I was always very inclined to buy stocks having high operating profit margins. But during last days something which changed my lookout towards profitable stocks.
Recently I was doing a study on stocks having high operating profit margins. The only filter that I used was “volume”. I was ready to consider any stocks which had at least last 10 years of data available on internet. But I didn’t want to select such stocks which trade very less (low volumes).
I was sure that even small and mid cap stocks can offer high operating profit margins. Generally I deal only with large cap stocks, but this time I wanted to venture into a new area.
True to my belief, I found some very interesting small and mid cap stocks during my analysis. These were stocks with huge profit margins.
But while I was analyzing their fundamentals deeply, I had some stunning realizations. In fact for me these realizations are so big that, it will change forever that way I see profitable stocks.
As soon as I realized these facts, I immediately corrected my search criteria. Now the filter that I use to analyze profitable companies is not only volume and operating profit, but new ones.
I will tell you about my realizations in the following lines. But first lets see my initial list.
The list of decent stocks having high operating profit margins:
|SL||Stocks||Volume||Operating Profit Margin (10Y Avg.)|
|1||Balmer Lawrie Investments Ltd||9.81K||98.10%|
|3||Pilani Investment And Industries Co||232||94.16%|
|4||Vardhman Holdings Ltd||26||93.46%|
|7||Bajaj Holdings & Invest||557||89.86%|
|8||Integrated Financial Services||3.78K||87.74%|
These are top 12 stocks with phenomenal operating margins. The operating margin range from 61% to 98%.
Just to give you an idea, a typical company in India works at an average operating margin of 20-25% (Example: ITC: 40%, Maruti: 14%, NTPC: 27%, Tata Motors: 7%)
So, what made these 12 companies so profitable?
For several days I did not get my answer. I struggled for several days and ultimately it came as a flash.
The answer was right in front of my eyes. The nature of business was the answer. See this table:
|1||Balmer Lawrie Investments Ltd||Finance – Investments|
|2||Tata Investment||Finance – Investments|
|3||Pilani Investment And Industries Co||Finance – General|
|4||Vardhman Holdings Ltd||TEXTILES|
|5||JSW Holdings||Finance – Investments|
|7||Bajaj Holdings & Invest||Finance – Investments|
|8||Integrated Financial Services||Finance – General|
|9||Coal India||Mining & Minerals|
|10||NMDC||Mining & Minerals|
|11||Bajaj Finserv||Finance – Investments|
Out of total 12, 7 companies were from Financial Sector whose main job is investment only. Such companies are bound to have lower expenses, hence they exhibit higher operating margins.
I was aware about the high margin of Coal India & NMDC. Again the nature of business (mining and minerals) give them this leverage. But both these companies are a government owned subsidiaries. I personally try to avoid investing in public sector companies as far a possible.
Vardhman Holdings, Gujarat Hotels and Nesco made to this top 12 list came as a small surprise to me. But again, these are smaller companies. Apart from Nesco, which has operating profit of 96 Crore, Vardhama holdings and Gujarat Hotels has operating profit of only Rs.16 Crore and Rs.3.8 crore respectively.
Looking at the above data, I was sure that, picking only operating profit margin figure is not giving the right picture of profitable companies. Host of top names were missing from this list.
What was the problem?
If companies of finance sector are so profitable, why leaders chose to do business in other sectors?
The answer was hidden in the below table.
|SL||Stocks||Operating Profit (Rs.Cr.) *|
|1||Balmer Lawrie Investments Ltd||26.27|
|3||Pilani Investment And Industries Co||63.48|
|4||Vardhman Holdings Ltd||16.59|
|7||Bajaj Holdings & Invest||865.66|
|8||Integrated Financial Services||2.77|
* Operating Profit (10 Year Average)
You can see that all the above companies (except for Coal India, NMDC & Bajaj Holdings), all companies made low lump-sum profits.
So this was the answer, though finance sector is very profitable, but it did not generate higher monies (profits).
I realized that my logic of identifying most profitable stocks via only operating profit was partially flawed. It inherently favored companies of finance sector. So what next?
