In volatile markets, it is the Large-Cap stocks that hold their ground where others find it tough to do so. With a tremendous investor base, these companies and investors build value in symbiosis. DSIJ tells you how the blue-eyes boys of the Indian stock market can help you grow.

In the world of investing, while the amount of returns your investment generates is a key factor, another significant aspect is the safety of investments. In simple words, risks and returns both assume equally important roles in the investment lifecycle.

It is fairly evident that investments are made when the risk-reward ratio tilts towards reward. However, the choice becomes less obvious when the investment scenario gets uncertain and investors look for safety. While some seek safety in risk-free investments, others who cannot resist equities tend to look for Large-Cap blue chip companies as an option. Good dividend history, high liquidity in these counters and lower downside risks make these an attractive option.

The year 2013 has seen a pall of uncertainty shrouding the investment climate, both on the domestic and the global front. A similar sentiment prevailed in the markets in 2008, when the global markets went under a recessionary tide, sweeping even big names like Lehman Brothers under. Such was the upheaval that it wiped out many companies from investors’ palette. As a matter of fact, there are many firms that have still been unable to make good their losses.

However, there are many Large-Cap companies on the Indian bourses that managed to weather this storm. Here, we bring to you a list of companies that not only managed to emerge unscathed from the troubled economic scenario but have also managed to deliver remarkably on the bourses since then. We have also taken into consideration a few factors like growth in their topline and bottomline.

Sifting Process: Best Of The Best

In our longlisting of companies, we rounded up those which enjoyed Large-Cap status in FY08 and man- aged to maintain this in FY13 as well. Companies that made it to our final list proved to be consistent value crea- tors over the long term.

Of course, long term can mean different things in different contexts, though the typical understanding is anything over a one-year period. But equities need time to grow, and hence deserve a slightly larger incubation period. We have taken into account a period of five years, as this includes a whole economic cycle including one- off events like the 2008 downturn.

After arriving at a preliminary list, we ranked the companies based on five major aspects.

Parameter	Weightage
Topline (Sales) Growth (5-year CAGR)	0.20
Bottomline (PAT) Growth (5-year CAGR)	0.30
Market Capitalisation Growth (5-year CAGR)	0.20
EPS Growth (5-year CAGR)	0.20
Debt/Equity (As on FY13/Latest)	0.10

In the above parameters, we have accorded higher weightage to the toplines and bottomlines as it is difficult for larger companies to show consistent growth. In simple terms, while it would be easier for the smaller companies to grow on a smaller base, larger companies find it difficult to sustain growth. Either the consolidated or standalone profit and sales numbers have been taken into account, depending on which figures the respective companies have reported. We have also taken note of corporate action as necessary.

On the value creation front, we have considered the growth in market capitalisation over the period to calculate the value created by companies. To normalise the effect of equity dilution (if any) on the increased market capitalisation, we have allowed equal weightage to Earnings Per Share (EPS). EPS growth over the last five years has been accounted for.

We have also kept equity investors’ safety concerns in perspective by incorporating the companies’ debt/equity levels in our analysis. While this may weigh against the banking companies as the debt levels in the sector are typically high, the weightage of this factor is minimal and it also shows the performance of banks on the ‘cost of funds’ side.

The Sectoral Sieve

Investors would naturally be curious to understand the critical factors behind the healthy financial performance of the top 50 performers over the past five years (Refer to ‘Hefty 50’ on Page 30). Before diving into the details, here are some numbers that would interest you.

A sectoral bifurcation of our findings clearly suggests that the stocks from the FMCG (22 per cent of top 50 companies) and Banking (20 per cent) sectors dominate the list. Investors may recollect that we have remained bullish on both these sectors. In fact, many on the street had written off the FMCG story as the stocks had already moved up on the bourses. But we kept our faith in India consumer stocks and have repeatedly recommended FMCG counters. In a recent cover story in June 2013 (‘A Global Portfolio To Ride The Consumption Boom’, DSIJ Vol. 28, Issue # 13) we reiterated our call not only on India but also on the Asian consumption story as a whole.

Similarly, we had recommended Banking (Private Banks) stocks though many had expected to see higher valuations and deteriorating asset quality. We had some issues regarding the PSU banks considering their asset quality.

