Indias 20 Best Blue Chip Companies
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While returns make for one of the most important aspects of the investment lifecycle, the risks assumed in earning these returns are equally important. One very certain thing about year 2011 has been the uncertainty that has shrouded the investment climate, whether on the domestic or on the global front. Consider the historical returns of the Sensex from the start of 1991 during the months of January and February wherein the returns on an average have remained flat for the month of January and averaged at 4 per cent for the month of February. This year, however, the story was a bit different and the Sensex was down by 13 per cent in the month of January and by 3 per cent in the month of February. The reason for such a change in the scenario is no mystery.
Strings of negative news flows at regular intervals from the domestic and international front have adversely affected the market sentiment. Right on top is the worry about the rising inflation curve. Though it is nothing new and was so even in 2010, what has really caught the markets’ breath is the severity and stickiness of the inflationary trend. The RBI, in order to control the inflationary monster, has already increased the repo rates eight times since January 2010, which is up by 200 bps to 6.75 per cent – the highest since December 2008. Then arrived the black swan event of an uprising in the Middle East and North Africa (MENA) that led to the shooting up of the oil prices to above USD 110 per barrel. This made the commodity prices all the more ballistic. All this has had serious repercussions on corporate earnings, whether it due to a rise in their interest burden or an increase in their cost of production.
Why Now?
In such a scenario, “bada hai to behtar hai” (if it is big it is better) aptly fits and here when we say big it implies a larger market capitalisation. It is generally believed that large-cap stocks have more diversified revenues and comparatively higher predictable earnings. They are not susceptible to a sell-off in case panic grips the market so much as the mid or the small-cap counters are. In short they are well-equipped to handle a down-trend in the market. Selecting the best among the large-caps is a step ahead in insulating an investor’s portfolio from value erosion in such uncertain times. This is exactly where our selection comes to the aid of our readers. We have applied market capitalisation as the first filter for identifying the companies to be recommended.
However, size was not the only criterion for selecting these companies. There were other criteria as well that went into consideration, one of the most important being the leverage of the company that needs to be low in a rising interest rate scenario. Except for companies in the financial sector and CESC, all the companies have a debt to equity ratio of less than 0.5 and three companies have not had any debt on their balance-sheet at the end of FY10. In addition to this, the dividend yield plays an important role in selecting the companies. With capital appreciation not taking place in the current situation, a higher dividend yield provides some solace to investors. All the companies selected have a long history of dividend payment and the average yield has worked out to be 1.5 per cent, calculated as on March 18, 2011.
Furthermore, there were qualitative factors that were also considered before finalising the list. Those companies which have a diversified revenue stream, including geographical diversification, were given a higher preference as they are better equipped to face the volatility. We have also included those sectors that are considered defensive such as pharmaceuticals and FMCG. These constitute 30 per cent of our portfolio. We had carried out a similar exercise last year but with a larger portfolio size of 50 stocks. The return generated by them has not been as spectacular but nevertheless we have managed to beat the market. If we had invested an equal amount in all the stocks the return would have been 8 per cent but had we bought one of each scrip, the returns would have been 11 per cent compared to 6 per cent yielded by the Sensex in the same period. Here is the list of the 20 large-cap blue chip stocks that we have short-listed to create a portfolio for our readers selected on the basis of the above said parameters.[PAGE BREAK]
Aditya Birla Nuvo
Aditya Birla Nuvo (ABNL), as the name suggests, is a part of the USD 30 billion Aditya Birla Group with revenues of USD 3.5 billion (FY10). It is present in the segments of financial services, telecom, fashion and lifestyle, IT-ITeS and manufacturing. ABNL is present in all those sectors which are presently on a growth path as far as India is concerned. For 9MFY11, ABNL’s one-third revenue came from financial services, one-fourth from the manufacturing sector, 22 per cent from telecom, 10 per cent from fashion and lifestyle, and the rest 9 per cent from IT-ITES.
