Nomura has identified top 10 listed Indian companies with strong competitive strength that can deliver long-lasting returns.
These companies have been shortlisted by carrying out detailed analysis of the sources of competitive strength across sectors and in-depth look at management capabilities.
The brokerage has also minimised subjective and personal bias by combining quantitative and historical analysis to rank firms based on competitive strength.
Following are the companies that have been identified as the most competitive companies:
1) Amara Raja Batteries
Action: Strong technology partner, growing brand awareness and cost advantage will remain key sources of competitive advantage.
Technological innovation, superior product quality, strong brand building efforts, and expansion of distribution networks and relationships with OEMs have helped AMRJ to gain significant market share across all segments. We expect the company to continue to deliver consistent earnings growth over the next five years as industry conditions remain favourable and AMRJ delivers on its strong execution capabilities.
The stock has re-rated significantly over the past two years on strong earnings and market share gains delivered across all segments. Current valuation (on 1-yr fwd P/E) is at a 13 per cent discount to EXIDE. We believe as Amara Raja increases its scale of operations and continues to deliver strong and consistent earnings growth, it should trade in line with EXIDE.
2) Cummins India
Action: Solid long-term fundamentals story
Cummins India has delivered a solid PAT CAGR of 22 per cent and 20 per cent over the past 10 and five years, respectively. We believe KKC remains a fundamentally strong business with a solid long-term opportunity in power-short India. With strong competitive advantages such as technology leadership in MHP and HHP engines, localized manufacturing, a wide service network and strong management, KKC looks poised to grow at a steady rate in the long term.
The stock is trading at ~16x one-year forward P/E and we believe captures most of the downside it currently faces from cyclical headwinds. We see limited downside from the current level, but given that our target price of Rs 496 (18x FY15F EPS of INR27.6) offers only limited potential upside, we remain neutral on the stock.
Action: One of the top five companies to own in India – simply put.
Since the turn of the decade, ITC has delivered 32 per cent -plus CAGR vs. the Sensex 21 per cent-plus and HUVR 15 per cent-plus.
The significant alpha generated by the stock amply demonstrates, in our view, the company’s ability to deliver consistent returns for shareholders despite various changes to tax laws over the past decade or so.
ITC’s one-year forward P/E was 10x in FY03, which is currently at 24.6x FY15F (EPS: INR13.57). This, in our view, clearly reflects confidence of the market in the company over the past decade. We believe multiples are likely to hold at these levels, with earnings growth being the key driver of stock price performance.
4) Nestle India
Action: Short term growth challenges should not cloud long term attractiveness.
Under-penetrated market categories, market leadership across segments, established brands, strong distribution and a global parent with a large portfolio of brands are all factors which we believe will remain the key drivers for Nestle in the long term. Nestle’s performance over the last few quarters has been underwhelming, but that should not concern long-term investors too much, in our view.
Over the last decade, Nestle has been an expensive stock, but the reason for that is the potentially attractive long-term opportunity it presents in the packaged food sector. For this, we believe Nestle’s valuation multiples should hold at high levels even within the consumer sector. However, we think high multiples are justified for a business with a high RoE and strong growth over the medium term. Our TP is under review.
5) Asian Paints
Action: Brands, execution, distribution network should continue to be key growth drivers and sources of competitive advantage.
Asian Paints over the last decade has not only been able to maintain its strong momentum, but has also meaningfully expanded market share vs both domestic and international players. The company’s efforts in brand building and excellence in execution has meant that APNT’s profits have increased at 23 per cent CAGR over FY03-13.
We see expensive valuations as continuing to sustain despite the fact that APNT does go through cycles and is impacted significantly by macro conditions. Valuations are likely to continue to remain high as, over the longer term, the company has delivered consistent shareholders returns higher than market average. We are reviewing our target price.
6) Pidilite Industries
Pidilite is a market leader in a range of categories within the consumer & bazaar segment (C&B) that includes adhesives, sealants, construction chemicals and art materials. We believe its strong brand, solid distribution network, and ability to launch innovative products in niche categories will help the company to sustain its competitive advantage.
The company has a strong balance sheet, with net cash and average FCF generation of INR2.3bn over FY09-12. Low capex and a longer product cycle have resulted in high ROCE, which has exceeded 20 per cent over the last 10 years ex FY09 and looks sustainable going forward.
We maintain our neutral rating and are reviewing our target price.
7) Sun Pharmaceuticals
A strong domestic business and balance sheet that allow the company to pursue value-accretive inorganic opportunities are the key sources of competitive strength, in our view. In the India formulation space, Sun Pharma has consistently grown ahead of the broader market. The company has an unparalleled presence in chronic segments, in our view.
We use the SOTP approach to value Sun. The parts we value are: a) specific product upsides at 8x FY15F; b) cash as at FY14F; c) Protonix liability; d) Taro at 10x FY15F, and; e) base business at 22.5x FY15F. Our Target Price is Rs 842/share. We maintain our buy rating and are reviewing our target price.
The company has a successful track record of execution. In India, there is a complete transformation for the company from an anti-TB and anti-infective player to a prominent chronic therapy player. In the US, Lupin has emerged as the largest Indian generic company in terms of volume with higher per product sales.
Lupin trades at 22.6x FY14F and 18.2x FY15F our EPS of Rs 33.5 and Rs 41.5, respectively. We expect Lupin to trade at a premium to the peer group average given our expectation of sustained growth and the possibility of consensus earnings estimate hike. We maintain our buy rating and are reviewing our target price.
9) HDFC Bank
For HDFC Bank, we dissect the sources of competitive advantage which has helped it deliver 30% plus y-y PAT growth over the past 55 quarters, driving a significant valuation premium over its peers. Brand strength and reach, product diversification and management quality are the overarching sources of its edge, but we dig deeper into their impact on profitability.
At our target price, HDFC Bank trades at 4x FY14F ABV of INR175.5 and 21x FY14F EPS of Rs 34.3 for FY14F ROA of 1.8 per cent and ROE of 21 per cent.
10) Axis Bank
While HDFC Bank’s strengths are well received, Axis’ evolution as a fiercely competitive bank across asset and liability franchise has largely been overshadowed by its large corporate exposure. We list parameters on which we believe Axis has built a sustainable competitive edge.
Despite the risk perceptions, Axis’ delinquency ratio has been the lowest barring HDFC Bank’s. Proactive provisioning policy has ensured a similar rank in NNPL ratios. Axis’ portfolio is well diversified, with below 5 per cent funded exposure to the power sector. With its sustainable edge over quite a few components of profitability (RoA), we think Axis offers a compelling story given its steep discount to HDFC Bank.