Even pharmaceutical companies are well represented, making up 12 per cent of the total 50. Pharma is another sector that we have been bullish on, with almost all of the major companies recommended by our research team.
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Deconstructing The Top 10: The Hows And Whys

Let’s understand the various strategies that the companies had deployed to better their performance over the period under review. The first name on the list is Titan Industries, which is a unique instance of how ideas can be transformed into winning brands that generate value for its stakeholders, create entire market spaces and then consistently dominate these spaces. Apart from the wrist watch brand Titan, the company has extended its horizon, creating and nurturing brands like Titan Eye, Tanishq and Fastrack. This has helped the company sustain its volume growth. The rise in gold prices and increased demand were also among the reasons for its strong performance.

For Jindal Steel & Power (JSPL), the availability of a larger plant and cost reduction were the primary factors behind he company moving strongly ahead of its peers.

As for Godrej Consumer Products (GCPL), its 3*3 strategy of building a presence in the emerging markets in three continents (Asia, Africa and Latin America) through three core categories (Home Care, Personal Wash and Hair Care) helped the company notch up good numbers. The overseas acquisi- tions were also a success, making for higher exports. Apart from that, the lower leverage has also resulted in better performance at the bottomline levels.

Essar Oil is a happy turnaround story. This was a company known for its consistent losses and heavy tax liabilities. It had also managed to find its way into the CDR Cell. But the management made the right moves that helped the company to steer its course. Essar Oil now has a strong presence in the hydrocarbons value chain, with operations spread across upstream (exploration and production), midstream (refining) and down-stream (marketing) activities.

The ideal scenario for a producer of goods would be to manufacture at the lowest cost and sell at higher than industry average realisations. In an exemplary performance, Shree Cement has not only managed to be the most efficient player by producing cement at a lower cost, but also managed to sell this at higher realisations in the northern and western regions, where it has a strong presence.

For Tata Motors, a seemingly high-cost acquisition helped shift its performance to the top gear. Apart from the domestic demand, which increased by leaps and bound since the end of 2008, the addition of JLR to its kitty was the prime factor behind the success of Tata Motors. Today, JLR contributes to more than 90 per cent of Tata Motors’ profitability.

Similarly, big acquisitions like that of Detroit-based Caraco Parma Labs and Israeli firm Taro Pharmaceuticals were major stimulants for pharma major Sun Pharmaceuticals.

The consistent performer HDFC Bank remained on an even keel, showing 30 per cent growth on a YoY basis. In fact, it has maintained this growth level for the past 34 quarters on a trot. For YES Bank, its policy of branch additions and a focus on corporate deposits has been the critical success factor.

NMDC emerges as the lone PSU player in our list of top 10. Increased contract prices and higher volume growth were the two factors that saw this company generating astonishing returns.

Outrunning Their Peers: BSE 200, Large-Cap MFs

While it is true that Large-Cap companies have created value for investors, did they outperform the other broader indices? If we compare the BSE 200 Index (which is made up largely of Large-Cap companies), it has fared significantly better than the Small-Cap and Mid-Cap indices. In the last five years, the BSE 200 has risen by a strong 43 per cent, while the Mid-Cap index went up by 13.52 per cent and Small-Caps are actually down 12 per cent.

Even some dedicated Large-Cap MF schemes have outperformed, with 34 schemes yielding better returns than the Sensex in the last one year.

Stocks Worth Stocking Up

All in all, the data suggests that with the benefit of time, Large-Cap companies have the potential to create value for investors. While it is true that a good past performance is no guarantee for future success, a well-grounded understanding of the past can surely reduce the margin of error.

Ahead in our story, we are recommending four stocks from the Large- Cap list, which have the potential to provide still higher returns from where they stand today. Read on...
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DSIJ Recommends

Asian Paints

BSE Code: 500820 | FV: Rs 10 | CMP: Rs 4673
TGT: Rs 5200 | Expected Gains: 11% | Time Horizon: 1 Year

In a volatile market, a stock that outperforms the benchmark in an uptrend and declines by relatively lesser margin in a down-trend makes for a comfortable investment. These are precisely the traits of the Asian Paints (APL) stock. In fact, this very resilience provides a downside cover to the stock. Other factors like the current and planned capex are expected to ensure growth and a positive long-term outlook. The best part is the company’s ability to pass on the increasing costs in its major operational segments to customers.

