Top 5 Indian Stocks with Consistently Rising Operating Margins

In a world where investors seek the golden ticket to profitable ventures, there is one measure that stands out, operating margins.

Operating margin measures the percentage of revenue a company keeps as operating profit. It indicates the profitability of a business and facilitates competition among competing businesses or different industries.

Investors highly value stocks with consistently rising operating margins. These stocks have the ability to generate consistent profits thereby creating value for shareholders.

Additionally, stocks with consistently rising operating margins tend to be more resilient during economic downturns. Their ability to manoeuvre choppy markets often demonstrates effective cost controls, efficient operations, and strong leadership.

Considering these factors, we highlight five Indian stocks with consistently rising operating margins.

#1 HDFC Bank

First on our list is the HDFC Bank.

HDFC Bank, the largest private sector bank in India, enjoys a market share of more than 15% in most retail loan categories like unsecured retail and vehicles segment.

The lender's business has grown substantially over the years, with the advances jumping 2.4x in the last five years.

While expanding its business, the company has increased its profitability. The operating margins have improved consistently, from 31.3% in fiscal 2020 to 37.4% in 2022.

The net profits have grown considerably, reporting a 5-year CAGR of 20.1%. The return on equity (RoE) is at an admirable 5-year average of 17%.

This performance is led by the company's strategy to avoid undue risks for the sake of expansion.

The bank has maintained its asset quality thanks to its conservative attitude with its margins and provisioning policies. The net non-performing assets (NPAs) have remained rangebound (0.3-0.4%) from the financial year 2018, the lowest in the industry.

HDFC Bank Financial Snapshot (2020-22)

	2019-2020	2020-2021	2021-2022
Net Profit Growth (%)	21.60%	16.70%	19.80%
Advances Growth (%)	20.10%	13.60%	19.90%
Deposits Growth (%)	24.20%	16.40%	16.80%
Operating Profit Margin (%)	31.26%	33.29%	37.42%
Return on Equity(%)	16.50%	16.50%	16.70%

Data Source: Ace Equity

The company is optimistic about robust growth in the future, emphasising deposit mobilisation and branch expansion. It is also confident of long-term synergies from its merger with HDFC Ltd and is well-placed to capitalise on the pickup in the corporate credit cycle.

The stock is trading at a Price to Book Value (P/BV) of 3.7 times, a premium to 7.5% to its 5-Yr median of 4x.

To know more about the bank, check out its financial factsheet and latest financial results.

#2 Bajaj Finance

Next on our list is Bajaj Finance.

Bajaj Finance is the largest NBFC (non-banking financial company) in India. The lender has grown its business substantially and now boasts an AUM (assets under management) of over Rs 2 tn.

While the advances have grown over 2.2x, the profitability has jumped 3x in the last three years. This comes on the back of operating margin expansion that has leapt from 59.3% in fiscal 2021 to 69.3% in 2023.

The net non-performing assets (NPAs) have remained steady, indicating the company has kept risks at bay while growing the business.

Bajaj Finance's forte has been the use of data analytics. The company uses artificial intelligence in its financing scheme. This has allowed the business to expand while retaining its credit quality.

Bajaj Finance Financial Snapshot (2021-23)

	2020-21	2021-22	2022-23
Advances Growth (%)	3.80%	30.50%	26.60%
Net Profit Growth (%)	-16.00%	59.00%	64.00%
Operating Profit Margin (%)	59.30%	62.30%	69.30%
Net Profit Margin (%)	16.60%	22.20%	27.80%
Return on Equity(%)	12.90%	17.60%	23.60%

Data Source: Ace Equity

Its portfolio is geared towards retail and consumer/mortgage finance, accounting for over 80% of the AUM.

Bajaj Finance competes with banks and NBFCs for traditional retail (mainly personal /consumer loans and mortgages) and certain non-retail lending products. In personal financial services, the company focuses on a relatively lower income group as compared to retail banks that focus on high-net-worth individuals.

The business is well-poised to grow over the long term. Bajaj Finance's long-term target is to continue growing its AUM at 25% while maintaining sturdy return ratios.

The company expects the growth to stem from existing verticals in tandem with new ones, such as microfinance, commercial vehicle loans and tractor loans.

At present, the stock is trading at a P/BV of 8.3 times, a discount of 14% to its 5-year median P/BV of 9.7 times.

To know more about the company, check out its financial factsheet and latest financial results.

#3 Titan

Third on our list Titan.

Titan is a leading manufacturer of watches, jewellery, and eyewear in India. It has about 60% share in the organised watch market. It's the world's fifth-largest integrated watch manufacturer.

Tanishq, Titan's key jewellery offering, is the largest organised jewellery retailer in the country with a market share of 4%.

Titan's leadership status, in tandem with an improving product mix, has facilitated sustainable expansion of its operating margins. The operating margins have increased from 8.8% in fiscal 2021 to 12.8% in fiscal 2023.

Moreover, over the past few years, the company has successfully capitalised on the increasing benefits of operating leverage.

Apart from this, the company's efforts towards brand premiumisation, the introduction of new products and stores, and digital initiatives to boost online sales, have paved the way for higher margins.

Titan Financial Snapshot (2021-23)

	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	2.95%	33.01%	40.92%
Operating Profit Margin (%)	8.82%	12.41%	12.78%
Net Profit Margin (%)	4.50%	7.63%	8.07%
Return on Capital Employed(%)	14.66%	23.04%	27.47%
Return on Equity(%)	13.76%	26.18%	30.97%

Data Source: Ace Equity

The business has done relatively well, with the sales growing at a 5-year CAGR of 20.2%. The RoE and RoCE are also at a notable 5-year average of 23.9 and 23.5%.