For 9MFY11 the consolidated income of ABNL grew by 17.32 per cent on a yearly basis and in the same time its net profit turned positive to Rs 529 crore as against a loss of Rs 26 crore for 9MFY10.
It was the turnaround of the life insurance and the fashion and lifestyle segments that helped it to post profits. We believe that such a diversified port-folio will help the company to de-risk its business further from any immediate volatility.
Allahabad Bank
Allahabad Bank, the oldest bank in India founded in 1865, still continues to be one the best performing nationalised banks. From a low of 2.6 per cent at the start of Q1FY09, the net interest margins of the bank have increased to 3.44 per cent at the end of Q3FY11. This along with a strong growth in the credit off-take (increase of 32 per cent on a yearly basis) led to a strong net interest income growth of 55 per cent on a yearly basis. But this higher credit growth did not come at the cost of its asset quality. Its gross NPAs stood at 1.77 per cent and net NPAs at 0.59 per cent, marginally up from 0.56 per cent a year ago.
To keep its growth intact the bank has applied to the government for capital infusion to the tune of Rs 1,000 crore. The scrip is currently trading at a price to book value of 1.5 times and this looks attractive compared to other banks such as Union Bank of India, Canara Bank, Bank of India, etc, that are trading at more than 1.9 times their book value. Add to that a 2.65 per cent dividend yield and this makes it a good investment to bank on.
Asian Paints
Asian Paints is India’s largest paint manufacturer with a dominant share in the decorative paints’ segment. For industrial and automobile paints, the company has a JV with PPG of the US. An increase of levels in the housing and construction sector along with shorter re-painting cycles will keep the demand for decorative paints intact. Its joint venture with PPG adds technological strength to the company’s offerings and will help it to penetrate the non-decorative industrial coatings business as well. There was only a marginal increase in the profit of the company for quarter ending December 2010 despite showing a 30 per cent increase in sales.
This was mainly due to a price hike that was implemented at the start of December, the full effect of which was not reflected in the December quarter results. Going forward we believe that the margins will return to normal in the forthcoming results. Currently the scrip is trading at a PE of 28 times and its EV/EBITDA of 17.5 times is in line with its peers.
What really differentiates this stock is the ability of the company to pass on the price rise in raw materials to its customers. Add to this a strong balance-sheet (debt to equity of 0.17 at the end of FY10) and a dividend yield of 1.05 per cent. The scrip is therefore sure to add some rainbow colours to your portfolio.[PAGE BREAK]
BASF India
BASF India is a part of the world’s largest chemical company, BASF Germany, having a presence in 80 countries and serving 726 industries with a portfolio of 683 product groups. The business of the company is divided into four segments viz. performance products, agricultural solutions, plastics and organic chemicals. This diversified product portfolio reduces the company’s reliance on any particular sector or product. Moreover, its MNC lineage gives it a competitive advantage over its peers in terms of access to a new and advanced product portfolio. This is more so because its parent company has identified India and China among the key focus geographies, and going forward they expect these two countries to contribute 20 per cent of their global turnover. To walk the talk the company has even earmarked a capex of Euro 2 billion (around Rs 12,480 crore) till 2013. Coming to the financials of the company, it has shown consistent growth in both topline and bottomline in the last ten years. The stockholders are adequately rewarded by the company’s financial performance and every year since 1990 the company has generously distributed a dividend that has never been less than the previous year. The scrip is currently trading at 17 times its FY11E earning. This is cheap when compared to one of the possible international deals whereby ChemChina is considering the acquisition of Makhteshim for around 22 times its FY11 consensus EPS estimate.
BEML
BEML, a premier public sector manufacturing company, operates in three major business verticals associated with segments such as mining and contruction, defence, and rail and metro for the manufacturing and sup-ply of various equipments. In addition to that there are three strategic business units (SBUs) viz. the technology division for providing end-to-end engineering solutions, the trading division for dealing in non-company products and the international business division to manage its export activities. The area where BEML scores over its peers is its focus on those segments and customers that do not have any ‘cyclicality; factor in demand.
