From Small-Caps To Large-Caps

It is common wisdom that given time and nurturing, a small start or idea can eventually turn really big. Think of a century scored by a batsman that starts from the first single scored, or of a full-grown tree that takes birth in a small seed. What helps along the way is getting the right direction. The century scored by the batsman required a strategy and focused approach, as the growing tree needs proper nourishment and care. What this tells you is that if provided with the right direction, appropriate strategy and sufficient time, small things hold tremendous potential energy within themselves.

This is applicable to all spheres of life, and definitely to the equity markets too. The way that some of the listed entities in India have grown in the past five years is a testament to the same. These companies have witnessed significant growth in the past five years to turn themselves into multi-baggers.

It is a good idea to have an eye on the big picture when you are doing the smaller things, so that they all add up right. The companies we have listed here seem to have followed this mantra very religiously. When we run through the list, one can easily make out that factors like a consistent focus on the right strategy along with the ability of the management to foresee opportunities and execute them accordingly has resulted in these companies creating significant amounts of wealth for investors. In the story, we tried to decode exactly what these companies have done differently to stay ahead.

Why have we have considered a period of five years in our analysis? The answer is quite simple. For one, five years is considered as ‘long-term’ in terms of investment period. Also, in the last five years, the Indian economy has seen a full economic cycle. This period also includes the global recession in 2008, which was a ‘once in a century’ sort of scenario. So, the companies that have managed to endure the difficult economic cycles must have real mettle.

The Wealth Creators

When we analysed the critical factors behind the success of the companies making it the list, we found many – product innovation, rural reach and brand focus. However, one thing was common – a strong management bandwidth.

While this was on a micro basis, we also tried to find out if there was any particular sector that stood out with its performance. But apart from the finance segment, which features five times on the list, and pharmaceuticals, which appears twice, there were no other repetitions.

As for the list of star performers, this was calculated on the basis of the change in market capitalisation of the company. While the base price is considered as on April 2, 2008, the last date is considered as April 1, 2013. We enumerated the companies that have managed to grow from the small cap segment (market cap more than Rs 50 crore and less than Rs 500 crore) to don the large-cap hat (market cap of over Rs 3000 crore). Then, we ranked the companies on the basis of their five-year CAGR.[PAGE BREAK]

First on the list is Titan, which has provided CAGR returns of over 148 per cent. When we look at the performance of Titan, the critical success factors that emerge are its focus on innovation, better reach in Tier II & Tier III cities and its presence in every layer, viz. premium, luxury and even the mass markets. While its brand Zoya focused on the luxury segment, the Tanishq, Titan and Fastrack brands are pitched at the mid-market level, while Sonata and Titan Eye Plus are mass market brands. Apart from the domestic markets, the company also had a presence in the international market. However, what we feel has really helped Titan is rise in the gold prices, which multiplied several times during the period.

Second on the list is GRUH Finance. This company has a strong management bandwidth, and is a part of the HDFC Group. The strong quality of management has actually helped the company overcome the lull in the real estate market. The critical success factors were the focus on Tier II and Tier III cities and on the salaried class. While the metros witnessed a lull, the realty markets remained vibrant in smaller cities. Further, with a strong management calibre, the company managed to keep the cost of funds under control. No wonder the company has created wealth for its investors.

Third is South Indian Bank (SIB), a Kerala-based private sector player. The ability to attract and mobilise NRI funds, a focus on community-led lending and increased reach are the major factors behind the success of SIB. The banking sector as a whole remained vibrant, but SIB has made its mark to enter the large-cap group.

The next two spots have been captured by two surprise entrants, Supreme Industries and Ramco Cements. While Supreme Industries is into plastic products and has managed to capitalise on the increased spending power in the semi-urban and rural areas (with products like moulded furniture), Ramco Cement managed to ride the demand-supply mismatch in the southern parts of India.

Next on the list is CRISIL. A strong MNC parental support and strong services basket have helped the company put in a strong show on the bourses. Apart from that, when the company came out with an IPO, it left a good amount of scope for retail investors on the valuations front.

TTK Prestige is another example of how rural reach and increased spending ability has created opportunities for growth. Continuous innovation in products has also helped this kitchen appliances manufacturer to create wealth for investors.

LIC Housing Finance also has similar parameters (reach in Tier II cities and its ability to contain the cost of funds) as we listed in GRUH Finance.

For Aurobindo Pharmaceuticals and Ipca Labs, we feel that exports and continuous research on new products are the critical success factors. The management of both the companies consistently focused on product research, and their efforts have paid off.

We have already discussed the top 10 companies in the list. Next is Amara Raja Batteries, which manufactures automobile batteries (Amaron) for OEMs. With the automobile sector witnessing sharp growth, Amara Raja has created a good amount of wealth.

Last on the list is Page Industries, which markets the Jockey brand in India. Its strong brand recall, management bandwidth, increased rural reach and ability to pass on costs have helped the company witness a continuous northward movement.

Here, we would like our readers to understand that these criteria have to do with the companies’ past performance and may not necessarily be repeated. But these factors can serve as pointers to gauge which companies may be value creators going ahead. In this special supplement on small-caps, we have provided a list of companies ranked on the basis of various parameters of growth, efficiency and sustainability. While these are not direct recommendations, getting a pulse of these critical success factors mentioned above could help investors find the winners of tomorrow.