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- Jul 1, 2023 - Top 5 Companies that Have the Potential to Create Lasting Generational Wealth
Top 5 Companies that Have the Potential to Create Lasting Generational Wealth
In the world of investing, which can be a froth with volatility and unpredictability, there are certain stocks that have stood the test of time.
They have proven to be exceptional generators of wealth that can last generations. These stocks with their unique qualities, have consistently outperformed the markets, delivering substantial returns to their long-term investors.
Imagine investing in a Titan or a Bajaj Finance in the early 2010s. Or in Asian Paints and Pidilite. Your initial investment of a couple of thousands could have multiplied significantly, potentially turning into millions.
These companies have demonstrated remarkable resilience and have become the cornerstone of many investors' portfolios.
Keeping this in mind, here are five companies that have the potential to stand the test of time and deliver handsome returns simultaneously.
#1 Deepak Nitrite
At the top of our list we have Deepak Nitrite.
Deepak Nitrite is a promising candidate because of its dominant presence in the speciality chemical segment, its cost leadership and advantageous geographical location.
The company's consistent growth and the positive outlook for the sector further enhances its potential for wealth creation.
The Indian speciality chemicals market is expected to surpass its Chinese counterpart, increasing its global market share from 4% in fiscal 2022 to around 7% by 2026.
Deepak Nitrite, a frontrunner in this industry, stands to benefit the most from this growth trajectory.
The company is the largest producer of sodium nitrite and sodium nitrate in India, since 1972. It also holds the top spot for Phenol and Acetone production and ranks among the top three global players for products such as xylenes and oximes.
The leadership position enables the company to maintain its margins even in an inflationary environment. Its impressive performance in previous years amid inflationary conditions bears witness to the same.
Over the past five years, the company has multiplied its revenues by 4x and net profit by 13x. The Return on Equity (RoE) and Return on Capital Employed (RoCE) have also expanded and now stand at 44% and 37%, respectively.
Deepak Nitrite Financial Snapshot (2018-22)
| 2017-2018 | 2018-2019 | 2019-2020 | 2020-2021 | 2021-2022 | |
|---|---|---|---|---|---|
| Revenue Growth (%) | 20.29% | 63.36% | 56.92% | 2.85% | 56.28% |
| Operating Profit Margin (%) | 12.58% | 16.01% | 25.16% | 29.17% | 24.24% |
| Net Profit Margin (%) | 4.71% | 6.43% | 14.45% | 17.79% | 15.68% |
| Return on Capital Employed(%) | 9.46% | 17.02% | 37.56% | 40.06% | 44.82% |
| Return on Equity(%) | 9.65% | 17.42% | 46.23% | 39.60% | 37.52% |
Despite expanding the business to address the growing demand, the company has not piled up debt on its books. The debt to equity has fallen over the years and is at 0.1x in the financial year 2022, enabling ample scope to leverage the strong balance sheet for future expansion.
While the business aims to expand consistently over the long-term (double digit revenue growth), focussing more towards value added products, it has outlined its plans for the next two years. The company plans to invest about Rs 15 bn in new upstream/ downstream products besides debottlenecking projects in the existing product line.
The stock trades at a PE of 34.9x, a premium of 25% to its 5-year median PE of 27.9x.
To know more about the company, check out its financial factsheet and latest quarterly results.
#2 LTI Mindtree
Next on the list is LTI Mindtree.
LTI Mindtree is a strong contender on account of its robust business growth prospects, driven by its expertise in its two largest segments, namely BFSI (Banking, Financial Services, and Insurance) and Hitech and Media.
Moreover, the company possesses five decades of combined experience, a team of highly skilled professionals and a comprehensive set of IT service offerings.
Being the fifth largest IT company in the country, it has a strong global presence across North America, Europe and the rest of the world with over 700 active clients.
The business has performed exceeding well and is likely to witness additional growth catalysts as the new organizational structure stabilizes.
Over the last five years, the net sales and profit of the company has grown at a 5-year compound annual growth rate (CAGR) of 34% and 31%, respectively.
The 5-year average RoE and RoCE stand at a respectable level of 32% and 43%, respectively.
LTI Mindtree Financial Snapshot (2018-22)
| 2018-2019 | 2019-2020 | 2020-2021 | 2021-2022 | 2022-2023 | |
|---|---|---|---|---|---|
| Revenue Growth (%) | 26.07% | 15.04% | 12.84% | 112.48% | 25.50% |
| Operating Profit Margin (%) | 23.14% | 21.68% | 24.25% | 23.04% | 20.08% |
| Net Profit Margin (%) | 16.04% | 13.98% | 15.67% | 15.13% | 13.29% |
| Return on Capital Employed(%) | 46.57% | 40.38% | 41.73% | 49.97% | 38.27% |
| Return on Equity(%) | 35.20% | 29.92% | 30.86% | 37.05% | 29.20% |
The erstwhile Mindtree's core competence was in digital services, whereas LTI enjoyed a notable background in infrastructure management and enterprise application.