Defence, railway, metro rail and the construction and mining sector are such segments. BEML primarily serves government agencies. When we consider the financials of the company for the nine months ending December 2010, the company has witnessed its topline increasing by 3 cent and bottomline by 21 per cent. The current price of the scrip is trading at a PE of 12.7 times and EV/EBITDA of 7.56 times, which is lower compared to the other listed players that are trading at a PE of above 15 times.
Bosch
Bosch, one of the strongest auto ancillary brands in India, is a market leader in diesel fuel injection systems with a market share of 80 per cent. Bosch is a preferred supplier to all the major automotive players in India. Its business is divided into automotive and non-automotive segments. The automotive segment contributes 89 per cent to the total revenue while the balance 11 per cent is derived from the non-automotive segment. Bosch, like other MNC subsidiaries, enjoys the benefit of new and better technol-ogy transfer from the parent company. However, what works in the favour of the company in India in the current situation is that the country is being labelled as the new auto hub.[PAGE BREAK]
The Bosch Group, already sup-plying products globally, is likely to help its Indian counterpart which will be a logical supplier, thereby helping the group to consolidate its position further. The company has already ear-marked a capex programme of Rs 1,300 crore over three years in order to cater to the higher demand. For the nine months ending December 2010, Bosch’s revenues increased by 41.1 per cent to Rs 5,006.92 crore (Rs 3,550.61 crore) while the profits increased by 50 per cent to Rs 648.37 crore (Rs 432.46 crore). The scrip is currently avail-able at a PE of 21.5 times and an EV/EBIDTA of 16x. Though this may look a bit steep, it is fair when we look at the growth opportunity that the company can bank on in the future. Besides, with a low debt to equity of 0.08x and a consistent dividend track record of 19 years, Bosch makes for a good grab.
Castrol India
Castrol India, a subsidiary of Castrol UK, is the second-largest lubricant company in India with a market share of 22 per cent. The company operates in two different segments viz. automotive and industry, each contributing about 85 per cent and 15 per cent of the revenues respectively. Though Castrol is the second-largest lubricant company in India, it enjoys a leadership position in most of the segments it operates in such as passenger car engine oils, premium 2-stroke and 4-stroke oils and multi-grade diesel engine oils. This gives the company an advantage of pricing power. With the sales of automobiles in India firing on all cylinders, we expect the company to keep its momentum going. What is good for the company’s products is that it has a recurring demand and therefore even if there is some moderation in auto sales, it will have mini-mum impact on the company. The company is debt-free and therefore does not have to worry about the rising interest rates. Moreover, when it comes to pleasing its shareholders, it has pleased like no one else. In the last 20 years it has given a bonus eight times and has been continuously distributing dividends since 1990. Its CMP of Rs 417 discounts its CY10 earning by 17 times and that certainly looks attractive if we consider the type of growth that the company has demonstrated.
CESC
ESC is India’s first fully integrated electrical utility company. It has been generating and distributing electrical power in Howrah, Kolkata since 1897. The company is the sole distributor of electricity within an area of 567 sq kms of Kolkata and Howrah, serving 2.3 million consumers which include domestic, industrial and commercial users. Currently it owns and operates 1,225 MW of power. It also operates in the retail business segment through the brand name Spencer. To improve its power business, the company is following two long-drawn-out strategies: 1) it will be increasing generation capacity from 1,225 MW to 2,425 MW by 2014 and to 5,665 MW by 2016 and 2) it wants to be a national player in power distribution and is entering into new distribution circles with it being a front-runner for the Patna circle.
On the retail front, Spencer currently has 208 stores with 0.9 million sq feet (msf) area under operation. In the next three years it intends to increase it to 2.5 msf. In terms of EBITDA at store level, it wants to increase it to Rs 50 per square feet (psf) from the current Rs 20 psf in the next 18 months.
