While stocks fluctuate on a day-to-day basis, real wealth is created in the market when you hold a good company for the long term. In November 2021, we conducted our annual Wealth 100 study, which was published in the December 2021 issue of 'Wealth Insight'. This coverage is meant to bring out the most rewarding stocks of the last decade. While creating this list, we applied the following filters:
- In order to ensure consistency of wealth creation, we removed those stocks that delivered more than 50 per cent of their total gains over 10 years within a specific year.
- In order to ensure quality, we ensured that the return on equity (ROE) should be more than 12 per cent in at least eight out of the last 10 years; or it should be rising in at least eight out of 10 years.
Do note that we also included dividends while calculating the returns. That's only sensible as dividends become substantial as your holding period goes up.
Here we discuss two wealth creators from the top 10 in the list.
Deepak Nitrite: Rapid growth
This manufacturer of chemical intermediates operates through four business segments - basic chemicals (17.3 per cent of FY21 revenue), fine and speciality chemicals (17.5 per cent), performance products (6.9 per cent) and phenolics (58.3 per cent).
While the company has, over the years, maintained its market leadership in the three segments - basic chemicals, fine and speciality chemicals, and performance products - it witnessed significant growth after FY18 when its phenolics plant commenced operations in 2018. The Chinese government's crackdown on pollution-causing industries worked in favour of the company, as it took advantage of the demand-supply mismatch caused by the move. Moreover, an additional impetus came from companies looking to de-risk their supply chains, which ultimately acted as a catalyst for the company's phenolics division. The phenolics segment offers phenol, acetone, cumene and isopropyl alcohol manufactured completely by its subsidiary Deepak Phenolics. It has already established itself as the most trusted player in the domestic market for phenol and acetone, with a market share of over 50 per cent.
Given its success in the phenolics segment and the resulting strong cash flows, Deepak Nitrite prepaid a major chunk of its debt, lowering the debt-to-equity ratio to 0.25 in FY21 from 1.11 in FY19. Interestingly, while the market capitalisation has surged 124 per cent over 2018-2021, the profit after tax has increased by 127 per cent, bringing down the P/E from 38.1 times to 31.4 times and making it a lot more attractive from an investment perspective.
Tasty Bite Eatables: A tough landscape
Tasty Bite is a leading brand in the natural, organic and ready-to-eat food category in North America. The company's export-driven B2C segment has a range of ready-to-eat Indian and Asian entrées, ready-to-cook sauces, ready-to-eat organic rice and grains. It also has a B2B business comprising a range of customised speciality-formed frozen products, sauces and gravies. Its holding company is Preferred Brands International (PBI), which is 100 per cent owned by Mars Inc., USA.
Following its incorporation in 1985, the company had a tumultuous journey (declared a sick unit in 1997, acquired by Hindustan Unilever and then buyout by PBI). However, it has gradually emerged as the largest brand of prepared (both ready-to-eat and ready-to-cook) Indian food in the US. Tasty Bite's consumer business has been growing on the back of several factors, including healthy food choices made by consumers, the ongoing trend of eating at home and the growth of speciality food (international cuisines like Indian and Asian food). The marketing and distribution of its products are taken care of by PBI (for USA) and Mars Inc. (globally). For the B2B business, the company is a trusted partner to marquee quick-service restaurants and cloud-kitchen brands across India and South East Asia.
The company operates in a highly competitive industry and is subject to ever-changing consumer trends and consumption habits. While the demand for ready-to-eat food is on the rise across the globe, several new brands are entering the market. Additionally, at a P/E of 99.3 times, the valuations seem quite stretched as well.
Also in our 'Wealth 100' series: