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India Inc.: Small wonders!

Mar 23, 2007

It is common knowledge that India Inc. has had its dream run since the early years of this decade and this has been well manifested in the valuations accorded to them in the equity markets. While the corporate growth has been holistic with contribution from companies across sectors, select majors in each of the sectors have made their presence felt. A comparison of the compounded annual growth clocked by a sample of few sectors selected by us to the compounded annual growth in the market share of the top few companies in those sectors, gives us an interesting perspective on this. While it is a given that the low base effect has magnified the growth numbers for the smaller companies, it is also worthwhile noting that a few of the companies have displaced some of their larger counterparts in the respective product segments by clocking relatively superior level and quality of growth.

The trailblazers
%Marketshare FY01 FY03 FY06 CAGR
Cement (Rsm) 220,062 234,042 330,139 8.5%
Grasim+Ultratech* 9.8 11.6 21.1 16.6%
ACC 11.9 10.3 11.3 -1.0%
Gujarat Ambuja 5.9 6.7 9.2 9.3%
Detergents (Rsm) 51,788 44,785 53,547 0.7%
HLL 35.9 43.1 40.4 2.4%
Nirma 21.4 21.6 20.3 -1.0%
P&GHealth&Hygeine 2.3 2.7 6.2 21.9%
Fabrics (Rsm) 1,483,679 1,559,295 1,689,418 2.6%
Arvind Mills 0.7 0.8 0.8 2.7%
Alok Industries 0.3 0.5 0.5 10.8%
Raymond 0.1 0.1 0.2 14.9%
Hotels (Rsm) 40,775 39,543 65,541 10.0%
Indian Hotels 16.9 14.4 16.5 -0.5%
EIH 11.7 9.7 11.5 -0.3%
ITC 3.3 4.9 11.9 29.2%
Passengercars (Rsm) 169,973 189,800 331,989 14.3%
Maruti 48.2 44.5 41.6 -2.9%
Hyundai Motor India 17.0 20.0 23.7 6.9%
Tata Motors 7.3 11.4 13.6 13.3%
Pharmaceuticals (Rsm) 320,618 368,652 461,152 7.5%
Ranbaxy 5.9 8.6 8.7 8.1%
Cipla 3.3 4.2 6.5 14.5%
Dr.Reddy's 3.0 4.6 4.7 9.4%
Steel (Rsm) 492,750 618,453 1,172,113 18.9%
SAIL 28.1 27.6 24.3 -2.9%
Tata Steel 9.2 11.4 10.4 2.5%
JSW Steel 2.7 3.8 5.2 14.0%
Software (Rsm) 216,849 278,363 504,850 18.4%
TCS N.A. N.A. 21.2  
Infosys 8.8 13.0 17.9 15.2%
Wipro 8.2 11.0 16.3 14.7%
Source:CMIE Industry market size and shares - March 2007
* The market share of Grasim for FY06 includes that of Ultratech (9.4%)

In case of manufacturing companies like Grasim, capacity addition (standalone as well as acquisition of Ultra Tech) and higher utilisation levels apart from better realisations and improved efficiency has helped the company report stronger numbers. While Ultra Tech was one of the major propellers of the company's growth, savings in operating costs resulting from ongoing modernisation efforts, up-gradation of plants and energy optimisation have aided the gain in market share.

Similar capex led volume game was the case with JSW Steel in the steel sector. In the detergent market, P&G Health & Hygiene's 'Tide' garnered better realisations as compared to peer HLL's 'Surf Excel' and 'Rin', thus scoring higher over the latter. The strong performance of the company was also on the back of focused marketing initiatives and deeper distribution.

Both Raymond and Tata Motors derived the benefits of 'exclusivity' in their respective sectors by regularly launching new products and catering to a niche segment. Cipla, on the other hand, focused on stability of revenues through its contract manufacturing business, against the volatile generic business (subject to pricing pressure) of its peers Ranbaxy and Dr. Reddy's.

Players in the service sectors, like Infosys (software) and ITC (hotels), focused on expanding their capacities in terms of employees and rooms. Better pricing power in terms of billing rates and average room rentals (ARR) respectively, also supported their case.

The point that we wish to drive home is that while companies with bigger balance sheets, higher turnover and wider reach may offer a comfortable hedge in times of short term volatility, the smaller and equally promising entities may seize a larger chunk of the growth pie in the longer term. Thus instead of concentrating only on the blue chips, investors must also evaluate the prospects of some of the smaller entities in the sector that have an equally compelling business model, with the potential to generate higher growth and returns as compared to their larger counterparts. The catch also lies in the fact that you may find the most opportune moment to buy the Infosys' and HLLs in the making at attractive valuations!

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