The company intends to use PE funding to fund these expansion plans. The scrip is trading at a PE of 8 times and its EV/EBITDA stands comfort-able at 8 times.[PAGE BREAK]
Crompton Greaves
Crompton Greaves (CGL), a pioneer and leader in the management and application of electrical energy, is organised into three business groups viz. power systems, industrial systems and consumer products. For FY10 it was the power segment (including over-seas) that constituted 68 per cent of the revenue followed by consumer durables and industrial systems sharing 18 per cent and 14 per cent respectively. The growth lever for the company going forward, apart from the investments in the government’s 11th Five Year Plan, is the proposal by Power Grid Corporation (PGCIL) to set up seven transmission corridors at an investment of about Rs 50,000 crore. Looking at the growing demand of the products and to be able to match that, CGL has made seven acquisitions in the last two years. Currently the company enjoys a leadership position in India along with a growing presence in the other Asian countries. The overseas’ power segment of the market increased its share from 25 per cent in FY09 to 28 per cent in FY10. Additionally, the progress on the listing of Avantha Power, in which the company has a 32 per cent stake, augurs well for the stock. At the end of Q3FY11 the total order book of the company on a consolidated basis stands at Rs 7,000 crore, which is 0.77 times its FY10 revenue. The current share price of the company discounts its last year’s earnings by 18 times and EV/EBITDA of 12 times. With increased capabilities in various domains, good order book and a huge spending in the transmission and distribution space in India, we believe that the company is well-poised to chart a new growth trajectory in the future.
Cummins India
Cummins India (CIL) manufactures diesel engines in India and draws a major competitive advantage over its peers due to its lineage. CIL is a 51 per cent subsidiary of Cummins USA and therefore has access to the best technologies across all the segments that the company is present in. The company has planned to increase its annual investment in the Indian subsidiary from Rs 100 crore to Rs 300 BSE Code: 500480FV: 252 Week H/L: 810/494crore for the next three years. This will help to increase CIL’s revenue share in Cummins Global’s revenue from its current level of 10 per cent to 15 per cent. For the first nine months of FY11, CIL saw a 44 per cent increase in sales on a yearly basis and in the same time its profit increased by 37 per cent. Looking at the current run rate we believe that the company will meet its guidance of 45 per cent growth in its topline for FY11. Its CMP of Rs 663 discounts the FY11E earning by 22 times. This looks attractive if we consider CIL’s strong balance-sheet (zero debt) and ROE of 30 per cent.
Dabur India
Dabur India operates in key consumer products like hair care, oral care, foods, etc. A diversified port-folio of the company helps it to minimise its sensitivity towards a rise in the price of any one commodity. To minimise the rising input cost, the company has taken various steps like lower advertisement spends, cutting other expenditure, and effecting price hikes.What is comforting about the company is that it has demonstrated a sustained double-digit volume growth in the last few quarters and for the latest quarter (Dec 2010) it clocked 13 per cent volume growth. The company has even used the inorganic path to grow its business and recently it acquired US-based Namaste Laboratories LLC and its three subsidiary companies for USD 100 million in an all-cash deal. The deal marks Dabur’s entry into the USD 1.5 billion ethnic hair care products market in the US, Europe and Africa. Currently the scrip of the company is trading at 30 times its 9MFY11 annualised EPS that is at a fairly high premium to its listed players. However, looking at the return on net worth of 58 per cent, dividend yield of 1 per cent and its ability to absorb the higher input cost with-out impacting the EBIDTA margins, the scrip does come across as an attractive one.[PAGE BREAK]
Divi’s Laboratories
Divi’s Labs is one of the leading pharmaceutical companies of India with a strong presence in the CRAMS (contract research and manufacturing services) segment and has one of the strongest CCS (custom chemical synthesis) pipelines. The company enjoys a healthy relationship with innovator pharmaceutical companies. It derives a good part of its revenues from exports, predominantly from the regulated markets of the US and Europe (52 per cent and 27 per cent of FY10 sales respectively). The company will be a key beneficiary of the increased outsourcing from India as it offers a unique proposition of low costs coupled with higher levels of chemistry and regulatory skills. All this creates a high entry barrier for new players. To further strengthen its position and fulfill the growing demand, the company has undertaken a capex of Rs 200 crore for setting up a new SEZ that is expected to come on stream by FY12. For Q3FY11 EBITDA margins improved by 420 basis points.on yearly basis. The profit increased by 45 per cent on a yearly basis. At a CMP of Rs 621 the scrip is trading at a PE of 21 times and dividend yield of 1 per cent.
