Rochon-alysing the Indian stock market

What if we apply the Francois Rochon school of investing to the Indian context? Of course, some of his four-part process uses discretion. However, here is what you would find if you were to run this philosophy in the Indian context.

1. You have to remove banking and financial companies as applying Rochon’s process to them is not feasible


2. Keeping a market cap requirement of Rs 600 crore or more you get 1,186 companies The number of companies reduces further if you keep companies with at least five years of financial history only


3. 389 companies get dropped out when you apply the debt-to-PAT ratio of less than four times


4. Another 486 companies get filtered out for not having an ROE of 15% or more Further 58 companies fail to meet the five-year profit after-tax growth of at least 10% per annum.By now only 228 companies remain 174 of the remaining companies have a promoter holding of at least 50%


5. 32 companies have a current P/E ratio of less than 50 and less than the five-year median P/E ratio.

Finally, another 18 companies would get excluded due to a lack of market leadership, competitive advantage, and/or presence of cyclicality. Which 14 companies finally stand out after the Rochon acid test? We take a snapshot of the 14 companies that tick all the right boxes as far as Francois Rochon’s investment philosophy is concerned. This is an objective view of these companies and how their businesses have performed and grown over the last few years, along with causes of concern, if any.

Godfrey Phillips India – Quick Facts

• Godfrey Phillips sells Marlboro cigarettes in India, through its partnership with US tobacco giant Phillip Morris. The company benefits immensely from Marlboro’s brand recognition
• Its other businesses include cigarette brands Four Square, Red & White, and Cavanders, retail chain 24Seven and export.
• The company’s recent growth is also through its smart capital allocation, with a focus on retail and exports to offset low cigarette volumes.
• They are prompt to exit failing ventures and have shuffled their export mix timely.
• Godfrey Phillips plans to focus on unmanufactured tobacco export, which has grown by 34% annually in the last five years, and expand its retail stores

The domestic cigarette business is still the primary source of revenue. It is not only heavily regulated but also highly taxed. Watch out for adverse movements that may impact the business significantly.

Swaraj Engines – Quick Facts

• This Mahindra group entity is one of the largest tractor engine manufacturers in the country. They supply 20-65 horsepower diesel engines to Mahindra & Mahindra for their ‘Swaraj’ brand of tractors
• Its Mohali (Punjab) manufacturing plant has a total annual capacity of 1,50,000 engines
• The M&M tag and order book with the world’s largest tractor manufacturer provides stability and revenue visibility
• Swaraj enjoys a prompt payment cycle, reflected in the consistently low debtor position and negative cash conversion cycle
• Its dependency includes reliance on the parent company for orders, the tractor industry’s seasonal nature, the extent of tractor penetration and farm mechanization in the country
• There are plans for capacity expansion by 30% and has revised the limit of related party transactions with M&M
• Swaraj Engines has a dividend yield of 4.3% and a P/E ratio equal to its five-year median

Pfizer India – Quick Facts

• US-based Pfizer’s subsidiary, Pfizer India, is one of the largest pharmaceutical companies in India with around 150 products in 15 therapeutic areas
• Its facility in Goa can manufacture over 300 crore tablets a year
• Pfizer has an expansive product portfolio. It owns some renowned brands that have helped it become a market leader in antimicrobial medicines, immunisation, antacids, etc.
• The national immunization program adopted its Prevenar 13 which strengthened it in the pneumonia vaccine space
• In recent years, it has leveraged its parent company’s product portfolio
• To nullify advertising restrictions, Pfizer utilised Rs 368 crore in the last five years towards promotional activities
• Entering the National List of Essential Medicines (NLEM) is a significant hurdle for Pfizer having lost two products to it in FY23
• Its future strategy is to expand its product portfolio through new launches and its reach
• Pfizer has also stepped into core therapeutic areas while remaining wary of the dynamic regulatory environment

