Top Five Companies With Consistent Operating Profit Growth

Active investors in the stock markets always look for one particular number in a company’s results and that is the net profit. One, however, should note that the true performance of a company is measured by the operating profit margins. Besides having their main business, companies also have an income category called the non-operating income or ‘other’ income which could be income derived from investments. This ‘other’ income adds to the profit but it does not have any impact on the share price of the company. Reliance Industries, for example, in the last quarter derived half of its profit from ‘other’ income and one can see that the stock of the company has not moved as per expectations.

The operating profit is a reflection of the true performance of a company as it indicates how much a company is earning from its business before paying its stakeholders. The operating profit margins differentiate the companies in the same sector. One needs to check the operating profits of the companies in the same sector form which one can find out which company is more profitable than the other. It, however, should be noted that companies could have other problems like liabilities, forex loss or high interest outgo which could result in losses despite having good operating profit margins. Here are five companies that have been showing consistent growth in their operating profit margins in the last five years on a standalone basis.

Mahindra & Mahindra Financial Services (MMFS)

Mahindra & Mahindra Financial Services (MMFS), as the name suggests, is a subsidiary of Mahindra & Mahindra (M&M) which has 56 per cent stake in the company.  MMFS is one of the leading non-banking finance companies (NBFCs) having a wide range of product portfolio which includes vehicle financing, pre-owned financing, insurance broking, housing finance, personal loans, etc. As of March 31, 2012, it has 607 offices covering 24 states and four union territories and this pan-India presence allows the company to tap good growth opportunities. The company tops our list due to a consistent rise in its operating margins. This is evident from the fact that the margins of the company in FY08 stood at 59.35 per cent and from then on have gradually improved over the years to touch 73.64 per cent in FY12. On an YTD basis the stock has appreciated approximately by 24 per cent. On the valuation front the company is trading at a trailing price to earnings (P/E) multiple of around 11.4 times.

Adani Ports & Special Economic Zone

Adani Ports, an Adani Group company, has seen a rise in its operating margins over the last few years. The company, originally named Mundra Port & SEZ, handles India’s largest port and special economic zone (SEZ) located in Mundra, Gujarat.The margin expansion in the recent June quarter has been due to the lower employee expenses and a steep increase in the non-cargo income. Overall, the margin improvement has been due to a steep rise in its revenues which have grown at a five-year CAGR of 34 per cent. The net profit during the same period has grown by 46 per cent, indicating huge margin expansion. The stock has surged by 31 per cent during the year but after its lower than expected results in the June quarter, the stock on a YTD basis has lost 5 per cent on the bourses. According to media reports, the government has also denied security clearance for a coal import terminal at the government-controlled Mormugao Port in Goa. In all, the government has denied security clearance four times in the last few years and that is weighing high on its business. Nevertheless, albeit all the concerns the company has maintained its high margins.

ITC

When it comes to continuous growth at the operating levels, no wonder ITC finds itself on the list. This FMCG company with a high focus on the cigarette (tobacco) segment is also a part of the Sensex. Rather, it is the largest market-cap company on a free float basis and also holds the highest weightage (9.73 per cent) in the Sensex. Despite the relatively new FMCGH segment incurring losses, ITC has always managed to sustain its operating profit growth. Since FY08 the operating profits on a standalone basis have increased from Rs 4,176.61 crore to Rs 8,848.62 crore in FY12. Naturally the bottomline has also increased significantly from Rs 3,120.10 crore to Rs 6,162.37 crore during a similar period.

Bhushan Steel

Bhushan Steel Ltd, formerly known as Bhushan Steel & Strips Ltd, is the largest secondary steel producing company with an existing steel production capacity of 2 million tonnes per annum. The company has three manufacturing units in the states of Uttar Pradesh (Sahibabad), Maharashtra (Khopoli) and Orissa (Meramandali) in India and its sales network is spread across many countries. For the June quarter 2012 the net sales of the company grew by 27.31 per cent on a YoY basis to Rs 3,841 while the net profit stood almost at a flat level at Rs 205 crore, down by 1.90 per cent as compared to the same period last year. This jump in topline was due to higher sales volume and flat realisation during the quarter. Moreover, the company’s performance over the last five years has also remained robust. The net sales of the company in the last five years have grown at a CAGR of 21 per cent while the operating profit has grown by 37 per cent. Capacity addition and the increasing steel demand were the main reasons for this strong performance. The scrip has provided handsome returns to the investors - up by 49 per cent on an YTD basis to Rs 462.

Tata Communications Limited

Tata Communications Limited is an integrated provider of communications. The company, formerly known as VSNL, has leadership in Indian data services, global international voice services and strategic investments in South Africa, Sri Lanka and Nepal. The company has seen an improvement in its operating margins though there are significant increases in personnel expenses and administrative expenses. The major driver for this has been an increase in scale which helps improve margins due to the fixed cost component of the industry. For FY12 the company had an operating profit and net profit of Rs 987.97 crore and Rs 171.34 crore respectively. On an YTD basis, the stock has yielded a return of 7.37 per cent.