Up THE VALUE CHAIN

Want to play in equities, but don’t know how to pick the winners? Can’t crunch numbers to uncover the big picture, but find the call of the stock market impossible to resist? Don’t worry. There are some simple ways to play the market. One of them is go with the Big Daddies — the business houses. The ET Intelligence Group has crunched the numbers and done the maths for you to identify business houses that topped the value-creation charts last year

Stock market investing is an art where every investor has to use his own set of colours. Everyone is likely to have a different approach to making investment decisions. Some investors may analyse fundamentals to identify an undervalued company. And technical buffs can search endlessly for that positive break-out. But not all are that savvy. There are several simple investment approaches followed by lay investors that have proved to be equally profitable over a period of time. Betting on a business house, which is big, well known and has a successful history, is one such strategy.
The logic is simple. If a business house has created value and weathered the storms in the past it shall continue to do so in future. These large business houses hold significant resources within the group to help out an occasional laggard and the management has a reputation to defend, which makes it more conservative and sound. This investment strategy won’t suit someone looking for large gains in a short period of time, but investors seeking steady growth without having to worry about safety of capital do follow this strategy.
The ET Intelligence Group has tried to figure out the business houses that have created maximum value for their shareholders over the last one year. A key finding of the analysis was that although all leading business houses — Tatas, Birlas or Bajajs —created decent value for their shareholders, a horde of smaller or lesser-known business houses outperformed them by a wide margin. These business houses —the proverbial dark horses as one may call them — are thriving across various sectors and have the potential to make it big. If you are someone, who can justify an investment decision on the Tata, Birla or Bajaj brand, it is time to look beyond them. The Wockhardt group turned out to be the biggest value creator for its shareholders thanks to the turnaround in its flagship company Wockhardt (For details refer to story on Page 2). Its smaller sibling Carol Info Services, which is engaged in contract manufacturing of neutraceutical and milk products, also witnessed a substantial jump in its market capitalisation.
The Lalbhai group was a beneficiary of the turnaround in the textiles industry as the market value of Arvind Mills almost tripled in one year. Chemicals maker Atul saw its valuations jump in the first half of FY11 and then remain steady for most of the year as its profitability improved.
The TTK Group represented by TTK Prestige and TTK Healthcare enriched its shareholders by over 167% in the last year. While TTK Prestige tripled in value, TTK Healthcare gained 18%. Kitchenware manufacturer TTK Prestige had a fabulous year in FY11 as its profits jumped 60%. The growth juggernaut continues as its profit for the June quarter was up 58%.
Inox Group’s excellent performance came mainly from Gujarat Fluorochemicals, which saw 149% jump in valuations over the last one year although its FY11 profit was down 21%. In comparison, multiplex company Inox Leisure had a bad year with profits falling 73%. Still the fall in its market value was substantially lower at around 30%.
Packaging film maker Uflex doubled its market value in the last one year as its profits tripled in FY11. This ensured Flex Group a berth in the top 10 value creating small business houses. It was mainly the spurt in PET film prices that boosted its profits through FY11. This may not continue in FY12 or beyond. Its sibling Flex Foods, which sells frozen mushrooms and vegetables, lost 12.5% of its market value as its profits dropped 9%. Still considering its 2 per share dividend that it announced for FY11, it is giving a substantially high yield of 6.7%.
Apple Industries Group, which controls Hexaware Technologies and Apple Finance, Sujana Group, which is present in steel and capital goods, Firodias of the Kinetic fame, Jatia Group which runs Asian Hotels and plastic and petrochemicals player Taparia Group are the others that have created over 50% value for their shareholders over the last one year.
Two business houses — LN Bangur Group and Camlin — should have made it to the list of top value creators. However, in both these cases the substantial jump in market value of their group companies has come due acquisitions by MNCs. Andhra Pradesh Paper Mills of the Bangurs was acquired by International Paper for a substantial premium. Similarly, Japan's Kokuyo picked up a controlling stake in Camlin for a premium. Thanks to the mandatory open offers following these deals, the market value of the firms has skyrocketed. However, with the ownership change we could no longer keep them under their earlier business houses.
Given below are a few companies from these leading small business houses, which an investor may consider adding to his portfolio. The companies have a sound business model, healthy financials and steady growth prospects. A few of these companies may not come from the business houses that have figured in the Top 10, but from groups that would come in the Top 15.

Performance Appraisal of the Large Business Houses

The bigger you grow, the more difficult it becomes to grow faster. This is the general rule, which is why when companies such as Apple Inc double their profits in a quarter it becomes talk of the town. After all, it is much easier to double a company's profits from `10 crore than if it were, say, `1,000 crore. Still, bigger the size, higher is the stability and so are the expectations. Among the bigger ones, Adani Group proved to be the largest value creator for investors with the combined market capitalisation of its three listed entities — Adani Enterprises, Adani Power and Mundra Port — going up 60% in last one year. In fact, the market capitalisation of the holding company Adani Enterprises jumped 182%, while its two subsidiaries faced stagnation.

The Zydus Cadila Group, which represents both the FMCG and pharma industries that became hot cakes when things are not so well, proved to be the second largest value creator among the big boys. The group’s market capitalisation rose 43% with both Zydus Wellness and Cadila Healthcare growing in tandem.