This advantageously equips LTIMindtree to excel in both services, enabling them to tap into the increasing demand for application-related solutions and services.
The ongoing technological transformation has led to a surge in technology spending. All of which offer a significant opportunity for established players like LTIMindtree.
The IT company is well-positioned to leverage its expertise and capabilities in digital solutions, analytics, cloud computing, Internet of Things (IoT), cybersecurity, and other emerging technologies.
These services should grow exponentially, with the cloud services market alone projected to reach a value of US$ 300 bn (Rs 24 tn).
LTIMindtree is trading at a PE of 34.2x, a premium of 25% to its 5-year median PE of 27.3x.
To know more about the company, check out its financial factsheet and latest quarterly results.
#3 Balaji Amines
Third on our list is Balaji Amines.
Balaji Amines is a strong contender for creating long-term wealth because of its dominant position in an oligopolistic industry that is experiencing some major tailwinds.
The company is a leading manufacturer of aliphatic amines and a leader in oligopolistic amines.
It is also the sole producer of certain speciality chemicals catering to the pharmaceuticals (51% of total revenues) and agrochemical sectors (26%) and others (23%), such as paints, oil and gas, etc.
This leadership status across an array of speciality chemicals catering to India and other countries (15% of revenues in FY23) helps Balaji Amine diversify the business, further enhancing its potential for wealth creation.
The business has done well over the five years, demonstrating the company's competency. It has witnessed a steady revenue growth rate of 22% and a net profit growth rate of 29.1%.
This robust growth has trickled down to the returns. The company reported a notable 5-year average RoE of 27.5% and RoCE of 33.6%.
Balaji Amines Financial Snapshot (2018-22)
| 2017-2018 | 2018-2019 | 2019-2020 | 2020-2021 | 2021-2022 | |
|---|---|---|---|---|---|
| Revenue Growth (%) | 8.75% | -0.54% | 40.12% | 76.71% | 1.41% |
| Operating Profit Margin (%) | 20.96% | 19.85% | 28.92% | 27.40% | 26.46% |
| Net Profit Margin (%) | 12.42% | 10.42% | 18.57% | 17.96% | 17.19% |
| Return on Capital Employed(%) | 25.09% | 17.94% | 35.58% | 50.21% | 39.08% |
| Return on Equity(%) | 22.51% | 15.83% | 31.38% | 38.98% | 28.94% |
The business has been generating cash, which has allowed the company to expand its capacity with negligible debt on its books.
Going forward, the company plans to invest Rs 3.5 bn for the financial year 2024 for the installation of new plants. This will be geared towards high-value derivatives and specialty chemicals that will materialize into higher revenue and enhanced margins, offering revenue and profit visibility.
Balaji Amines operates in an industry that is massively benefiting from China's plus-one strategy.
Globally, the Aliphatic Amines industry is controlled by two-three producers and is expected to grow at a CAGR of 5-7% over the long term.
At present, the stock trades at a PE of 23.2x, a premium of x% to its 5-year median PE of 21.4x.
To know more about the company, check out its financial factsheet and latest quarterly results.
#4 Supreme Industries
Fourth on our list is Supreme Industries.
The company has a leadership position in plastic piping systems, unmatched competitive advantage, adept manufacturing capabilities, extensive pan-India network, and technological tie-ups.
The management has always been emphasising on prudent capital allocation, with a clear focus towards achieving high ROCEs across business verticals.
The company's ability to differentiate its products in a crowded market has driven profitability, propelling ROCEs in an otherwise commodity business. This approach highlights the management's dedication to optimizing resource utilization and maximizing profitability.
These characteristics make it an excellent candidate for generating wealth in the long term.
As a leader in the plastic piping segment, the company has reported significant business growth. While the sales are up 13.1% on a 5-year CAGR, the net profit is up 16.9%.
Supreme Industries Financial Snapshot (2018-22)
| 2018-2019 | 2019-2020 | 2020-2021 | 2021-2022 | 2022-2023 | |
|---|---|---|---|---|---|
| Revenue Growth (%) | 13.00% | -1.86% | 15.38% | 22.30% | 18.46% |
| Operating Profit Margin (%) | 14.25% | 15.34% | 20.47% | 16.24% | 13.36% |
| Net Profit Margin (%) | 7.74% | 7.91% | 13.09% | 12.46% | 9.40% |
| Return on Capital Employed(%) | 30.66% | 25.65% | 37.25% | 35.27% | 27.15% |
| Return on Equity(%) | 21.45% | 19.76% | 30.65% | 27.62% | 20.99% |
The RoE and RoCE have also expanded over the last 5 years, averaging at 24.1% and 31.2%, respectively.
Despite expanding its capacity consistently, the company boasts a well-capitalised balance sheet with no debt on its books. This will help the company in pursuing growth opportunities and navigate market fluctuations.
Supreme Industries plans to invest around Rs 7.5 bn towards capital expenditure which will take its capacity from 600,000 MT per annum as of 31 March 2023 to 750,000 MT per annum by 31 March 2024.