I began talking to myself, If I would have been a business man, which company I would have like to invest in?
The logic was simple, the company which generates more profits for every dollar of invested capital is preferable.
Suppose I invest $8Mn in Business-A and another $10Mn in Business-B. Both the companies made $1Mn of profit. It means, Business-A generates $0.125 for every dollar I have invested in it.
Business-B generates $0.1 for every dollar I have invest in it.
It means Business-A is more profitable.
Using the same logic, a financial ratio called, “Return on Capital Employed” (RoCE) can be used to identify profitable companies.
I decided to check the above 12 stocks based on RoCE.
|1||Balmer Lawrie Investments Ltd||Finance – Investments||43%|
|2||Tata Investment||Finance – Investments||13%|
|3||Pilani Investment And Industries Co||Finance – General||9%|
|4||Vardhman Holdings Ltd||TEXTILES||10%|
|5||JSW Holdings||Finance – Investments||5%|
|7||Bajaj Holdings & Invest||Finance – Investments||17%|
|8||Integrated Financial Services||Finance – General||11%|
|9||Coal India||Mining & Minerals||47%|
|10||NMDC||Mining & Minerals||36%|
|11||Bajaj Finserv||Finance – Investments||6%|
* I used 10Y Avg. Operating Profit instead of PAT to calculate roce.
Invariably all finance sector stocks (except for Balmer Lawrie Investments) showed a RoCE in range of 5% to 17%. This is too low compared to their phenomenal operating margins.
If one wants to find most profitable stocks, looking only into operating margin is not enough. Stocks which has a combination of high operating profit margin and high RoCE (like Balmer Lawrie) are actually most profitable companies.
List of Most profitable stocks in India 2017
(Updated on 10-April’2017)
|SL||Company Name||Market cap||P/E ratio||Div yield (%)||RoCE (%)||Operating margin (%)|
|1||Sun TV Network Ltd.||311.27B||73.92||1.87||25.87||54.44|
|2||Castrol India Limited||213.91B||31.75||2.13||112.44||28.48|
|3||Ajanta Pharma Ltd||152.15B||30.54||0.75||39.01||31.42|
|4||Tata Consultancy Services Limited||4.75T||18.28||1.91||38.88||25.77|
|5||Oracle Financial Services Software Ltd.||314.36B||26.82||4.44||25.09||36.67|
|6||Eclerx Services Ltd||55.50B||14.78||0.07||39.19||33.24|
|8||Procter & Gamble Hygiene & Health Care||240.37B||51.86||0.49||29.25||25.78|
|9||Accelya Kale Solutions Ltd||21.75B||22.98||2.8||68.83||37.6|
|10||Hindustan Zinc Ltd||1.21T||16.37||1.34||18.98||38.33|
|11||Advanced Enzyme Technologies Ltd||46.37B||44.14||-||25.03||44.88|
|13||Torrent Pharmaceuticals Ltd||249.72B||24.57||1.72||31.75||21.88|
|14||Bajaj Corp Limited||60.84B||50.51||2.84||40.46||24.07|
|15||Jagran Prakashan Limited||61.36B||13.65||1.87||26.4||28.38|
|16||Colgate-Palmolive (India) Limited||275.66B||47.59||1.29||59.36||18.34|
|17||Balmer Lawrie Investments Ltd.||8.85B||22.7||3.16||35.34||97.86|
|18||Dr. Lal PathLabs Ltd||79.86B||51.02||0.26||29.84||24.02|
|19||GlaxoSmithKline Pharmaceuticals Limited||230.86B||70.36||1.83||18.39||33.89|
|20||Aurobindo Pharma Ltd||383.70B||16.46||0.49||26.52||20.77|
|22||La Opala RG Limited||29.63B||53.26||0.33||26.76||31.4|
|23||Pidilite Industries Limited||361.57B||42.2||0.59||28.78||19.08|
|24||Page Industries Limited||157.10B||61.13||0.67||40.58||18.45|
|25||VST Industries Limited||44.58B||26.18||2.4||41.8||22.48|
|27||Kitex Garments Limited||20.10B||18.26||0.34||31.35||30.23|
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