They are the unsung heroes who are consistent in their performance. Conservatism runs through their blood. Their businesses are not viewed as opportunistic assets and their balance sheets are rarely over-leveraged. Kiran Kabtta Somvanshi & Crystal Barretto analyse South India Inc to find the best among them
THERE is something about South India that makes it distinctly different from the rest of the country ? be it politics, films, or consumption patterns. The difference probably lies in the way of life or cultural undercurrent that exists in the four southern states. And, the same applies to South Indian businesses. Traditional South Indian business houses are known to be conservative, who look at their businesses as going concern ventures and not as opportunistic assets ready to be arbitraged. They do not over-leverage their balance sheets and generally remain law compliant. Most of these companies prefer to be low profile. Consistency in growth, dividends and performance is a typical feature of such businesses, leading to higher earnings visibility. Such companies provide the necessary defensive anchor to one?s portfolio.
However, this does not mean that there are no equally competent companies elsewhere in the country. Conversely, it also does not mean that all South Indian companies exhibit the above-mentioned characteristics. The corporate scam unveiled at Satyam, a South-based company, is a case in point. However, exceptions cannot be the rule.
ET Intelligence Group has analysed companies based in South India with the aforesaid characteristics and which are investment-worthy. Criteria like debt-equity ratio, dividend yield, growth in net sales and profit, cash in books and returns on net worth and capital employed have been used to arrive at a varied list of companies.
A few of the lesser-known companies have been profiled here and the others form part of the list Southern Fare.
The Other Stars In The Southern League
The list of companies below has been culled from a larger list of companies registered in the four states of South India. The ones on the list have been chosen because of their low debt, good cash flows, healthy growth in sales and profit over the past three years and consistent dividend payouts. In the case of Coromandel International, Shilpa Medicare, Shree Renuka Sugars and Sundaram Finance, the debtequity ratio is little over 1, but other factors were more compelling for their inclusion. Public sector undertakings and multi-nationals have not been included in the list.
For banking and financial companies, we have used the ratio ? price-to-book value ? instead of the conventional debt-equity ratio. This is because due to the nature of their business which involves lending and borrowing of funds, their liabilities are significantly higher than those of other companies. Hence, the price-to-book value ratio is a better tool to analyse their market valuation.
CMP: Current Market Price, OPM: Operating Profit Margin, MCap: Market Capitalisation, Y-o-Y: Year on Year, RONW: Return on net worth, Div Yield: Dividend Yield, D/E Ratio: Debt to Equity Ratio, P/B: Price to book value, NIM: Net Interest Margin.
ELGI EQUIPMENTS
Part of the LG Balakrishnan Group, Elgi Equipments is the market leader in air compressors and automobile service station equipment. Elgi manufactures equipment for diversified industries like construction, mining, transport, power, railways, defence, oil, textiles and electronics. It has subsidiaries in France and China that tap the export market. The company has no debt on its books and is consistently paying dividends. The company targets to grow by 30% each year over the next two years supported by inorganic growth outside the country.
NAVA BHARAT VENTURES
Nava Bharat Ventures (NBVL) is a well-diversified company with operations in ferroalloys power generation, sugar and bio-fuels industries. The company, which started off primarily as a ferroalloy manufacturer, is increasing its thrust on power generation to capitalise on the differential between power supply and demand in India. Out of its total capacity of 228 mw, NBVL uses about 15% for captive consumption while about 75% is sold in the merchant market. The company also has captive coal mines in India and Zambia, thereby improving operational efficiency.
NUMERIC POWER SYSTEMS
Numeric Power Systems (NPSL) provides power management solutions for companies across the country. The company's key products include offline and online interactive uninterruptible power systems (UPS) and power conditioner accessories. NSPL is a leading player in the UPS segment with its key clientele from banking and IT industries. The company's sales have been growing at 17% over the past four years and are expected to continue as the company expands operations. NPSL gives a return on capital of 27% and a return-on-equity of 20% and pays dividends to its shareholders every year.
RANE HOLDINGS
RHL is the holding company of the Chennaibased Rane Group of companies that manufactures auto components for original equipment manufacturers in India and abroad. Being in the business for the last eight decades, the group has a loyal customer base and strong brand equity. RHL's income comprises dividends from the eight group companies, fees from the companies for use of the "RANE" trademark and fees from them for a range of strategic services provided. RHL is a consistent dividend payer. Its topline has been growing at 35-40% every year for the last two years and is likely to continue the growth trend on back of strong growth of the auto industry.
VST TILLERS & TRACTORS
VST Tillers & Tractors (VTTL) manufacturers power tillers, tractors, paddy transplanters, and diesel engines, primarily for small farmers with low spending budgets. Most of the company's products come under the government subsidy programme. VTTL functions out of Bangalore, Mysore, and Hosur with an annual capacity of 25,000 power tillers, 32,000 engines and 5000 tractors. Its power tillers division is the biggest contributor to sales and is expected to grow at 15% over the next two years.
CITY UNION BANK
City Union Bank is one of the small and efficient banks that have been consistently making profits and paying dividends. It has one of the best returns matrices across the industry with return-on-assets (RoA) and return-on-equity above 1.4% and 20% --when the standard RoA is 1%. It capitalises on niche markets of small businesses, SMEs, and traders primarily based in South India. Around 80% of its loan book is on a floating basis, helping it maintain a net interest margin in excess of 3%. The bank has a healthy asset liability management with 71% of deposits and 69% of advances having a maturity period of 1-3 years in FY10.
INDIA MOTORS PARTS & ACCESSORIES
One of the TVS Group companies, IMPAL is an all-India distributor of automobile spare parts and accessories. The company has a network of over 50 branches - distributing products for more than 60 manufacturers. IMPAL has an exemplary track record of growth over the last five years. Robust distribution network, strong fundamentals, consistent growth and dividend payouts are key positives for the company.
ADOR FONTECH
Ador Fontech Limited (AFL) offers products and services and provides solutions that involve conservation of mineral reserves as well as reducing down-time and inventory costs. Its product range includes filler wires and welding equipment while its services encompass reclamation welding and recycling of vital machinery components. The company's sales have been growing at 22% over the past few years. Further growth in industrial development will provide more momentum. AFL has been rewarding investors over the years through dividend payments and a high return on equity of 37%.
SHILPA MEDICARE
This Karnataka-based company is engaged in the manufacture of active pharmaceutical ingredients (APIs), especially in the oncology segment. It earns 75% of its revenues from exports. Except for the Dec-10 quarter, the company has seen a steady rise in its consolidated revenues and improvement in its operating profit margin over the last several quarters. While it has been in an expansion mode, it is paying dividends consistently.
(With inputs from Skandita Agrawal)