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Consistency Brings Cheer... And Cash
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Oddly enough, the starting year for this survey — 2003 — is also when the Indian stock market was at a very low ebb. Market indices and companies had not yet begun recovering from the after-effects of the dotcom crash of the early 2000s. But the boom years from 2003 to 2007 took investors to dizzying heights before the global financial crisis brought everything to a standstill.
Somehow, markets have had to weather other storms from that point on, and remain volatile and uncertain. The global economic environment and now the European sovereign debt crisis, is not helping any. It is also reasonable to assume that equity markets will go through hard times for another year or two. But, as the old adage has it, tough times do not last, but tough companies do. And that is exactly what this survey seeks to discover: how many companies have been able to weather the tough economic storms — both global and domestic — and yet managed to keep the faith with investors?
In succeeding pages, you can read through our list; the methodology on page 58 guides you through the process we used to arrive at our ‘winners'. In most cases, the results have been rather along expected lines. Take technology stocks, for example. You might have thought the most-followed firms — and the most-storied ones that became media darlings — would have topped the lists. Not so. Infosys Technologies, Tata Consultancy Services and maybe one or two others do make the list, but are close to the middle or lower half.
The story for pharmaceuticals is similar. With the exception of Lupin, there are no other notables that have turned in a consistent performance. Telcos that helped India leapfrog over wired telephony do not seem to have made investors happy either. Realty turned out to be a big, damp squib, though many investors suspect company promoters have done very well for themselves. This, despite the boom in household incomes and the demand for housing.
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Three sectors stand out: consumer goods, financial services and natural resources. In the former, it was not marquee names you would see, but the lesser known ones, like TTK Prestige, a kitchenware maker, and Page Industries, which makes underwear, that topped. In financial services, banks were dominant. HDFC Bank stood out on every list. IndusInd Bank, Kotak Mahindra Bank and Yes Bank showed a good business model backed by solid and imaginative management produce consistently high returns.
The natural resource business has benefited from the very low levels that commodity prices were at in 2003. Sesa Goa is one example, but there have been others: metals companies, mining companies and companies that have commodities at the core of their business.
That said, financial services in a fast growing economy are always among the best investments. Some so-called public sector banks made the list in some cases, but the logic was the same: solid, but nimble management. State Bank of India made the list too, but its troubles might set it back a little.
As one would expect in a growing economy, most of the returns get reinvested to sustain momentum. That has been validated by dividend performance across the board, with very few exceptions. Similarly, bonus issues — think of them as stock dividends — have also been a little lacklustre. The story of IPOs is a familiar one: a big pop at the beginning, and then mostly a rapid fading away.
Will these companies be able to sustain the returns they have achieved over the next two years? One of the striking aspects of this survey is that even after the global crisis of 2008 and its aftermath, the good companies continued to do well in return terms. So, even if conditions don't look too good for the next two years, chances are that they will find ways of maintaining their track records.
Here are a few characteristics that have emerged among businesses that have topped our return charts. One, they all have solid managements that are sharply focused on business development and expanding marketshare. Two, they can raise capital relatively easily and at a good price. Three, they are in mostly customer-facing businesses. They understand customers and pay attention to customer service. In carrying out this survey, it has been our endeavour to separate the wheat from the chaff. Next year, when we revisit this survey, we will know if we have. That said, you, dear readers, can tell us that now.
Stock investments are subject to market risks. Investors are advised to exercise caution.
(This story was published in Businessworld Issue Dated 28-05-2012)