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Sensex's Super 5

Feb 26, 2009

The BSE-Sensex has gained by over 171% over the past decade. This translates into a 10.5% return on a compounded basis. This is considered to be a strong performance, keeping in mind the market meltdown over the past year. However, there have been a handful of companies whose stocks have outperformed the BSE Sensex by miles during the same period. In this article, we shall take a look at five such stocks that have outperformed the index by the widest margin.It may be noted that for this article, we have only included only those stocks that are a part of Sensex now and were also part of the BSE Sensex back in February 1999. In the interim though, some of them may have even gone out of the Sensex reckoning and may have again made a comeback.


Top gainers over a period of ten years

Source: CMIE Prowess
BHEL: The stock of BHEL has garnered returns of over 1,040% over the last decade. This translates into a compounded return of nearly 27.6%. BHEL traded at a price of about Rs 121 in February 1999. The market then gave it a valuation of about 8 times price to earnings. Its sales and profit growth languished over the next 3-4 years until FY03. But with the advent of the upturn in the capital goods cycle in the country, especially for power plants (which is a major source of revenue for BHEL), demand saw an exponential rise.

The company's CAGR in sales and profits over the entire nine year period between FY99 and FY08 stood at 13.5% and 20.2%, with an average ROE of 16.7% over this period. This good earnings performance over the period, coupled with the steadiness with which it has been receiving orders and growing its order backlog led to an increased market valuation being awarded to the stock. Even after the recent market crash, BHEL now trades at a P/E of about 23. Thus an earnings growth of 20% since FY99, along with a P/E expansion from 8 times to 23 times has led to its stock price appreciating at scorching pace of 27.6% CAGR.

Source: CMIE Prowess
Tata Power: Given India's power crisis, the opportunity that has opened up for companies within the sector and those catering to it cannot be denied. Or what else can explain the fact that the top two wealth generators among Sensex companies over the past decade have a close connection. Closely following the power equipment major, BHEL is power generator Tata Power, which has generated 877% point-to-point returns for shareholders during this period.

Given that it is a utility company, the growth in sales and profit has not been extraordinary during these years. While sales have growth at a compounded annual rate of 17% during the 10-year period, net profits have recorded an 18% growth. Given its utility status which helps it generate good cash flows, the company has not required much debt to fund its expansion. The debt to equity ratio during these years has averaged just around 0.6 times. The basic reason the stock has generated such strong returns is expansion in valuation. As seen from the chart, the stock's price to book value has witnessed an expansion from 0.54 in 1999 to 1.91 in 2009. It should be noted that P/BV is a key metric to value power stocks, given that these are asset-based businesses. And the reason while valuations have expanded is that investors have come to believe of the strong potential that the business has and the standing that a company like Tata Power has within it.

Source: CMIE Prowess
Reliance Industries: Third in line is India's largest private sector company, Reliance Industries, which has recorded a return of 810%. This translates into a compounded return of 24.7%. The company has performed well mainly because of three factors. Fundamentally, the company created a lot of real value by capacity additions, acquisitions in its existing businesses - refining and petrochemicals. In the upstream business, the discovery of KG gas helped. In terms of market cap, the 'value unlocking' of the parent RIL, boom in commodity prices (which benefited RIL as a producer) and foray into hot industries like retail and SEZs also helped.

Source: CMIE Prowess
Grasim Industries: Fourth in the list is the flagship company of the Aditya Birla Group, Grasim Industries. The stock of Grasim has recorded a gain of nearly 788% over the last decade, witnessing a compounded return of 24.4%. The reason for its strong performance has been on account of various factors.

First is the fact that the company has maintained a strong return on invested capital of 22% over the last ten years, which is commendable for a commodity company. Secondly, Grasim has been a major beneficiary in the upturn in the cement sector. And last and most importantly, is the fact that the company has a strong management. The fact that it went through much needed business restructuring at the right time helped the company in creating shareholder value. With the closure of pulp and fiber plants at Mavoor, the hiving off of the textile and sponge iron businesses and divesting stake from MRPL are a few cases in point. In addition, the company was able to benefit from the well timed acquisition of Ultratech Cement as well. These initiatives have in turn helped the company to increase its operating performance as well.

Source: CMIE Prowess
State Bank of India: Last in the list is India's largest bank, the State Bank of India (SBI), recording a return of 638%. This translates as a compounded annual return of 22.1% over the last decade. SBI has been one of the largest beneficiaries of the economic upturn in the banking and financial sector. This it has been able to do by focusing its business largely towards corporates. At the same time, it also applied the strategy of expanding its network and reach throughout India. This has allowed the bank to maintain its margins by acquiring low cost funds over the years. Presently, SBI has a network of over 9,373 branches and 7,546 ATMs across the country.


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