Ambit Capital Sees Profitability Ratio Improving For These 10 Indian Firms

Ambit Capital has listed 10 Indian companies that are likely to witness an improvement in return on capital employed.

A pedestrian looks on while an electronic stock board displays a graph. (Photographer: Kiyoshi Ota/Bloomberg)
A pedestrian looks on while an electronic stock board displays a graph. (Photographer: Kiyoshi Ota/Bloomberg)

Ambit Capital has listed 10 Indian companies that are likely to witness an improvement in return on capital employed as margin expands.

India Inc.’s pre-tax RoCE—the efficiency with which a company can employ its capital, both debt and equity—has been steady since FY11 due to stable-to-better operating profit margin in a weak sales environment even as capital employed turns have been deteriorating since FY15, the brokerage said in a note.

According to Ambit Capital, companies that have shown a significant turnaround in the last 15 years largely focussed on improving operating profit margins through competitive advantage. “For instance, firms showing over 10% RoCE expansion witnessed about 10% EBIT margin expansion, despite lowering capital turns since FY15.”

The 10 firms highlighted by Ambit are...

Bharti Airtel


  • Key beneficiary of a market pricing reset underway as the telecom industry has consolidated
  • 20% revenue CAGR estimated over FY20-23 is either due to Vodafone Idea’s subscriber loss accruing to it or tariff hikes
  • Also, built in-house digital capabilities

Risk: Elevated payout for 5G spectrum and weak consumption trends hampering monetisation ability both in business-to-business and business-to-consumer

United Spirits


  • Working on improving its revenue share of Prestige and above category
  • Working extensively towards improving factory productivity
  • Looking at cost-cutting in packaging by finding better alternatives and cost rationalisation measures
  • Sees Ebitda margin improvement of about 150 basis points over FY20-23
  • Controlled receivables, improving cash flow, reduction of debt and liquidation of non-core assets to aid RoCE

Risks: Incremental lockdown or restrictions on bars, pubs and restaurants would delay revenue recovery and hence improvement in return ratios. Also, adverse change in route to market would lead to higher receivables and hence elevated capital employed. This may also lead to slower revenue for a few months which too would affect profitability.

Honeywell Automation


  • Higher margin, better working capital management led to RoCE improving to 26% in FY20 from 19% in FY16
  • Raw material consumption became efficient and other operating expenses moderated
  • Expects pre-tax RoCE improvement to accrue from continued working capital management as it focusses on lowering dependence on projects business and improving free cash flow conversion to 100%

Risks: Projects-based nature of the business implies delays in collections and cost overruns could drive lower margins and higher working capital, thus hurting RoCE in the process. Also, adverse developments at the group level could hurt financials at the Indian entity.

Balkrishna Industries


  • Set to benefit from the higher scale and backward integration through carbon black plant and entry into higher radial diameter tyres
  • Capex from FY22 largely expected to be maintenance capex, resulting in lower capex intensity
  • Improving revenue and operating margin trajectory along with lower capex intensity are likely to improve RoCE back towards levels of 23-24% from the recent lows of 19-20% by FY23

Risks: The second wave of Covid-19 intensifying in Europe and North American markets—Europe/North America contribute about 50%/20% of volume. Adverse macro factors like low rainfall/drought-like conditions in key global markets of Europe/North America. And import restrictions and exchange rate risks across key markets.

IndiaMart InterMesh


  • Benefits from dominance in B2B classifieds with a focus on industrial products
  • Can return to 26% revenue CAGR post FY21 blip
  • Can achieve similar growth trajectory over FY21-24E, capitalising on penetration increase, driving operating leverage

Risks: Verticalised B2B classifieds portals like Moglix and IndustryBuying provide full-stack e-commerce solutions. IndiaMart confines itself to listings. If B2B buyers evolve and opt for full-stack commerce, IndiaMart will be disadvantaged.

Indian Companies That Consistently Outpaced The Economy



  • Trying to improve the pan-India market share to 15% from 11-12%
  • Targeting about 15% Ebitda margin through higher scale, better mix and cost control
  • Capex intensity is already low and capacity sharing with Kubota Corp. is likely to reduce this further
  • Improving operating margin and low capex intensity are likely to improve RoCE

Risks: Inability to extract synergies out of Kubota tie-up, or in the worst case break-up with Kubota. Adverse macro factors like low rainfall/drought-like conditions for two successive years, low government subsidies for tractors. And an inability to make headway in exports as desired due to levy of import duties etc.

Polycab India


  • Working on improving its revenue share from fast-moving electrical goods
  • Trying to leverage their existing cables/wires channel which is 15-20% common with the other FMEG category
  • Looking to make multiple new IoT-based launches in the category
  • Currently, FMEG margins are very low and hence are likely to expand once scale improves

Risks: Excessive competition in the FMEG space which hinders Polycab’s ability to expand margins.

Tube Investments Of India


  • Set to benefit from revival in domestic OEM cycle
  • Ebitda margin to gain from cost optimisation and improved product mix
  • Strong focus on revenue growth, PBT margin, RoCE and free cash flow/PAT is likely to continue, aiding overall RoCE improvement
  • Turnaround of CG Power likely to be an additional kicker for growth and profitability

Risks: Inability to turnaround CG Power would be a drag on profitability and cash flows. Also, CG Power has extended corporate guarantees worth Rs 950 crore to related parties (international operations) which remains a key monitorable. Also, inability to sustain the turnaround in the cycles division would hurt return ratios.

Navin Fluorine


  • CRAMS already firing with Q2 revenue more than 2x year-on-year
  • New order flows continue to increase from global pharma innovators
  • New capex will start contributing to revenue from FY23 and drive growth
  • Estimate share of high value added segment to reach 68% of total revenue by FY23 and drive growth

New CEO, Radhesh Welling, is driving transition across the organisation and is largely responsible for the daily operations of the business.

Sundram Fasteners


  • Set to benefit from domestic OEM revival along with reviving U.S. class 8 truck cycle
  • Aims to increase export revenue mix to about 50% by FY25 and double revenue from non-auto segment by then
  • Higher scale and better mix will aid Ebitda margin
  • Improving EBIT along with lower capex will result in pre-tax RoCE rising almost 1,000 basis points over FY20-23E to about 26%

Risks: Large-scale second wave of Covid-19 in India resulting in major lockdowns, thus delaying CV demand revival. Also, continuation of intermittent lockdowns across FY22 in the developed markets, impacting exports. And a large non-synergistic acquisition might land the company in a phase of lower RoCE and subdued earnings growth due to higher debt on the books/interest cost. These would hit valuation multiples as well.

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