Small & mid caps with stable earnings growth
Presenting three companies that have seen stability in earnings growth for the last five years
By Danish Khanna | Jun 21, 2019
In the world of investments, success is scripted by long-term profit growth. In other words, your investment success in the long run hinges much on the stability of earnings growth of the companies you are investing in.
If you compare a company having stable earnings growth with one lacking it, the former is likely to show better profit growth in the future.
Earnings stability indicates that the company has consistent earnings-per-share (EPS) growth, which also helps in forecasting its future earnings accurately.
Here we are looking at the companies that have reported EPS growth between 10 and 25 per cent in the last five years.
Established in 1986 as Gujarat Rural Housing Finance with HDFC and Aga Khan Fund for Economic Development (AKFED) as promoters, the company has 195 offices in 11 states and one union territory. This subsidiary of HDFC is involved in providing a wide range of loans for the affordable housing category, with the prime focus on rural and semi-urban areas and average loans of 8.19 lakhs as of March, 2019.
The company is headed by Mr. Keki M Mistry, who is also the Vice Chairman & CEO of HDFC. It has five housing finance schemes - Gruh Suraksha, Gruh Suvidha, Gruh Sajavat, Gruh Samruddhi and Gruh Shubh Lakshmi - which cover home loans for salaried persons, professional and self-employed, loan for repair/renovation and for properties singly or jointly owned by women.
The company's earnings per share growth has been on an increasing trend over the last five years and grew by 14.2 per cent in FY15 and 22.9 per cent in FY19. The loan assets have also increased substantially at a rate of 20 per cent compounded annually over the last six years and are currently standing at 17,408 crore as against 15,558 crore in March 2018. The company has witnessed an increase in the cost of borrowing in the last one year, which could be partly attributed to the liquidity crisis in the NBFC sector, resulting in high costs and low disbursements towards NBFCs by banks.
The Competition Commission of India (CCI) recently approved the proposed amalgamation of Gruh Finance and Bandhan Bank in an all-share deal. HDFC will hold around 15 per cent in the merged entity.
Founded in 1995, Solar Industries is the largest manufacturer and exporter of explosives in India, operating through 25 manufacturing facilities in the country. The company is planning to double the number of its manufacturing units outside India from five at present. Also, it has been incurring capital expenditure for expanding the installed capacity to 4.5 lakh mt by 2020 from a current level of 3.3 lakh mt. In FY19, the company incurred over Rs. 271 crore in capital expenditure.
The mining sector is the largest consumer of industrial explosives, with Coal India being the largest customer. This PSU accounted for more than 17 per cent of its total revenues in FY19. Housing and infrastructure and exports contributed to 27 and 35 per cent, respectively, to the total revenues. Besides, defence contributed close to seven per cent to its revenue during the same period. However, the increase in raw material prices and political and regulatory risks, owing to the nature of its business, are some major headwinds faced by the company.
The company's current order book stood at Rs 1146 crore as of March 2019. Its earnings have seen a consistent rise over the past four years. Earnings per share grew 18.6 per cent in FY19 as compared to 11 per cent in FY15. The company's stock has been a wealth creator for its investors, compounding at a rate of more than 36 per cent in the last 10 years. However, its current PE is 40.6 times.
Repco Home Finance
Repco was incorporated in 2000 as a niche player in the HFC (Housing Finance Company) sector with a focus on tier-II and tier-III cities. The company has 143 branches and 24 satellite centres in 11 states and one union territory. It has a major presence in Tamil Nadu, which alone accounted for more than 57 per cent of its loan book in FY19. The company mainly provides loans to self-employed individuals. These loans accounted for more than 57 per cent of its total loan book. Besides, it provides loans for repairs, renovations and extension of the existing residential property.
As of March 2019, its total loan book stood at 11,036.8 crore, with 81.6 per cent being home loans and the remaining being loans against property. The average loan per unit was 14 lakhs. Over the last one year, the company has seen a rise in its Gross NPA, which is currently at 3.1 per cent, with the provision-coverage ratio of 40 per cent, which is an area of concern. Net interest margin has also fallen to 4.5 per cent from an earlier level of 4.9 per cent as of March 2018. However, the company has strained away from borrowing against the commercial paper, which usually has a very short-term duration as against long-term loans disbursed by the company. It is likely to benefit from government initiatives, such as 'Housing for All.'
In terms of financials, it reported an EPS growth of 18.6 per cent as of March 2019 and disbursements grew by 12 per cent in the last one year. Currently, its stock trades at a PE of 9.1x.Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.
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