Pharma major Sun Pharma's superior performance on the bourses made the group eligible to occupy a third position in our ranking. Its sibling Sun Pharma Advanced Research was more or less stagnant. From the Tata Group, Tata Power was the only large company to have stagnated in the last one year. The investors of all other large Tata Group companies — TCS, Tata Motors, Tata Steel, Titan and Tata Chemicals — enjoyed steady growth. With 80% growth in market capitalisation in a year, Titan proved to be the fastest of the lot

Within the mid-sized companies from the Group, Tata Coffee more than doubled investor wealth. On the other hand, Indian Hotels, Tata Global Beverages and Voltas ended up as laggards. Although at the fifth position in our ranking, the Murugappa Group distinguished itself with all its listed companies gaining in market capitalisation. Among those not doing well over the last one year, both the Ambani brothers make a prominent appearance with the Anil Ambani Group losing more than one-third of its value. Almost all the industries in which Indiabulls Group operates — real estate, brokerage and power — lost favour with the investors, which undermined the group’s performance. Similarly, loss of market interest in Torrent Power proved costly for the Torrent Group.

JATIA GROUP’s Asian Hotels North is known for its premium hotels brand Hyatt Regency. It operates one Hyatt Regency hotel in Delhi, where it is planning to add 35 more rooms. The company is also erecting a new tower with a total built up area of around 1.66 lakh square feet which marks its foray into ‘service apartments’. These will become available in FY12. With these additions, the company's room capacity will increase by 60%. The company joined hands with an overseas hospitality consultant to invest around `400 crore in the company through a preferential allotment in December 2010. These funds would be used for capacity expansion. The scrip is trading ata price to earnings multiple of 14.5 times which is reasonable considering a P/E of 16 for its peer TajGVK Hotels. Besides this, a history of consistent dividend payouts and low debt makes the company a better investment bet in the mid-size hotels segment.

PODDAR GROUP’s Siyaram Silk Mills is one of the few textile companies which have been making profits consistently for the last 15 years. It derives 80% of its revenues from blended fabric. Around 85% of the company's raw material is polyviscose. This has ensured higher return on capital employed and less dependence on cotton for the company. A strong distribution network of more than 60,000 franchise and retail units has helped the company to retain its brand power among the masses. A good track record of dividends and low debt on its books has ensured the company maintains its growth momentum. Currently, the company is trading at a priceto-earnings multiple of six times. This is significantly lower to its peers such as Donear Industries and Bhilwara Spinners

LALBHAI GROUP's chemicals manufacturer Atul has been on a steady growth path with expansion of product portfolio and a gradual increase in capacities. In the last three years, its profits grew at cumulative annualised growth rate (CAGR) of 35%, while sales grew at 14%. This indicates that the company’s efforts at improving margins have borne fruit. The company is aiming to grow revenues by a third in FY12 and FY13 without any inorganic growth plans. The company has systematically improved its return ratios over the last five years. The return on total employed capital has jumped to 22.6% in FY11 from just 9.9% in FY07. Its debt-equity ratio too has improved in the same period with a consistent record of steady cash flows and annual dividends.

This ABG GROUP company, India’s largest private shipyard, is enjoying a strong order book of 15,000 crore, which is seven times its FY11 revenues. FY11 may not have been the best year for the company, which saw revenues grow 15% and profits by merely 5.2%. However, it has aggressive growth plans ahead and is targeting 30% higher revenues in FY12. The company is steadily reducing its debt burden. This will bring down interest costs and add to profitability. Its acquisition of Western India Shipyard marked its entry in the ship repair business, which is growing fast. Its price-to-earnings ratio of below 10 appears attractive.

This TAPARIA GROUP company manufactures polystyrene and was suffering till FY09 due to an industry-wide oversupply situation that squeezed margins. However, its fortunes improved substantially in FY10, and yet the company's profits for FY11 were 45% higher than FY10. In these two years, the company shifted from commodity polymer to more value added products and expanded its capacities. A global rationalisation in polystyrene capacities is benefiting the company as domestic demand picks up. The scrip has gained 41% in last one year and is still trading at around 8 times its earnings for the trailing 12 months.

Increasing production capacity, entry into other electrical appliances and addition of franchisee stores are likely to lend support to TTK GROUP’s kitchen appliance maker. TTK’s cooker business is growing at 20%, which is higher than the industry growth rate of 10-15% as consumer preference grows towards brands. To cater to this growing demand, the company plans to almost double its cooker and cookware capacity to 80 lakh units by 2013- end. It is also planning to increase its kitchen appliances stores to 500 by FY13 from 285 through the franchisee model.Its net sales have grown at a 32% CAGR in the last three years to 776 crore in FY11. Profits have grown at 60% to 84 crore in FY11. The ROE for FY11 was 45%. The only concern is the high valuation of a P/E of 41. Investors can buy on dips.
For the purpose of this story we considered only the business houses with two or more listed entities. A combined market capitalisation of 10,000 crore in July 2011 was taken as a benchmark to differentiate between large and small business houses. In the small business houses shortlist those with a market capitalisation of less than 500 crore were excluded. The value creation is interpreted as an increase in market capitalisation over the last one year.