Dr Reddy’s Lab
Dr Reddy’s Lab is an integrated global generics company operating through three divisions – 1) global generics that sells generic formulations in the US, Europe, India and other the emerging markets, 2) PSAI which comprises API as also custom pharma services and proprietary products which focuses on developing NCEs, and 3) biosimilars. To improve its position on the domestic front, DRL added 600 people to tap the rural markets, the result of which will start getting reflected from FY13. To tap the emerging markets, DRL has tied up with GSK for the supply of branded products. DRL has already started its first shipment of four products to Mexico, followed by Brazil. In USA, the world’s largest pharmaceutical market, DRL has 74 regulatory filings out of which 32 are in Para IV filings that offers a 180-day exclusivity period to generic drug manufacturers. It is expected that DRL will be able to monetize a siz-able portion of this in the next two years. But looking at the all-round initiatives taken by the company and the strong regulatory filings, we are prescribing the stock to our readers for healthy returns.
Federal Bank
Federal Bank, is one of the strongest banks in Southern India and is spreading its wings to other parts of the country too.
The management of the bank has plans to add about 105 branches of which 60 branches would be in Tier I and Tier II cities. The expansion plan has put a strain on the bank’s cost structure and that has increased its cost to income ratio up by 300 bps.
However, we believe this is temporary in nature and once these branches start contributing revenue, the ratio will come down.
In the last quarter the bank has witnessed some stress in its assets. Its gross and net NPAs increased on a quarterly basis to 3.95 per cent and 0.81 per cent respectively from 3.84 per cent and 0.68 per cent in Q2FY11.
But we believe that all the bad news has been discounted in the current share price of the bank and going for-ward, as the bank improves its position (the management has guided 20-25 per cent credit growth in FY12), it will add momentum to the bank’s stock that is currently trading at a price to book value of 1.3 times.
Godrej Consumer Products
Godrej Consumer Products (GCPL) is a part of the Godrej Group and is one of the leading play-ers in the Indian FMCG market. The company that was earlier engaged in soap and hair colour products in only India now has operations in three geographies namely Asia, Africa and Latin America and three segments covering personal wash, hair care and insecticides.[PAGE BREAK]
The household insecticide business under Godrej Household Products (GHPL) has also been fully merged into GCPL. GHPL (contributing close to 30 per cent to the consolidated revenues) continued its strong per-formance and registered a growth of 24 per cent on a yearly basis during the quarter.
GCPL continued to consolidate its position in the household insecticide business and has improved its market share by 310 basis points YoY to 37 per cent during the quarter. The company also implemented price hikes of 3–5 per cent in its soap segment in January, with further hikes being contemplated to offset the margin erosion from the rising palm oil prices.
Coming down to the financials of the company, for Q3FY11 the com-pany on a consolidated basis saw an increase in sales by 90 per cent on a yearly basis and profit by 38 per cent. At its CMP of Rs 360 the stock trades at a PE of 26 times FY11E and dividend yield of 1.1 per cent.
Greaves Cotton
Greaves Cotton is one of India’s leading and well-diversified engi-neering companies. The growth drivers of the engine segment are in place. Auto sales in India are growing at a brisk pace and though industrial pro-duction is moderating a bit, it is likely to pick up going forward. Also, the monsoon is expected to be normal and this will drive the demand for agricul-tural engines.
