2010’s FASTEST-GROWING COMPANIES

BOTH Eucalyptus and Sal trees are sources of timber and other uses, but they don’t have equal standing. So are growth stocks. While the fast-growing eucalyptus is derided for being invasive water sucker and causing ecological imbalances, Sal, that take years to grow, preferred and even worshipped by some. With over 2,000 traded stocks and almost every company growing in the 9% economic growth, it becomes difficult to identify which one is sustainable and which one is not. In a bull market, good quarterly earnings numbers can keep pushing stocks up. But when the tide turns, as Warren Buffett said, investors will know ‘who has been swimming naked.’ ET Intelligence Group helps you find out a few steadily-growing companies that may not throw up some nasty surprises and also can generate healthy returns in 2011 and beyond.

SESA GOA
Although a number of events — such as 20% stake buy in Cairn India, Karnataka’s iron ore exports ban and logistic problem at Orissa — have hit Sesa Goa’s stock in the past few months, the company enjoys a sound financial and operating atmosphere. Sesa Goa’s production cuts in China, where it exports 70% of its output, due to energy norms and reduced government subsidy, appears discouraging. This has impacted its valuations, which at 9-10 times its annual earnings, are at a discount to its peers. Though its
short-term outlook remains bleak, an improvement in iron ore prices could be the next trigger for its earning growth.

KABRA EXTRUSIONTECHNIK
Kabra Extrusiontechnik is a domestic leader in extrusion machinery used for producing plastic pipes and packaging films. It has recently launched a new product to manufacture drip irrigation tube lines in collaboration with Drip Research Technology Services of the US. It is also planning to launch new high-speed multi-layer blown films plants by the end of FY11. The company has embarked on an investment plan of 85 crore, which will more than double its gross block by FY12. India’s plastic consumption is likely to double within the next six years from 8 million tonne in 2009. Industry experts believe that investment of nearly $10 billion would be required in the plastic processing industry to create the necessary capacity. This investment spree in the plastic processing industry will be a key growth driver for Kabra Extrusion’s machinery in future.

TITAN INDUSTRIES
Titan is India’s leading manufacturer of jewellery and
watches. Jewellery accounts for three-fourths of its sales and twothird of profits with watches accounting for the rest. In jewellery segment, the company has been able to grow higher than the industry, thanks to its well-established Tanishq brand. The company’s other two brands, ‘Gold Plus’ and ‘Zoya’, apart from its various relationship and loyalty programmes, enabled its strong performance during higher gold prices. The company has 60% share of India’s organised watch market and exports watches to 26 countries. It has also entered the business of eyewear. Leveraging its various brands, the company is also entering businesses of travel accessories. Considering its past success at establishing brands and its retail reach, these new initiatives can be expected to become success stories in going forward.

TATA SPONGE IRON
Tata Sponge Iron’s strong performance on the bourses was in tandem with its equally strong financial performance as its sales grew at a cumulative annualised rate of 23% over the past threes years and net profit at 82%. The company has no debt on its books. This gives financial flexibility for it in terms of capex plans. It procures iron ore from Tata Steel under a long-time pricing pact, while coal is either imported or sourced from Coal India. It has obtained 45% stake in a coal block in Orissa, where commercial operations are expected to begin in FY12. Besides, it is also set to double its captive power plant to 50 mw over the next few years. Both these factors will improve its profitability in future. Its stock fell as its September 2010 quarter numbers were affected by one-off items. Its valuations are cheaper compared to its peers such as Usha Martin and Monnet Ispat.

EXIDE INDUSTRIES
Exide Industries is growing on the back of the strong vehicle sales that improved its margins and enabled a double-digit growth in sales and profits in 2010. Being leader in power storage solutions business with a 70% market share, it also enjoys the pricing power enabling it to safeguard operating margins even in a downturn. Backward integration for inputs in the past few years, which accounts for 80% of total operational cost, has improved its operating margin to around 18%, which is higher than its peer group. With the expectation of rise in demand for automobiles, Exide is expected to post sustainable earnings in future. Rationalisation of cost through use of captive sourcing will further add to operating margins. So, investor with low-risk appetite and expectation of reasonable return can take exposure for at least 1-2 years.

HOW WE DID IT
WE checked five parameters for three consecutive years — debt-to-equity ratio, interest coverage ratio, return on capital employed, operating cash flows and dividend paying history — to select our sample. So all our companies hold a debt-equity ratio of below 1.5, interest coverage ratio of above 5, return on capital employed at above 15%, positive operating cashflows and a good dividend paying record for the past three years. After ensuring the fundamental soundness, we checked their growth numbers, for the past three years and also for the 12-month period ended September 2010. FAST FORWARD

VINATI ORGANICS
The specialty chemicals company Vinati Organics is the world’s largest producer of isobutyl benzene (IBB) — a key raw material for widely used anti-inflammatory drug ibuprofen — and second-largest producer of specialty monomer ATBS. The company has a number of further capex plans, including backward integration, to produce isobutylene raw material of ATBS and forward integration into polymerisation of ATBS. Similarly, it is setting up a plant to produce PAP, which is required for manufacturing of another widely-used drug paracetamol. However, delays in execution of these capex plans have resulted in a slowdown in growth of the company in the past three quarters.

OPTO CIRCUITS
Opto Circuits has been one of the fastest-growing companies in the healthcare sector. This export-oriented undertaking has been charting strong growth through sale of invasive cardiovascular and peripheral devices. Strong performance of Eurocor, its German subsidiary, and Criticare, US subsidiary, has also contributed to the company’s growth. Through its German acquisition, the company has been supplying the invasive devices across Europe and Asia at a lower cost. The invasive business segment is the long-term growth driver for the company. Opto commands premium valuations on the bourses, which are justifiable in view of the high growth prospects. Its stock is trading at a consolidated P/E of 16.5.

PAGE INDUSTRIES
Page Industries, which holds exclusive licence to manufacture and market Jockie brand of innerwear in India, has been one of the biggest beneficiaries of the growing consumerism and changing taste of Indian consumers. Its sales and profits have grown by over 33% in the past three years when compounded annually. It has grown its presence through multi-format retail stores across major cities in India. The company’s stock price has more than trebled since its listing in 2007, currently valued at P/E of over 33. Page’s higher stock valuation reflects its better margins and stronger growth.

(With contribution from Shikha Sharma, Jwalit Vyas, Ranjit Shinde, Abhineet Singh and Kiran Somvanshi)