Warren Buffett has time and again talked about the power of compounding. After all, that is what has made him perhaps the most successful investor of all time.
You just need a perfect consistent compounding stock for your portfolio to do well over the long run.
But what exactly are consistent compounders?
Simply put, these are companies that have shown a consistent increase in revenue and profitability over a long period.
They come with clean accounts, prudent capital allocation, and strong competitive advantages, making them the perfect low-risk route to generating long term wealth.
The stock price of such companies, compounds over time as the market rewards them for their consistent performance.
While the Indian share markets have been in a downtrend, investors get a chance of bagging such consistent compounding stocks for a discount.
So, which companies have been consistent compounders over the last couple of years and are available at discount?
Here are the top five…
#1 HDFC Bank
The first consistent compounder on the list is HDFC Bank.
Holding about 10% market share of the total banking industry, HDFC Bank is the country’s largest private sector bank by assets and by market capitalisation.
The bank is present in the broking business via HDFC Securities, which also operates as a third-party distributor of mutual fund products, insurance, initial public offering, fixed deposits, bonds, and non-convertible debentures.
Further, the bank’s subsidiary HDB Financial Services is a non-deposit-taking non-banking financial company that serves both individual and business clients.
When it comes to servicing retail customers, the bank relies on the model of a wide franchise and low-cost deposit base. This ensures good pricing power and sustainability of above-average NIMs (net interest margins).
As a result, in the last five years, the bank’s net profit has grown at a CAGR of 20%. Revenue growth has also been steady at a CAGR of 15.3%.
Recently, the bank’s parent company HDFC has announced its merger with the bank setting the stage for one of the biggest deals in the Indian financial sector.
As per the transaction structure, HDFC, India’s largest housing finance company with assets under management (AUM) worth Rs 5.26 tn and a marketcap of Rs 3.9 tn will merge with HDFC Bank.
The merger will improve the ability to cross-sell products to a larger customer base and will help the two entities leverage their distribution across urban, semi-urban, and rural geographies.
Further, the combined balance sheet of Rs 17.9 tn will enable larger underwriting at scale.
In its latest quarterly results, HDFC Bank reported a 7.5% YoY increase in revenue on the back of an increase in net interest income. Net profit also rose by 24% YoY.
HDFC Bank share price is currently trading only 5.6% higher than its 52-week low.
#2 Bajaj Finserv
The next consistent compounder on our list is Bajaj Finserv.
Bajaj Finserv was formed in 2007 as a result of its de-merger from Bajaj Auto and is the holding company for the businesses dealing with financial services of the Bajaj group.
The company is engaged in the business of promoting financial services, such as finance, insurance, and wealth management, through its investments in subsidiaries and joint ventures.
Bajaj Finance, a listed subsidiary of Bajaj Finserv, is one of the most diversified non-banking financial company (NBFC) in the Indian markets.
Bajaj Finance also operates as a housing finance company for its mortgage business via a wholly-owned subsidiary.
The insurance business of Bajaj Finserv is conducted under a joint venture with Allianz SE, one of the world’s leading composite insurers.
Bajaj Finserv is also engaged in the business of generating power through wind turbines, a renewable source of energy.
The company holds wind-farm assets in Maharashtra with an installed capacity of 65.2 megawatts.
In the last five years, the company’s sales have grown at a CAGR of 24.2% while net profit has grown at a CAGR of 21.6%.
In a recent interview, Sanjiv Bajaj, Chairman and Managing Director of the company said:
The PLI scheme, employee rate incentive plans, revival of private sector capital investment and deleveraging in the banking sector can bring medium-term opportunities for India.
Going forward, the digital transformation with robust customer additions, product launch and selective product mix will aid premium growth and earnings.
In its latest quarterly results, Bajaj Finserv reported a 22.6% YoY increase in revenue from operations at Rs 188.6 bn. Net profit jumped 37.3% YoY to Rs 13.5 bn due to improved business conditions.
The company recorded its highest ever assets under management and annual consolidated profit after tax in fiscal 2022.
#3 L&T Infotech
The third consistent compounder on our list is L&T Infotech (LTI).
L&T Infotech is one of the software companies of the Indian multinational conglomerate Larsen and Toubro. The group has various business interests ranging from construction, engineering, technology to financial services.
Founded in 1997, L&T Infotech is a global technology consulting and digital solutions company having operations in 33 countries and serving more than 485 clients globally.
In 2017, NASSCOM ranked LTI as the sixth-largest Indian IT services company in terms of export revenues.
In fiscal 2022, the company crossed the US$ 2 bn revenue milestone with a record growth of 26% on the back of 4 large deals with a net new total contract value of over US$ 80 m.
The reported growth in revenue has been broad-based across verticals, service lines, client buckets, and geographies.
The company is debt-free and backed by strong financials. The five-year average return on equity stands at 29.7%.
Its revenue has grown at a CAGR of 16.2% in the last five years while net profit has grown at a CAGR of 18.3%.
