Stocks That Double Every Three Years
Why is it that certain companies build up a reputation of consistency in terms of wealth generation? Some of the common traits include a scalable portfolio of established brands, superior brand equity, well-spread distribution networks, strong supply chain, aggressive marketing strategy, responsive customer setup, and so on. Armaan Madhani brings into the limelight some of these top performers and the reasons for their strong brand visibility
To quote James Clear, an American author who is best known for his book ‘Atomic Habits’, “I accumu- lated small but consistent habits that ultimately led to results that were unimaginable when I started.” It’s the most fundamental fact of life that consistent actions create consistent results. With the wild swings of volatility in the stock markets experienced by equity investors on a regular basis, consistent performance by businesses enables one to heave a sigh of relief. Looking back at past returns, it doesn’t take much to figure out that there is a small cluster of companies that have been able to consistently compound wealth and generate substantial alpha.
In this way they have been outperforming their peers and the broader markets by a huge margin in the long run. Upon back-testing all stocks listed on the bourses for returns over the past decade, it was found that there are 21 companies with current market capitalisation of more than Rs5,000 crore whose stock price has consistently doubled every three years. The table alongside summarises the same. On probing further it was found that there are certain characteristic traits that are common among such breed of companies, which skew the odds in their favour by empowering them with formidable barriers to entry.
This enables them to gain an exclusive competitive advantage over the rest of the field. It also helps to develop a long-term sustainable business model and furnish astronomical returns. These common traits include a scalable portfolio of established brands, superior brand equity, well-spread distribution net- works, strong supply chain, aggressive marketing strategy,responsive customer setup, regular and astute investment in technology, a fundamentally robust balance-sheet, high liquidity position, low leverage, high free cash flow generation, high promoter holding and strong corporate governance.
Over the past decade, each of these consistent compounders have consistently added capacities of existing product lines as well as introducing new products in order to increase their scale of operations and diversify the overall revenue. Also, healthy cash flows from operations have helped these businesses fund their capital expenditure majorly through internal accruals, thus resulting in an optimal capital structure. These companies actively explore all the avenues to ensure constant growth of their business which includes deeper penetration into new and existing markets. Let us delve deeper to further understand the intricate moats built by some of these consistent compounders over the last decade.
Pidilite Industries
Pidilite Industries is a leading manufacturer of adhesives and sealants, construction chemi- cals, craftsmen products, DIY (do-it-yourself) products and polymer emulsions in India. Its extensive product range also includes paint chemicals, automo- tive chemicals, art materials and stationery, fabric care, mainte- nance chemicals, industrial adhesives, industrial resins and organic pigments and preparations. Particularly, two moats that have succoured the company to consistently compound wealth are that a large number of its products have been developed through strong in-house research and development and its brand Fevicol has become synonymous with adhesives to millions in India, ranking amongst the most trusted brands in the country.
The company’s other leading brand, M-Seal, has 70 per cent market share in the plumbing segment, while Dr. Fixit has achieved 98 per cent top-of-the-mind awareness among consumers. The market dominance of these brands is near-mo- nopolistic. From the outset, the company has had a razor sharp focus towards building power brands and diversifying into pioneer categories in a nascent stage such as tile and stone solutions, waterproofing consultancy and services and flooring space. Some of its other major brands are Fevikwik, Fevistik, Roff, Fevicryl, Motomax, Hobby Ideas and Araldite. These brands have high volume, medium margin products with market dominance (even in remote areas) and wide distribution.
Havells India
Havells India is a leading FMEG (fast moving electrical goods) and consumer durable company with presence across India. It owns prestigious brands like Havells, Lloyd, Crabtree, Standard and Reo.The company is also a major power distribution equipment manufacturer for domestic, commercial and industrial applica- tions. On the branding aspect the company has positioned its products towards the mass premium segment. Despite operat- ing in an industry with low barriers to entry and a highly competitive environment, the company has managed to grow due to its formidable branding, high innovation capacity and willingness to capture the first mover advantage in several niche categories such as IoT (internet of things) technology for smart homes.
Over the last decade, the company has perennially expanded its markets by carrying out new product launches such as water heaters in 2012, domestic appliances in 2013, air coolers in 2016 and water purification and personal grooming in 2017. Its deep-seated culture of constant focus on sharpening its competitive edge on all fronts – operational efficiency, optimal use of assets, high level of automation and backward integration along with strong relationships with dealers, vendors and an effective governance framework – has played a pivotal role in making the company a consistent compounder of wealth over the years.
Balkrishna Industries
Balkrishna Industries (BKT) started as a producer of ‘off-highway tyres’ (OHT) in 1987. For over 30 years, BKT has successfully focused on specialist segments such as agricultural, construction and industrial as well as earthmoving, port and mining, ATV and gardening applications. Low-cost manufac- turing setup is its forte, which has allowed the company to price its products lower than competitors, maintain healthy margins and capture a market share of 5-6 per cent in the global OHT market. The company operates in a segment predominantly known as ‘large varieties – low volume’ and has made itself fully geared over the years to leverage the peculiarities of the segment.