With the volumes doubling nearly every five years, APL has been adding capacities to match the growing demand across geographies. Among these are the recently executed capacity additions at Khandala, Rohtak and Sriperumbudur, as well as in those Bangladesh and Nepal. This validates a robust upside potential in terms of demand.

Going forward, we expect short-term uncertainty in certain geographies that the company is present in. We also foresee the raw material prices remaining high and adding to the mar- gin pressures. However, APL’s strong performance during tough times, its ability to pass on costs to customers, a healthy product mix, massive capacity additions and a positive long-term outlook give the company a good chance to continue performing well regardless of the environment. Add this stock to your portfolio for superior returns going forward.

Sun Pharmaceutical

BSE Code: 524715 | FV: Rs 1 | CMP: Rs 1043
TGT: Rs 1250 | Expected Gains: 20% | Time Horizon: 1 Year

Sun Pharma is currently the top stock in the pharma sector by all measures. Be it in terms of revenues, market cap or operating margins, this company beats all its peers hands down. In fact, it is the first company in the Indian pharma sector to cross Rs 1 trillion crore in market cap.

Besides having a strong domestic presence, Sun Pharma is also a dominant player in the export markets,from which it derives 75 per cent of its revenues. USA is the top contributor, from where it derives more than 50 per cent of its overall revenues. It also has the highest number of product fillings. The company has recently acquired two US-based companies, viz. Dusa and URL Pharma. Both these firms also have a decent product pipeline, which will further help Sun Pharma in terms of new launches in the US market.

Despite being a generics company, its EBITDA margins are at 41 per cent, which is among the highest in the pharma industry. Its revenues and net profits have witnessed a three year CAGR of 41 per cent and 39 per cent respectively. This growth has been consistent over the last two decades, which gives us comfort in recommending this scrip for the long-term investment horizon. Though the scrip is expensive as compared to its peers, it remains a good investment idea as it has always justified the premium at which it trades.
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HDFC

BSE Code: 500010 | FV: Rs 2 | CMP: Rs 824
TGT: Rs 1050 | Expected Gains: 27% | Time Horizon: 1 Year

HDFC has long been at the forefront of housing development in the Indian markets. The company has been the most consistent performer and remained unscratched in the difficult market scenarios. This is one of the few companies that has seen all the economic cycles, be it the global recession of 2008 or the burst of 2000, HDFC has weathered all storms. The company has a presence not only in the Tier I and Tier II cities, but in the Tier III cities as well. We see the growing demand from Tier III cities going ahead.

While the housing loan portfolio brings its own advantages, the company has many unlisted entities like HDFC Life (Insurance business), HDFC Securities and others. On the valuations front, the scrip is trading at a price to book value of 5x. This may look high, but we feel that the consistent performance of this company justifies its higher valuations. One should have this stock in the portfolio from a long-term perspective.

Pidilite Industries

BSE Code: 500331 | FV: Rs 1 | CMP: Rs 265
TGT: Rs 305 | Expected Gains: 15% | Time Horizon: 1 Year

Pidilite Industries is a company that has constantly reaped the benefits of consistency and inventiveness. A strong brand recall, leadership in the adhesives market, a range of innovative products and pricing power are factors that make this a worthwhile recommendation for the long term. It has also demonstrated the ability to overcome difficult economic cycles unscathed. The expected improvement in the export markets and rapid urbanisation in domestic markets are expected to be major demand drivers. The EBITDA margins are also expected to pick up as crude prices have stabilised.

Pidilite has been a consistent dividend paying entity for the last 23 years, and this is an added benefit for investors. On the valuations front, the CMP of Rs 265 discounts its trailing four quarter earnings by 29x, which is in the line with its industry peers.
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Private Companies Versus PSUs

In terms of value cration, PSUs have managed to do better than their private sector peers

A dynamic environment results in high amounts of volatility in the operations of a company. It can result in extensive swings in its performance, valuations and pricing. This has the potential to result in proliferation of its market capitalisation or erosion of wealth. But with such market conditions and macroeconomic factors, buoyancy is more important than gauging their outperformance or underperformance.

In the period from 2008 to 2013, a total of 147 companies have managed to maintain their Large-Cap status. Analysing the performance of these companies gives us a crisp picture of how the large and stable companies of India have performed.

