Indian Companies That Consistently Outpaced The Economy

Corporate earnings suffered as India’s growth slowed even prior to the pandemic as mounting bad loans slowed credit growth, defaults by IL&FS group caused a credit crisis and slowing consumption cooled GDP growth.

The GDP growth has a correlation with the earnings as corporate financials improve when a growing economy generates a higher demand for goods and services. In the last five financial years, the nominal GDP (at current prices) and real GDP (adjusted for inflation) grew at an annualised rate of 10.2% and 6.7%. Both the nominal and real GDP growth have declined since 2016-17.

Despite a slowing GDP growth prior to Covid-19, four companies delivered returns better than the nominal GDP growth in the last five years.

Selection criteria:

All listed companies (except banking and financial stocks) are included in the analysis—financials excluded as their performance is measured by separate parameters.
Companies with revenue and earnings per share growth higher than the nominal GDP expansion in each of the previous five years.

Four companies that showed resilience to a slowing economic cycle include Avenue Supermarts Ltd., the operator of D-Mart supermarket chain; KEI Industries Ltd., a wire and cable maker; Safari Industries (India) Ltd., a luggage manufacturer; and ready-to-cook food maker Tasty Bite Eatables Ltd.

Avenue Supermarts

The supermarket chain’s standalone revenue, operating income and net profit fell 12%, 37%, and 37% year-on-year, respectively, in the second quarter ended September.

Covid-19 impact on the company continues but the increased focus on e-commerce with the expansion of operations in Pune and Mumbai suburbs, new store additions in the second quarter, and operating cash flow of Rs 470 crore in the first half of 2020-21 are key positives, according to SBICap Securities.

With recent fundraising of Rs 4,100 crore via qualified institutional placement, the company is well placed to capitalise on opportunities in the real estate sector. SBICap sees the company’s profitability improving gradually in the second half of 2020-21.

JPMorgan said in a report that earnings will be weighed down by Covid-19 impact (store closures, social distancing) but the medium-term growth prospects remain intact. The company will emerge as an eventual beneficiary of the consumer shift to large-format stores, it said.

Risks: Slowdown in consumer spending, delayed recovery in merchandise and apparel, slower retail expansion, and an increase in competition.

KEI Industries

The cable and wire maker’s sales, operating income and net profit declined 16%, 3%, and 10% year on year, respectively, in the second quarter.

Dolat Capital said in a report that the company’s decision to cut down its exposure to EPC business and plan to concentrate on retail business will reduce its interest outgo in the medium term due to lower borrowings on working capital. The brokerage expects demand recovery to continue through tier 2 and 3 cities.

According to a report by Elara Capital, the company is poised to take advantage of India’s infrastructure investment, a growing retail franchisee and its plans to build capacity to meet demand.

Risks: Fall in distribution capex leading to lower order inflows, slower pace of execution, higher commodity (copper and aluminium) prices.

Safari Industries

The luggage and accessories company’s sales fell 63% year-on-year due to the weakness in the travel and tourism industry in the quarter ended September. It reported an operating loss and a net loss was Rs 5.3 crore Rs 9 crore, respectively, in the second quarter.

A report by IDBI Capital said the management believes that the worst phase for the luggage industry is over and foresees partial recovery in the second half of 2020-21. The company focused on cutting marketing expenses and employee costs in the first half of 2020-21.

IDBI Capital remains structurally positive on the growth prospects of the luggage industry, but expects the near-term sales and earnings to remain weak.

Axis Direct, in an August report, expressed concerns on near term outlook due to travel restrictions. But it remains optimistic on the long-term outlook for the sector given multiple drivers like an accelerated shift in consumer preferences away from unorganised labels to brands, rising leisure travel, shortening of replacement cycle for luggage as well as backpacks.

Risks: Delayed recovery in the travel and tourism sector.

Tasty Bite Eatables

The ready-to-eat frozen food company’s sales revenue and net profit declined 13.8% and 3.6% year-on-year, respectively in the second quarter. The company is hardly tracked by analysts.

According to its 2019-20 annual report, Tasty Bite continues to retain the position of market leadership in its key markets including the United States, Canada, Australia, and New Zealand, while the expansion is made into new geographies such as the U.K. and Germany. The report said market expansion, increased distribution points, new product launches and increased acceptance by consumers are the key growth catalysts.

Risks: Pricing pressure from food service customers, increase in input costs, volatility in prices of agriculture commodities, Covid-19 impact on business due to destabilized supply chains are some of the key risks mentioned in the annual report.