ET 500: Key factors that sets apart some companies which improved cash flows consistently
Operating cash flow reflects the ability of a company to generate enough cash to sustain its operations after providing for various operational expenditures. This makes it a sturdier parameter of analysis when compared with net profit of a company.
SYSTEMATIC EXPANSION
A company which embarks upon cautious expansion through a mix of debt, equity and internal accruals will have a stable cash flow. Shree CementBSE 0.40 %, one of the largest cement companies in North India, more than doubled its capacity from 6.3 million tonne (MT) in FY08 to 13.5 MT in 2012. Yet it has maintained its debt-to-equity ratio at an optimum level of less than 1.7 during these years. That has helped the company to deliver consistent returns over the last five years.
STRONG BRANDING
A strong and trusted brand ensures a loyal customer base, which is hard to replicate. Castrol, one of the pioneers in automotive lubricants, is a prime example of this. Despite bigger peers such as Indian OilBSE 0.15 %, BPCLBSE 1.39 % and HPCLBSE 0.91 %, the Indian unit of the multinational company was able to maintain a healthy growth over the past five years.
The company invests nearly 6% of its sales every year in brand building. Because of its established brand,CastrolBSE 0.45 % India's products enjoy a premium of nearly 20% over its peers.
Spread across various sectors, there are 24 companies in the ET 500 list which have shown a consistent growth in net profits and operating cash flow
Operating cash flow reflects the ability of a company to generate enough cash to sustain its operations after providing for various operational expenditures. This makes it a sturdier parameter of analysis when compared with net profit of a company.
The latest ET 500 ranking includes a few companies which improved their cash flows consistently over the years. We looked at the key factors that set apart these firms.
We selected companies whose net profits grew at a compounded annual growth rate or CAGR of over 20% in the last five years. We then short-listed companies from manufacturing and capital-intensive industries whose operating cash flow, excluding interest had grown at a CAGR of over 20% during this period. This was done to assess the consistency in cash flows with net profits.
Spread across various sectors, there are 24 companies in the ET 500 list which have shown a consistent growth in net profits and operating cash flow.
DOMINANCE
There are many ways a company can dominate its industry - access to superlative technology, a vast distribution network, and established brands. A dominant player is often in a position to enjoy pricing power in the industry.
Hero MotoCorpBSE 0.66 % has long maintained its dominance in the 100-cc segment of the two-wheeler industry through brands such as Splendor, Passion, CD Dawn and CD Deluxe which have huge acceptance, especially, in rural areas and to a reasonable extent in urban areas.
Spread across various sectors, there are 24 companies in the ET 500 list which have shown a consistent growth in net profits and operating cash flow.
DOMINANCE
There are many ways a company can dominate its industry - access to superlative technology, a vast distribution network, and established brands. A dominant player is often in a position to enjoy pricing power in the industry.
Hero MotoCorpBSE 0.66 % has long maintained its dominance in the 100-cc segment of the two-wheeler industry through brands such as Splendor, Passion, CD Dawn and CD Deluxe which have huge acceptance, especially, in rural areas and to a reasonable extent in urban areas.
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SYSTEMATIC EXPANSION
A company which embarks upon cautious expansion through a mix of debt, equity and internal accruals will have a stable cash flow. Shree CementBSE 0.40 %, one of the largest cement companies in North India, more than doubled its capacity from 6.3 million tonne (MT) in FY08 to 13.5 MT in 2012. Yet it has maintained its debt-to-equity ratio at an optimum level of less than 1.7 during these years. That has helped the company to deliver consistent returns over the last five years.
STRONG BRANDING
A strong and trusted brand ensures a loyal customer base, which is hard to replicate. Castrol, one of the pioneers in automotive lubricants, is a prime example of this. Despite bigger peers such as Indian OilBSE 0.15 %, BPCLBSE 1.39 % and HPCLBSE 0.91 %, the Indian unit of the multinational company was able to maintain a healthy growth over the past five years.
The company invests nearly 6% of its sales every year in brand building. Because of its established brand,CastrolBSE 0.45 % India's products enjoy a premium of nearly 20% over its peers.
NICHE BUSINESS
A strong presence in a niche segment often results in better and consistent cash flows. Pidilite IndustriesBSE 0.00 %, one of the biggest companies in the adhesives industry, has stuck to its core competency of manufacturing various kinds of adhesives used across different industries. With a portfolio of brands including Fevicol, Dr Fixit, M-seal and Fevistik, the company has been able to carve out a market share of close to 45% in the adhesives and sealant market.
PARENTAGE
Having a strong parent helps a company cope better in a difficult economic scenario. An established company is likely to invest more in research and development, which helps in beating competition.
Bayer CropScienceBSE 0.69 % is one such company which has enjoyed healthy returns over the years due to constant innovation. BayerBSE 0.69 % CropScience is a subsidiary of Bayer AG, one of the world's leading companies in crop protection. Thanks to the robust R&D capability of its parent, Bayer CropScience has been able to launch three to four products every year.
A strong presence in a niche segment often results in better and consistent cash flows. Pidilite IndustriesBSE 0.00 %, one of the biggest companies in the adhesives industry, has stuck to its core competency of manufacturing various kinds of adhesives used across different industries. With a portfolio of brands including Fevicol, Dr Fixit, M-seal and Fevistik, the company has been able to carve out a market share of close to 45% in the adhesives and sealant market.
PARENTAGE
Having a strong parent helps a company cope better in a difficult economic scenario. An established company is likely to invest more in research and development, which helps in beating competition.
Bayer CropScienceBSE 0.69 % is one such company which has enjoyed healthy returns over the years due to constant innovation. BayerBSE 0.69 % CropScience is a subsidiary of Bayer AG, one of the world's leading companies in crop protection. Thanks to the robust R&D capability of its parent, Bayer CropScience has been able to launch three to four products every year.
Source : RAJESH NAIDU & SURAJ SOWKAR,ET BUREAU