Last month, LTI announced amalgamation and arrangement with Mindtree, another group software company, in an all-stock deal.
The merged company will become the fifth largest IT services company in India with a combined market cap of US$ 18 bn, surpassing Tech Mahindra.
With a strong presence across geographies and minimal overlapping in terms of vertical mix, the combined entity will have a strong client base of 750+ clients.
The combined entity will have revenues of US$ 3.5 bn as of financial year 2022, with EBIT and PAT margins of 17.8% and 15.1%, respectively.
The entity will have access to a cash pool of US$ 991 m, which could be used for potential M&A opportunities in the future.
LTI indicated that the merger would enhance the scale of the merged entity, which would help it to participate in the larger deals, especially in the three large verticals of banking and financial services, communication, and media and technology.
Following the recent meltdown in technology stocks, L&T Infotech share price are currently trading 10.5% away from their 52-week low.
L&T Infotech Share Price Performance – Since Listing
#4 Gland Pharma
The fourth consistent compounder on our list is Gland Pharma.
Incorporated in 1978 as private company in Hyderabad, Gland Pharma is primarily engaged in manufacturing injectable formulations.
Gland Pharma has a global presence in around 60 countries and operates on a business-to-business model in countries like India, the USA, Canada, Australia, and some European countries.
The company has 1,415 product registrations in multiple countries of the world, with 368 product registrations in the USA and 54 registrations in India.
Gland Pharma has a total of seven manufacturing units located in different parts of the country. The company has all its facilities approved by USFDA and has a track record of receiving no warnings.
The company was listed on the bourses in 2020, and has robust financial outlook. The company is debt free and its five-year average return on equity stands at 17.4%.
Its revenue has grown at a CAGR of 20.9% in the last five years while net profit has grown at a CAGR of 26%.
The company remains on track to develop a complex product pipeline and build manufacturing infrastructure to support commercialisation.
The management has guided a capex of Rs 3 bn and Rs 2.5 bn in financial year 2023 and 2024, towards expanding its injectables capacity at Pashamylaram, warehousing, and API capacity.
Going forward, the outlook remains strong given its enhanced capabilities in peptides, hormones, long acting injectables, delivery systems, and biologics.
There still remain considerable scope to increase market share in existing products and Gland Pharma has a consistent and successful compliance track record.
In its latest quarterly results, Gland Pharma reported a 24% YoY increase in revenue at Rs 11 bn. Net profit jumped 9.8% YoY to Rs 2.9 bn.
Gland Pharma share price are currently trading 6% away from it 52-week low.
#5 Grasim Industries
The last consistent compounder on our list is Grasim Industries (GIL), the flagship company of the global conglomerate Aditya Birla group.
In 1947, Grasim Industries started as a textile manufacturer in India. However, since then it has evolved into a leading diversified player with a leading presence across many sectors.
It’s the largest producer of viscose rayon fibre in the world and one of the largest Chlor-alkali, linen and insulator players in India.
Apart from this, through its subsidiaries, UltraTech Cement and Aditya Birla Capital, it’s also India’s largest cement producer and a leading financial services player.
As a result of its operating efficiencies over the years, the company has a strong balance sheet despite investments in subsidiaries/related parties and ongoing capex.
Its revenue has grown at a CAGR of 20.3% in the last five years while net profit has grown at a CAGR of 15.8%.
Recently, the company has doubled its investments to enter the paint industry and plans to spend about Rs 100 bn and expects to start production by the fourth quarter of fiscal 2024.
Grasim has also earmarked over Rs 26 bn as capital expenditure (capex) for the financial year 2022 towards its Viscose Staple Fibre (VSF) business.
This expansion will increase Grasim’s VSF capacity by about 40%, which will cater to the growing demand for sustainable man-made cellulosic fibres in the country.
In the long term, the company plans to enhance its value-added products portfolio to create a meaningful speciality chemicals segment. The aim is to increase the share to 40% for both VSF and chlorine value-added products by 2025.
In its latest quarterly results, Grasim Industries reported a 45% YoY increase in revenue from operations at Rs 63.8 bn. Net profit jumped 122% YoY to Rs 10.7 bn on the back of strong operating performance.
Grasim Industries share price are currently trading 3.8% away from its 52-week low.
Snapshot of consistent compounder stocks from Equitymaster’s stock screener
Please note that these parameters can be changed according to your selection criteria.
Why you should invest in consistent compounding stocks
With market volatility at all-time highs, investing in consistent compounders will ensure stable returns in the short term and market-beating returns in the long term.
Investing in such companies also takes away the stress of timing the market. As long as you are patient and are willing to let compound interest do its work, you will be able to create immense wealth.
Note that while we have talked about wealth creators of the past, the real talent is in finding the big wealth creators of the future.
If you are interested in investing in such stocks, you can sign up for Co-Head of Research at Equitymaster, Tanushree Banerjee’s recommendation service – Forever Stocks.
The service will provide you with a curation of around 20 stocks that can be bought and held for a very long period of time up to several years or decades.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)