This period saw these 147 companies clocking in a CAGR of 20.38 per cent in their revenues. The operating profits increased by 12.73 per cent and net profits declined by 3.85 per cent. This clearly marks growth in revenues with increased pressure on margins. Cost pressures and interest costs seem to have acted upon to curb the profitability of these companies.

With the above general trend in place, it would be interesting to look at the performance of public sector undertakings (PSUs) against that of the private companies. In terms of market capitalisation, private companies have seen a CAGR of 10.11 per cent in the last five years. At the same time, PSUs have put in 10.51 per cent. With such a closely similar market reaction on these distinct sectors, a deeper look into this would be fascinating.

Private Versus PSU

While private companies have been better than PSUs on the topline front, their performance on the margin front has been relatively far inferior. The trend of higher profitability amongst PSUs is also seen in the EPS of these companies. The EPS of private companies grew from Rs 24 per share five years ago, to Rs 38.09 per share at present. At the same time, the EPS of PSUs grew from Rs 28.22 per share to Rs 44.88 per share. Although profitability is higher in PSUs, the five-year CAGR in EPS for both these sectors stands at roughly 9.5 per cent.

Although there has been healthy growth in the EPS of companies across the board, it is important to note that there is a decline in the ROCE (Return on Capital Employed). For private companies, ROCE declined to 22.11 per cent from 31.68 per cent five years ago. For PSUs, the ratio declined to 15.73 per cent from 24.45 per cent five years ago. This indicates a reduction in the overall efficiency and profitability of companies’ capital investments, which is a clear validation to a difficult operational environment.

Based on these parameters, while the revenues of private companies are better, PSUs have clearly outshined private companies on the profitability front.

Historically, compared to private companies, PSUs have the reputation of being cash-rich. In recent times, there has been pressure on these companies in terms of investing this surplus cash or paying dividends. Both of these, directly or indirectly create shareholder value. Another place where the government’s push for special dividends proves beneficial is when it comes to easing the fiscal pressure that the government faces.

For private companies, the dividend yield has increased to 1.26 per cent from 1.19 per cent five years ago. At the same time, the dividend yield for PSUs increased to 2.84 per cent from 2.63 per cent five years ago. During times where returns on the prices of stocks become uncertain, PSUs provide for a better investment.

Among PSUs, Allahabad Bank, Corporation Bank and Syndicate Bank have been high on dividends. There are also companies which have seen a tremendous growth in dividend yields in the last five years. These include Syndicate Bank, Indian Bank and Jammu & Kashmir Bank.

The high-cash position poses an advantage of lower debt levels, and hence improved profitability in the case of PSUs. The debt equity ratio of large cap PSUs in 2013 stood at 1.15 for private companies and at one for PSUs.

In the private space, there have been some companies that have outperformed significantly and have helped drive the growth of the respective segment. These companies have figured in our ‘Top 10 Companies’ list. Growth has been broad-based among PSUs and the space lacks performers achieving supernormal numbers. Companies like Petronet LNG, IDBI Bank, NMDC and Jammu & Kashmir Bank have been outperformers in the last five years.

A stark difference in the sample of private companies versus PSUs is the distribution of the sample. The trend of the top three private companies being much higher than the top three PSUs may initially seem like the performance of private companies is better than that of PSUs.

But this is hardly true. For example, the average five-year net profit CAGRs of the top three private companies come to 77.24 per cent; and that of PSUs comes to 27.96 per cent. However, the net profit of private companies declined by 7.63 per cent and that of PSUs grew by 8.27 per cent.

This shows how the sample is more extensively distributed in private companies than in PSUs. The deviation of the performance of private companies has been high and towards the extremes, marked by a few companies while the PSU space lacks companies posting supernormal figures. Performance has been concentrated around the average in their case.
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Conclusion

In the last five years, the private sector has performed better than PSUs in terms of revenues. However, PSUs seem to have been at a better position in terms of profitability. While the improvement in their operational profit has been only slightly better, their net profit seems to exceed that of private companies by leaps and bounds.

What puts PSUs in a better position is the fact that these companies have huge cash piles. This gives them the advantage of functioning at a lower leverage than private companies.

Ultimately, this reduces the interest burden on PSUs and hence positively impacts profitability.

Moreover, the high cash position also implies better dividend yields. Higher dividends play an important role during turbulent times, like they did from 2008 to 2013.

This has put the PSU Large-Caps in a better position over the last five years.
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