Titan's offerings span various verticals such as jewellery, watches & wearables, eye care, fragrances & fashion accessories, and Indian dress wear. While the watch segment straddles the lower, middle and premium markets, the jewellery segment is more middle-premium with a focus on adornments.

The company is confident of growth in the near future. It aspires to further strengthen its international presence to 25 international stores by the end of fiscal 2024, with growth primarily being driven by additions in the GCC (Gulf Cooperation Council countries) region.

Moreover, the company is uniquely positioned in terms of hefty headroom for market share-led revenue growth and strong competitive moats as jewellery purchases shift increasingly to organised players resulting in strong revenue growth.

The stock trades at a PE of 83.4x, a premium of 7% to its 5-year median PE of 77.9x.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Tata Motors

Fourth on our list is Tata Motors.

Tata Motors is India's leading automobile player, with a 45% market share in the commercial vehicle (CV) segment. It is also present in the passenger vehicles (PV) segment (with a market share of 18%), where it has turned around its business with a slew of successful launches.

Apart from the Indian market, Tata Motors also caters to the global luxury auto space with its Jaguar Land Rover (JLR) brand. The international segment swung back into profits recently, in the quarter ending December 2022, after seven consecutive quarters of losses.

This change of fortune is attributable to a strong order book, better semiconductor chip supply, tempered commodity prices and an improved product mix.

Additionally, the demand for PVs in general, and JLR products in particular, has also been strong in key markets globally. And its Indian CV (commercial vehicle) business has been recovering, with a positive outlook in tow.

All these factors have culminated in higher margins in the past few years, growing from 6.2% in fiscal 2021 to 10.5% in fiscal 2023, marking an impressive growth trajectory.

Tata Motors Financial Snapshot (2020-23)

	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-3.47%	10.69%	23.98%
Operating Profit Margin (%)	13.98%	9.97%	10.57%
Net Profit Margin (%)	-5.21%	-4.03%	0.68%
Return on Capital Employed(%)	-1.27%	1.23%	7.48%
Return on Equity(%)	-22.17%	-22.53%	5.24%

Data Source: Ace Equity

The sales have also been inching up, growing at a 5-year CAGR of x%. But the substantial growth in the business has expanded the company's borrowings.

The debt-to-equity is at an alarming 2.2x in fiscal 2022, raising concerns. However, the growth prospects and the solid backing of the promoter group, Tata, offer some respite.

Going forward, Tata Motors is well-placed to capitalise on the growing consumer preference for electric vehicles in India, leading the market with a share of more than 80%.

The stock trades at a PE of 88.9x, a premium of 166% to its 5-year median PE of 33.4x.

To know more about the company, check out its financial factsheet and latest financial results.

#5 Mahindra & Mahindra

Last on our list is the automobile giant, Mahindra & Mahindra (M&M).

Mahindra & Mahindra (M&M) is the world's largest manufacturer of tractors and enjoys a strong presence in the utility and low commercial vehicle segment in the country. It is a dominant player in the Indian tractor segment, capturing a 41% market share.

The company has done well over the last few years on the back of strong product launches.

While the revenue has grown at a 5-year CAGR of 2.4%, the net profit has delivered a 4.2% growth. The higher net profit is a direct result of the expanding operating margins, which are up from 15.6% in fiscal 2019 to 17% in fiscal 2023.

The margins have witnessed a jump owing to the increased volumes and higher realisation which have helped the company benefit from operating leverage.

This has also helped propel returns over the years. The 5-year average RoCE and RoE stand at 11.8% and 14.1%, respectively.

M&M Financial Snapshot (2019-23)

	2019-19	2019-20	2020-21	2021-22	2021-23
Revenue Growth (%)	14.11%	-27.78%	-1.35%	21.00%	34.28%
Operating Profit Margin (%)	15.56%	18.00%	19.12%	16.73%	17.01%
Net Profit Margin (%)	5.75%	3.43%	4.81%	7.77%	9.00%
Return on Capital Employed(%)	13.65%	9.18%	9.46%	11.92%	14.90%
Return on Equity(%)	15.77%	6.83%	9.14%	16.44%	22.09%

Data Source: Equitymaster

Mahindra & Mahindra is present across a wide array of sectors, apart from automobiles. The company caters to IT, finance, hospitality, real estate etc, running businesses in eleven different sectors via various listed and unlisted entities.

The automotive and farm equipment segment accounted for more than 70% of the total revenues in fiscal 2023.

The company wants to establish a strong brand presence in the farm equipment sector by launching new product portfolios, going forward. It aims to expand the farm machinery business tenfold by fiscal 2026 and also focus on electrification automation.

In the auto segment, the company aims to strengthen its position in Internal Combustion Engine Sport Utility Vehicles (ICE SUVs) and has a new portfolio of pickups in the pipeline for future growth. The company is committed to boosting its EV portfolio and expects 30% of total sales to come from electric SUVs by 2027.

The stock is available at a PE of 20.5x, a mere premium of 1% to its 5-year median PE of 19.4x.

To know more about the company, check out its financial factsheet and latest financial results.

Conclusion

Investing in stocks with consistent growth in margins involves a significant level of risk. While a company's past performance is an important indicator of its growth potential, it is not a guarantee of future success.

Market conditions, industry trends, and other factors can impact a company's performance in ways that are difficult to predict.

Therefore, it is important to carefully evaluate the fundamentals of each company before making any investment decisions. That is what successful investing is all about.

Happy Investing!

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