The stock trades at a PE of 45.6x, a premium of 45% to its 5-year median PE of 31.4x.
To know more about the company, check out its financial factsheet and latest quarterly results.
#5 Dr Lal Path Labs
Last on our list is Dr Lal Path Labs.
The company makes the cut because of its leadership position in the diagnostics industry, advanced laboratory capabilities, extensive network, and prudent capital allocation techniques.
Dr Lal Pathlabs is the largest diagnostics chain in the country with a pan-India presence.
The diagnostics market is highly fragmented, with unorganised standalone centres catering to half of the business, while hospital-based diagnostics centres account for 37%. The current mix highlights the scope for a shift from unorganised to organised players.
Moreover, the industry is expected to grow sustainably on the back of higher life expectancy, an ageing population, increasing health consciousness, higher disposable incomes, and improved customer convenience.
This along with increasing home testing, greater awareness, interest in preventive diagnostics and an ever-expanding specialised test menu.
The government of India has become more cognizant and is focussing on building a resilient and sustainable healthcare ecosystem. In line with this, the allocation of funds to the Department of Health and Family Welfare increased by more than 100% in fiscal 2023. Even the budget under the Ayushman Bharat - Pradhan Mantri Jan Arogya Yojana (PMJAY) has more than doubled.
The company has done well, growing the business substantially over the last 5 years in a competitive market. The sales and net profit have doubled in value while returns have remained rangebound. The 5-year average RoE and RoCE stand at 17.9% and 17.6%, respectively.
Dr Lal Pathlabs Financial Snapshot (2018-22)
| 2017-2018 | 2018-2019 | 2019-2020 | 2020-2021 | 2021-2022 | |
|---|---|---|---|---|---|
| Revenue Growth (%) | 15.77% | 14.82% | 10.89% | 17.84% | 31.08% |
| Operating Profit Margin (%) | 27.93% | 28.22% | 29.96% | 30.84% | 29.38% |
| Net Profit Margin (%) | 16.25% | 16.66% | 17.11% | 18.75% | 16.78% |
| Return on Capital Employed(%) | 37.90% | 34.78% | 32.94% | 36.03% | 32.60% |
| Return on Equity(%) | 25.32% | 23.76% | 23.74% | 26.89% | 26.39% |
Dr Lal Path's ability to maintain profitability in a crowded market highlights its competence and commitment to optimizing resource utilization and maximizing profitability.
The company boasts a well-capitalised balance sheet and plans to expand organically and inorganically while integrating and leveraging the in-house expertise.
At present, the stock is available at a PE of 77x, a premium of 24% to its 5-year median PE of 62.5x.
To know more about the company, check out its financial factsheet and latest quarterly results.
Conclusion
Whether you're an experienced investor looking to strengthen your portfolio or a beginner seeking to understand the key drivers of generational wealth, this set of companies can be an excellent starting point for further research.
Moreover, they offer valuable insights into the world of long-term investing.
But no matter how great the prospects, you must consider your risk-bearing capacity and investment horizon. That is what successful investing is all about.
Happy investing!
Safe Stocks to Ride India's Lithium Megatrend
Lithium is the new oil. It is the key component of electric batteries.
There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.
So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.
If you're an investor, then you simply cannot ignore this opportunity.
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.comDisclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...
FAQs
How long should we hold stocks?
The strategy behind long term investing is to hold on to stocks for a period of more than three years, or possibly more than five years.
Three years or five years sounds like a long period when one dives into the stock market. That's because most investors are looking to make a killing in the short term.
But that's the difference between a trader and an investor.
There are retail investors who choose to invest in fundamentally strong stocks and remain invested for the long haul. This can even mean a period of 3, 5, 10 or more years.
Which are the best long-term stocks?
The best long-term stocks are those that compound wealth that could last you for generations.
For this, you need to buy great companies at a reasonable price and hold on to them 'forever'.
Asian Paints is a classic example that embodies the true spirit of a 'Forever Stock'. Had anyone invested Rs 500 in the company when it went public in 1982, the value of the holding would be as much as Rs 10 m today.
To know about more such companies, check out our recommendation service - Forever Stocks.
What is value investing?
Value investing is an investment approach that allows one to profit from undervalued stocks. It is based on the idea that each stock has an intrinsic value, i.e. what it is truly worth.
Through fundamental analysis of a company, we can determine what this intrinsic value is.
If the intrinsic value is higher than the actual stock price of the company, then the stock offers an investment opportunity. It's like buying a Rs 100 note, for Rs 80.
Conversely, if the intrinsic value is lower than the current market price, then the stock is 'over valued' and should be avoided. Think a Rs 100 note selling for Rs 120.
Does value investing still work?
Value investing continues to be a reliable way for investors to make healthy returns.
Investors just have to be patient with their investments as value investing may not work well in all phases of the market.
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Janardan Mohanty
Jul 2, 2023Supreme industries is surely an emerging blue-chip identified by Equitymaster long back. I invested in the stock based solely on Equitymaster recommendation and today I watch its share price creating new 52 week high every fortnight or so.