Great Indian Companies For Your portfolio

Pick: 'Great' Indian cos for your portfolio

In a recent report, brokerage firm Ambit recently put out its latest findings in its “greatness” series – wherein it tries to identify which Indian companies are poised to enter the most productive phases of their lifecycles.

 

 

It’s a known fact that all companies go through a lifecycle. Picking investments involves buying stocks of companies that are at the most ripe time in their lifecycle to create shareholder wealth.

In a recent report, brokerage firm Ambit recently put out its latest findings in its “greatness” series – in which it tries to identify which Indian companies are poised to enter the most productive phases of their lifecycles, as well as establishes a framework of qualities historically found with such ‘great’ firms in the past.

Excerpts from the note:

-- The trajectory of a company over this lifecycle, and hence the extent of its success is decided by the decisions taken by its management at critical junctures (as one stage of a lifecycle comes to an end and a new one begins). The four lifecycle stages are: youth, prime, descent, turnaround/demise.

-- In the youth stage, promoters start small, hit upon a winning product/service and then start expanding. Shareholders returns are usually volatile in this stage. Typical characteristics of such firms include: recently-listed, narrow product range, no big-ticket acquisition plans, high return-on-equity/revenue growth, young promoters, and limited stock coverage. Examples include Infosys   (1994-2002), Berger Paints   (1991-2000) and IPCA Labs  (2003-2014).

-- In the prime stage, the company is “on the top of its game”. It is typically the sector leader or among the top, announces large capex/acquisition plans backed by fund-raising, and also looks to diversify into other businesses. Characteristics also include: large following among investors, products have become brands, robust operating cash flows that enable the company to start paying healthy dividends, while acquisitions become frequent. Notable examples include Bharti Airtel   (1999-2009), HDFC Bank   (2003-2014) and Sun Pharma   (2003-2014).

-- The descent stage arrives after the company has indulged in excesses at the peak of its success. Hubris and arrogance have set in as the company mistakenly believes itself to be unassailable. Unrelated diversifications made in the past eat into balance sheet and capital efficiency suffers. Characteristics include established past track records having resulted in hubris, forays into new businesses/geographies, new generation of promoters/management coming in, and a shift away from the company’s core strength.

These result in RoE and RoCE suffering. Notable examples are Tata Steel   (2003-2014), TTK Prestige   (1994-2004) and Suzlon  (2007-2014)

-- Not all companies survive after the descent stage, those who do turn around, are where managements take corrective actions, take tough decisions such as selling off non-core businesses. Shareholder returns at such stages are similar to those during the ‘youth’ stage. Examples include: TTK Prestige (2004-2014), IndusInd Bank (2008-2011) and Titan (1999-2009).

Using the four-stage framework, Ambit has identified forward-looking ideas for each of those stages. “The objective is to help investors assess the future trajectories for these firms and hence the consequent share price implications,” it said.

Ambit’s recommendations are to Mayur Uniquoters  , VA Tech Wabag  and eClerx  (youth), Page Industries  , Motherson Sumi   and CRISIL   (prime), Asian Paints  , Ambuja Cements   and Apollo Tyres   (descent) and Ashok Leyland  , TVS Motors  and Bajaj Electricals   (turnaround), The firm’s recommendation is to buy companies at the youth, prime and turnaround stages while selling firms belonging to the descent stage.