Fine Organic Industries – Quick Facts

• Established in 1970, Fine Organic is India’s top and the world’s sixth-largest manufacturer of oleochemical-based additives
• 68% of its revenue in FY23 was from exports
• Oleochemicals are made by converting vegetable oils and animal fats into additives. It is an alternative to chemical compounds and requires complex technology and expertise. It is used in food, plastic polymer, cattle feed, cosmetics, coatings, etc.
• Approval is a long process with an entry barrier for new firms, while Fine Organic is a name to reckon with in the industry
• The company has a five-year median ROCE of about 39%
• The company expects the oleochemical segment to overtake the broader specialty chemical industry due to its sustainability
• As an eco-friendly alternative to petrochemicals position, Fine Organics has a globally favourable position
• The volatility in vegetable oil prices may be a hindrance to the steadiness of growth. Fluctuating raw material prices have impacted financial performance in the recent past

Galaxy Surfactants – Quick Facts

• Galaxy Surfactants is one of India’s leading manufacturers of performance chemicals and specialty care products, and the largest manufacturer of oleochemical-based surfactants
• Product portfolio, technical expertise and consistent R&D activities are its strengths
• Galaxy has obtained 30 patents and launched over 20 products in the last five years
• It plans a capex of around Rs 150-200 crore annually for the next few years, focusing on specialty care
• In recent years, growth was predominantly driven by price growth, while volumes in both segments have been just around 3% per annum, which along with the lack of export growth causes some concern

Tata Consultancy Services – Quick Facts

• Tata Consultancy Services (TCS) is India’s top IT company in revenue and market cap
• 38% of its revenue in FY23 came from banking, financial services and the insurance industry
• Innovation is one of its core strengths, having pioneered IT research laboratories in partnership with various academic institutions
• It had success with recent launches like BaCNS, Quartz, and Twix
• TCS faces competition from many Indian and global firms
• Exposure to one sector can affect its consistency in times of slowdown
• The projected global IT sector growth is 5.2% pa till 2030. The firm’s order book is $34.1 billion, 1.2 times its current revenue
• TCS has a $50 billion revenue target by 2030 and is making major investments in futuristic technologies

Emami – Quick Facts

• Emami is an FMCG company with a strong presence in the consumer healthcare segment
• Its products can be found in 49 lakh retail outlets, with six market-leading brands
• It has a stellar brand reputation built by brands like Navratna, Zandu, Boro Plus, Fair & Handsome, Dermi Cool, etc.
• Emami has spent Rs 2,483 crore on advertising at an average of 17% of revenue in the last five years
• Emami’s profits have more than doubled since FY2018
• Its topline growth has been only 6% per annum, with acceleration in the last two years
• It plans to continue building its brand, improve its distribution, and expand in underpenetrated segments like antiseptic creams, men’s skincare, etc.
• It expects its investments in a few small and medium-sized companies to be future growth drivers

Garware Technical Fibers – Quick Facts

• Garware Technical Fibers is a key player in the technical textiles domain, catering primarily to fishing and shipping industries, as well as sports, agriculture, building, construction, etc.
• 60% of the business revenue is from exports
• Garware’s strength lies in superior R&D process and technological innovation, with over 90 patents filed and 24 approved
• Garware constantly pursues its expansion overseas and aims to increase market penetration with a focus on sports nets
• It is also expecting potential growth from geosynthetics, a low-cost synthetic product used to protect the terrain in the infrastructure industry
• While the export revenues have posted decent growth despite the Covid effect, domestic topline growth has been just around 1% per annum in the last five years
• Investors should also keep an eye on the oil prices because they can drag the margins

Procter & Gamble – Quick Facts

• P&G is the market leader in vitamins, minerals, and supplements with products like Neurobion (Vitamin B), Evion (Vitamin E), Nasivion (Nasal Decongestant), Polybion (B-complex), and Livogen (iron)
• P&G has posted notable profit growth despite a stagnant topline
• Since 2018, its five-year median operating profit margin has grown from 7.4% to 21%
• Strengths include astute management, efficient cost optimization, and divesting from non-consumer health sectors, strengthened market presence through targeted campaigns
• Investors should keep an eye on the top line. Despite the company posting good growth in the last three years through strategic initiatives, any slowdown can impact future growth

