivery, service excellence and vendor consolidation. Indian IT grew rapidly and became the dominant player globally, with India having the one of the largest concentrations of IT talent in the world. Large-cap Indian IT companies have made a clear choice of going up the value chain and competing in the enterprise transformation space. Having dominated the ADM, testing and infrastructure management sectors, global competition is mainly between Indian offshore players now, leading to a lack of pricing power and commoditisation.

Infosys has been one of the dominant players in the Indian IT industry and has taken advantage of the aforestated opportunities and outperformed the benchmark indices. Since the time of its listing till FY2012, Infosys’ stock price has grown by more than 50x. In fact, the actual returns would be even higher if we account for the dividends received by shareholders. The outperformance of this company can be attributed to its strong management team, who had the vision, execution skills, buoyancy in demand for IT services and a competitive edge over their global peers.
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Oil & Gas

Reliance Industries (RIL) has been one stock in the Oil & Gas sector that has outperformed the benchmark. During 1992-2012, RIL’s stock price has grown 26x as compared to the BSE Sensex growth of 7x. The actual returns would be even higher if we account for the dividends received by shareholders and include some of the businesses that were de-merged and listed separately during the last decade. This outperformance can be attributed to its strong management team, who were also efficient allocators of capital. Although petrochemicals and refineries is a commodity business, the scale and low cost of RIL’s operations remained unmatched during the past two decades.

ONGC’s stock was trading at only 9x of its earnings during the same period. However, given that ONGC has had a high dividend payout ratio, the returns to the shareholders are much higher.

Metals & Mining

In the metals and mining sector, miners emerged big winners, beating the benchmark by a long way. To cite a few examples, NMDC’s stock price is up 375x during the past 12 years. Sesa Goa and Sterlite are up 176x and 80x respectively as compared to the growth of 7x seen in the BSE Sensex during 1992-2012.

The returns for metals and mining companies have been stellar post 2002 as the margins and earnings witnessed an unprecedented multi-fold rise with the commodities boom led by China. Mining companies and integrated steel companies’ margins have a high leverage to metal prices as their costs witness modest increases even though the prices of their finished products rise multi-fold. With a strong growth in profitability, a lot of companies’ balance sheets were deleveraged, which led to massive re-rating of their stocks. Even SAIL’s stock had grown 50x during the seven years of the commodity boom from 2001 to 2008.

Overall, metals and mining stocks went full circle during the past decade. The prices of metals, and hence, the stock prices of the companies, fell massively during the financial crisis of 2008. At the lowest point, the prices of non-ferrous metals such as aluminium, zinc and copper were trading well below the cost of production for most companies. This did not last very long, and the commodity prices spiked up again in 2009-2010, which again led to massive outperformance of metals stocks during the same period.

FMCG 

Stocks in the FMCG space have grown manifold over the last two decades, for eg. those of ITC (~37x), Nestle (~28x) and HUL (~14x). The healthy performance of these stocks has been on account of their strong fundamentals, with their bottomlines witnessing a CAGR of ~20 per cent during the period. Other stocks in the sector with a shorter listing history, such as Godrej Consumer (50x) and Marico (37x), have also been multi-baggers.

The surge in personal disposable income (post liberalisation), higher aspirations of consumers leading to growth in consumption and changing consumer preferences have all lead to healthy financial performance of FMCG companies, which has resulted in an appreciation of stock prices and huge value creation.
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Auto

The Indian automobile industry has been one of the biggest beneficiaries of economic growth in the country over the past two decades. While India's GDP expanded at a CAGR of ~7 per cent over FY1992-2012, the overall auto sales (ex. three-wheelers and tractors) grew by a robust ~12 per cent over the same period. During the same period, the two-wheeler (motorcycles grew by an impressive 18 per cent), passenger vehicle and commercial vehicle segments of the automobile industry registered a strong volume CAGR of 11 per cent, 14 per cent and 10 per cent respectively. This can be attributed to factors like firm GDP growth (leading to increasing affluence of rural and urban consumers), favourable demographics, low penetration levels, entry of global players and easy availability of finance.

Hero MotoCorp has been a prime beneficiary of strong growth in the domestic motorcycle industry. The company has witnessed a ~21 per cent volume CAGR over the past two decades, which has translated into a revenue CAGR of ~25 per cent. Unarguably, the company has created significant value for its investors, and this is reflected in the ~26 per cent CAGR in stock returns over FY1992-2012.

Bajaj Auto, since its demerger, has outperformed its peers as far as the stock price performance is concerned, to register an impressive CAGR of ~76 per cent over FY2009-2012.

Mahindra & Mahindra has also been a consistent performer over the past two decades, and its stock price has witnessed a CAGR of ~18 per cent over the same period. A strong focus by the management on the tractor and utility vehicle segments has enabled the company to maintain its leadership position in these segments.

Banking

Growth in the Indian economy coupled with the financial sector’s liberalisation (12 new licenses in two tranches) has led to a transformation of the Indian banking sector over the last two decades. Since their listing, private banks like Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank and YES Bank, have all created immense wealth, outperforming the broader markets by giving returns at a CAGR of more than 25 per cent as compared to annualised returns of not more than 14 per cent offered by the Sensex during the comparable period. The underlying driver for better performance of these private banks was superior management, a focussed strategy, prudent lending, better risk management practices and advanced technological platforms.