It has developed a large base of more than 2,700 SKUs to meet diverse needs and applications. Moreover, this segment is neither exposed to any technological obsolescence nor wild fluctuations in demand for its products. Another moat is its robust distribution network spread over 160 countries coupled with prime after-sales service which is difficult for novice players to replicate. The company has also achieved self-reliance in carbon black along with multiple sourcing arrangements for other raw materials. This backward integration has helped the company combat wild swings in commodity prices.
Aarti Industries
Aarti Industries is one of the leading and competitive producers of benzene-based specialty chemicals in the world. The company is regarded as rare in the global specialty chemicals sphere since it combines process chemistry competence (recipe focus) with scaled-up engineering competence (asset utilisation). With a strong and de-risked portfolio of more than 200 products, it ranks in the top five globally and exports to over 60 countries. Using its combined strengths of innovation and sustainability, the company has been providing customised chemical and API solutions and services that have propelled its exponential growth. The company’s almost impenetrable barrier to entry comes from the fact that it is the only player in the country to have products until the sixth level derivative of benzene chemistry.
This is along with a high level of backward and forward integration across all key-value chains which have empowered it to benefit from the global trend of vendor consolidation and long-term supply contracts. Also, a majority of the company’s contracts are long-term contracts that suggest healthier control on the overall cost structure and strong order book. Over the last decade, with optimal capital allocation the company has focused its efforts towards building an intergraded business model with heavy emphasis on value-added products and better operating leverage. This has led its stock to furnish phenomenal multibagger returns.
Deepak Nitrite
From a bulk commodity products manufacturer the company has metamorphosed into a specialty chemical company operating in three key divisions, namely, basic chemicals, fine and specialty chemicals and performance products. It also manufactures a wide range of intermediates for use in industrial explosives, paints, cosmetics, polymers, optical brighteners and others. The company dictates 80 per cent domestic market share in sodium nitrite and 50 per cent market share in nitro toluene. It is the only company in India to have a fully integrated OBA (optical brightening agent) setup. It is also one of the top three global players in Xylidines, Cumidines and Oximes chemicals, along with extensive presence across 30 countries.
During the last decade, the company’s performance was bolstered by benefits accruing from backward integration initiatives and capacity expansion for established products. The management’s efforts of reorienting its industry mix and geography mix to ensure better product acceptance also played a major role in driving the performance. With a strong diversified product portfolio, the company witnessed increased demand for key products in the export markets which also led to solid realisation gains. Further, the company’s position as a fully integrated supplier of OBA has strengthened its competi- tive edge.
Hatsun Agro Product
Hatsun Agro Product has been in business for over five decades and has achieved the position of the largest private sector industry in the dairy sector manufacturing and marketing milk and milk products, ice-cream, etc. Its portfolio includes Arun Ice-Creams (South India’s leading ice-cream brand), Arokya Milk (the country’s largest private sector milk brand), Hatsun Dairy Products, Ibaco (premium chain of ice-cream outlets), and Oyalo and Santosa (a fast growing cattle feed brand). The company’s unique distribution model of reaching consumers through its own distribution outlets eliminates additional costs, thereby benefitting the operating profitability.
Over the last five years, the company has successfully conduct- ed geographical diversification with revenues from Tamil Nadu reducing to around 54 per cent in fiscal 2021 from around 67 per cent five years earlier. A strong market position in the milk segment has been cemented by its widespread presence in South India with majority of the processing units located across Tamil Nadu. Also, its leading market position in the sector has been supported by strong brand value, particularly in South India along with healthy operating efficiency backed by established procurement and distribution networks and a diversified product portfolio.
Vinati Organics
Vinati Organics is among the leading global manufacturers of specialty chemical products and is the world’s largest manufac- turer of IBB and ATBS with cur- rent installed capacity of 25,000 MTPA and 40,000 MTPA, respectively. The company retains a global market share of 65 per cent in each chemical and also holds the first rank as an ATBS manufacturer worldwide. The company’s competitive advantage also stems from its unique product selection criterion. A peculiar criterion is that it only produces niche chemical products with a target of 15-20 per cent return on investment and a payback period of up to five years. Also, there is a barrier to entry through a unique process of integration with existing products.
For example, the manufacturing of Butyl Phenol which uses Isobutylene (IB) as raw material is already being manufactured by the company. The company targets import substitute products. It is the only backward integrated manufacturer of ATBS and Butyl Phenol with its own IB manufacturing unit which makes its operations more cost-efficient. A well-integrat- ed product portfolio has helped it to achieve high operational efficiencies and produce high-quality products. The company’s integrated business model and product innovations backed by large capacities have helped it to achieve high efficiency levels and significantly expand its market share.