The company has secured a long-term supply contract from Tata Motors for its two products, Ace Zip and Magic. To cater to the strong demand environment in the three-wheeler seg-ment and the incremental volumes from Tata Motors, the company is setting up a new plant in Aurangabad with an investment of Rs 100 crore. The plant will come up with an initial production capacity of 80,000 units per annum which will be operational by the end of FY11. The company has strong financials with an ROE of greater than 35 per cent. The current share price of the company discounts its last 12-month earnings by 15 times which seems attractive if we consider the growth that the company is going to experience in the near future.
HDFC
HDFC has the distinction of pioneering mortgage finance in India. What is encouraging is that despite going through a lot of eco-nomic ups and downs since its inception, it has maintained its growth momentum and since 2001 the company’s approval and disbursements have grown at a CAGR of 27 percent. Despite such high growth, the asset quality of HDFC has remained under control and its gross NPAs at the end of Q3FY11 remained at 0.85 per cent. In addition to this good asset quality, HDFC has a very low cost to income ratio compared to the other companies, which is below 10 per cent. Its CMP of Rs 663 is 6.25 times its book value and that looks a little expensive but if we consider HDFC’s investment in various subsidiaries like HDFC Bank, HDFC Mutual Fund, HDFC Life Insurance, etc the value of which works out at around Rs 190 per share and the future listing of some of its unlisted subsidiaries, it does make the scrip attractive at its current level.
IDBI Bank
IDBI Bank in its recent avatar came into existence in 2004 but has very quickly metamorphosed into a fast growing bank with 766 branches and 1,319 ATMs at the end of December 2010.
It has been instrumental in establishing many financial institutions like the NSE, NSDL, CARE etc. There are lots of areas where the bank needs to catch up with the industry average that will give a further boost to its financials.[PAGE BREAK]
A case in the point is its current account saving account (CASA), a low-cost funding for banks. Currently IDBI Bank’s CASA is at 15 per cent com-pared to more than 20 per cent that its peers can lay claim to.
There are certain other areas where the bank is already showing a good sign of improvement, especially on its cost front where it has reduced its cost to income ratio to 31.3 per cent (Q3FY11) against more than 35 per cent for many other banks. The bank is currently trading at a price to adjusted book value of nearly 1 time after taking into consideration the book value of its subsidiaries. This definitely looks cheap.
IDFC
Infrastructure Development Finance (IDFC) is a diversified financial company and a leader in providing financing for long-term infrastructure projects. It has business interests in private-equity funds, asset management and equity broking as well. The reason we selected this company in a rising interest rate scenario is due to its lower leverage that is at around five times. What this means is that one-fifth of its total loan portfolio is funded by its own capital whereby it can raise the interest but at the same time does not have to worry about the pressure of increasing the interest rates on its borrowings.
Apart from this, the other comforting factor is that around 65 per cent of the total assets to which it has an exposure are operating assets that are currently generating cash flows and it has little exposure to non-cash generating assets. Currently its share is trading at Rs 144 which is 1.8 times its book value. This looks to be in line with the current ROE (16 per cent) but if we include its other investments and subsidiaries, which comes to around Rs 50 per share, the scrip looks attractive at its current price with its price to book value going further down.
TCS
TCS, India’s largest software company, needs no introduction but what one needs to know is that in the recent past it has left its well-known peers lagging behind in terms of growth. TCS has been consistently generating better than expected volumes over the last few quarters. In fact, in Q3FY11 its sequential volume growth was 5.7 per cent, ahead by quite a mile considering its peers, as for example, Infosys which has shown a volume growth of 3.1 per cent. We believe that this growth momentum will continue. This confidence comes from the hiring target set by the company. If in Q4FY10 the company was set to hire 30,000 people for FY11, then in Q1FY11 the number was revised to 40,000 and then in the second half of the year this number was further revised to 50,000 people, much higher than its peers. As economic conditions in the US, the largest market for Indian software companies, improve, we believe that along with volume one will surely witness an improvement on the pricing front too. The share price of TCS is currently trading at a PE of around 25 times and that looks reasonable if we consider the improving condition of the US market and the company’s ability and preparedness to exploit such opportunities.