GlaxoSmithKline Pharma – Quick Facts

• GSK Pharma is the tenth-largest pharmaceutical company in the world
• Its two main segments are pharmaceuticals with 80% revenue and vaccines with 20%
• GSK Pharma’s product portfolio and global lineage are its key strengths
• Its Calpol (fever), Augmentin (anti-biotic), T-bact (topical antibiotic), various vaccines, etc., dominate their respective therapeutic niches
• GSK Pharma has consistently introduced new products across both divisions, with a little help from its parent company
• The company faces hurdles from both competition and the potential inclusion of its products in the NLEM
• A growth rate of 15% per annum is expected in the Indian pharma industry until 2030
• GSK aims to leverage its parent’s portfolio to enter the adult vaccines segment and further strengthen its specialty medicines division
• Consistent product launches in general medicines are expected to secure its market leadership position

Rossari Biotech – Quick Facts

• Rossari Biotech is a specialty and textile chemicals manufacturer with a presence in three segments - home and personal care chemicals (70% of FY23 revenue), textile specialty chemicals (23%), and animal health & nutrition (7%)
• The company could pivot a relatively new segment into its primary growth driver through robust R&D initiatives
• In FY2019, it bagged marquee clients like Hindustan Unilever, which boosted its revenue by 12 times
• The company’s cash conversion cycle has almost doubled in the last five years
• Due to recent headwinds in the chemical sector, the company has also posted a decline in revenue for three consecutive quarters on a YoY basis
• The company expects product demands to double in the next few years
• Rossari has recently acquired Unitop (agrochemicals and oil & gas chemicals), Tristar (preservatives, aroma chemicals and home & personal care additives), and Romakk Chemicals (silicone oils)
• This is expected to accelerate its future growth. However, investors need to be aware of the competitive market

Britannia Industries – Quick Facts

• One of the largest Indian FMCG companies in the biscuit segment, the largest organized player in the bread market, home to brands like Good Day, Marie Gold, Milk Bikis, Nutri Choice, and others
• Britannia has a strong marketing and robust distribution system
• It has spent Rs 2,520 crore in the last five years on advertising (4% of revenue)
• The retail outlet reach has grown 8% annually, with double rural growth
• Its biscuit segment has recently witnessed a slowdown due to high market saturation and competition
• Instances of proposals of anti-minority shareholder decisions and eventual rejection were observed
• Due to a slowdown in its core business, Britannia has entered other related segments like bakery and dairy segments, which are expected to drive future growth
• The company aims to replicate its success in these new areas
• So, the company has added five new plants since 2018 and allocated additional advertising spend for FY23 to augment its success in the new segments

Abbott India – Quick Facts

• Another pharma giant in this list, Abbott India is a subsidiary of Abbott Laboratories US
• It has products for gastroenterology, metabolism, women’s health, vaccines, consumer health, etc., with brands like Thyronorm, Duphalac, Digene, Influvac, etc.
• Abbott’s biggest strength is its international portfolio, with 72 new products launched in five years
• The company operates in a highly regulated and competitive landscape, which could affect its growth plans
• The Indian pharma industry is expected to double by 2030, as per the FY23 Economic Survey. Lifestyle changes and improved access to healthcare are expected to be the main drivers for this growth
• Although the company does trade below its median P/E, at 47 times, the valuation still feels slightly expensive

Blue Dart Express – Quick Facts

• Blue Dart is a subsidiary of the German logistics giant DHL
• It is India’s largest express and parcel delivery company
• It has a 54% market share in the air express segment and an unparalleled distribution system among logistics companies covering over 14,000 pin codes in the country
• The company differentiated its business from its national and regional competitors by offering unique services such as day-definite delivery, industry-specific shipping, and various other time-sensitive delivery options
• To facilitate this, the company has taken over 12,000 vehicles and six Boeing 757s on a lease
• It is a competitive market with sensitivity to ups and downs
• Blue Dart’s topline growth has been inconsistent over the decade
• With a strong distribution network in place, Blue Dart right now hinges its growth prospects on three factors: friendly government policies to support the logistics sector, expansion in the e-commerce segment, and growth in the SME segment
• But whether Blue Dart will be able to capitalize on these factors depends on how it fares against the competition, especially in the e-commerce segment.