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Up to 9,000% return in 10 years! Time-tested formula throws up evergreen stocks and rising stars

An efficient business with consistency and sustainability creates value for shareholders.

Updated: Apr 26, 2018, 12.14 PM IST
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According to Edelweiss Securities, I-RoCE is a true reflection of a management’s ability to redeploy incremental capital at higher returns, not clouded by past capital allocation decisions.
Superior economies with reasonable competitive moat of a business can create long-term wealth for investors. An efficient business with consistency and sustainability normally creates value for shareholders, which can be measured by incremental return on capital employed (I-RoCE).

According to Edelweiss Securities, a Mumbai brokerage, I-RoCE is a true reflection of a management’s ability to redeploy incremental capital at higher returns, not clouded by past capital allocation decisions. Hence, it’s a lead indicator of future RoCE.

A screener using this criteria throws up companies like Kajaria Ceramics, Avanti Feeds, MRF, Atul, Sheela Foam, Vardhman and La Opala; evergreen companies that have either been improving or sustaining high RoCE at over 20 per cent for at least 10 years now.

Edelweiss classifies Heritage Foods, CCL Products, KPR Mill and Nilkamal as rising stars. From low historical RoCE of less than 20 per cent, these companies are now moving up the curve.

Kajaria Ceramics, Nilkamal, Avanti Feeds and La Opala have seen their RoCE increase from 12.81 per cent, 15.33 per cent, 4.77 per cent and 5.59 per cent, respectively, in FY08 to 32.19 per cent, 23.29 per cent, 61.69 per cent and 29.26 per cent as of March 31, 2017.

KPR Mills, CCL Products and Heritage Foods have also witnessed a substantial rise in RoCE during this period. Shares of these companies have delivered between 740 per cent and 9,000 per cent returns over the past 10 years.

Kajaria is the leader in tile industry, with 22 per cent market share (from 13 per cent in FY10) and enjoys highest Ebitda margins, whereas Heritage Food is focusing on high growth, high margin value-added products (VADP) segment, aiming to increase market share from 24 per cent to 40 per cent by FY22.

CCL Products is the largest manufacturer and exporter of instant coffee. Its focus on B2C branded sales, high margin freeze-dried capacity and cost efficiency are projected to help the business grow faster.

Avanti Feed, a leader with around 42 per cent market share in feeds business, is already a multibagger stock. It is targeting $1 billion revenue by FY22, and has been focusing on the value-added shrimp processing segment.

Incremental- RoCE is a key metric that measures value creation in a business. This rule of measurement is not limited only to the field of management. Higher I-RoC usually is a reflection of superior quality of an underlying business such as, high earnings growth, superior pricing power and hence higher operating margin as well as higher working capital efficiency, says ArunaGiri N, CEO & Fund Manager, TrustLine Holdings.

Edelweiss has picked Eicher Motors, TVS Motor, Britannia and Pidilite as evergreen stocks in the largecap space, and sees D-Mart as a rising star.

While doing stock selection, one should focus on I-RoCE as it reflects a management’s capability to redeploy incremental capital for superior returns (only 25 per cent BSE500 companies, excluding banks, could do this) and it is also a better tool to assess new capital allocation decisions made of CEOs.

“Companies with high I-RoCE have outperformed Nifty & BSE500 with an alpha of around 11-14 per cent CAGR over 10 years,” Edelweiss said.


A sectoral RoCE analysis done by the brokerage threw up media and entertainment, textiles, retail and building materials with superior I-RoCE, while industrials, metals and mining, cement, tea, coffee, sugar, real estate and electrical equipment showed deterioration on this count.

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