Investors are always inclined to buy the most profitable share available in Indian market.
My definition of profitable share was, that stock which displays highest operating profit margins.
But during last days, something happened which changed my lookout and definition of profitable stocks.
While doing the study on the most profitable share, one of the first filters that I used was volume. I preferred those shares which trade above a certain volume.
Market capitalization also dominated my screening criteria. I preferred high market cap stocks.
Apart from operating profit margin, volume, and market capitalization, I also ensured to pick only those stocks which had at least last 5/10 years financial data available on internet. The reason being, in order to do further detailed stock analysis, I needed at least this much data base.
There was no big logic about doing it this way. Perhaps I was comfortable to screen stocks like this, as it worked for me.
But one day I decided to drift from my usual screening criteria.
True to my belief, I found some very interesting 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 shares.
As soon as I realized these facts, I immediately corrected my search criteria. Now the filter that I use to analyze profitable companies had few new additions.
I will tell you about my realization in the following lines. But first lets see my initial list.
The list of decently big stocks having high operating profit margins:
|SL||Name||Sector||Operating margin (5YA)||SL||Name||Sector||Operating margin (5YA)|
|1||Housing Urban Develop||Financial||89.96%||26||Rural Electrification||Financial||35.62%|
|2||PNB Housing Finance||Financial||87.96%||27||Divi's Labs||Healthcare||34.18%|
|3||Bajaj Holdings||Financial||86.02%||28||RBL Bank||Financial||32.08%|
|4||L&T Finance Hld||Financial||73.18%||29||Kotak Mahindra Bank||Financial||31.76%|
|5||Gujarat State Petronet||Utilities||70.64%||30||Zee Entertainment||Services||30.78%|
|6||Power Grid||Utilities||58.25%||31||Zee Entertainment||Services||30.78%|
|8||NMDC||Basic Materials||55.81%||33||Piramal Enterprises||Healthcare||30.00%|
|9||AU Small Finance Bank||Financial||55.80%||34||DLF||Capital Goods||29.33%|
|10||Yes Bank||Financial||51.87%||35||Ajanta Pharma Ltd||Healthcare||29.25%|
|12||Oberoi Realty||Capital Goods||49.33%||37||GRUH Finance||Financial||28.89%|
|13||Sun TV Network Ltd||Services||48.89%||38||CRISIL||Services||28.48%|
|14||HDFC Bank||Financial||47.76%||39||JSW Energy||Utilities||27.82%|
|15||Cairn India||Energy||45.82%||40||Muthoot Finance||Financial||27.17%|
|17||IndusInd Bank||Financial||43.97%||42||Sun Pharma||Healthcare||26.47%|
|18||Hindustan Zinc||Basic Materials||43.28%||43||Tata Consultancy||Technology||26.42%|
|19||AXIS Bank||Financial||40.07%||44||NLC India||Utilities||25.92%|
|20||Bajaj Finserv||Financial||39.40%||45||Oil India||Energy||25.91%|
|21||Lic Housing Finance||Financial||38.13%||46||ICICI Bank||Financial||25.48%|
|22||Motilal Oswal||Financial||36.54%||47||Indiabulls Ventures||Financial||25.09%|
|24||JM Financial||Financial||36.28%||49||Indian Bank||Financial||24.20%|
|25||Oracle||Technology||36.09%||50||AIA Engineering||Capital Goods||23.60%|
Profitability and Nature of Business
These are top 50 stocks with high operating margins. The operating margin range from 23% to 89%.
The value of operating margins could be even higher, but remember that we have enforced the filter of market capitalization and trading volume.
Just to give you an idea, a typical company in India works at an average operating margin of 14.81% (average of top 500 companies).
So, what made the above 50 companies so profitable?
The answer is right in front of our eyes. The nature of business is the answer. See this table:
Out of total 50, 24 companies are from Financial Sector. Most of them are Banks or NBFC’s. Banking companies have lower expenses, hence they exhibit higher operating margins.
Other sectors which has featured in our top 50 most profitable companies are Utility, Services, Healthcare, Capital Goods, Basic Material, Energy and Transportation.
This highlights the fact that some sectors are inherently profitable. Hence, good companies operating in these sectors has more chance to be profitable.
The next step was clear for me. It was only prudent to find average ‘operating profit margin’ of sectors as a whole. This exercise was certainly going to give me new insights into the profitability of companies.
So, I did a small number crunching and the result is presented here for your reference.
Most profitable sectors in India
I prepared a list of top 500 companies in terms of market capitalization. Operating profit margin (5years average) was also recorded for all 500 companies
After this exercise of data collection, the next step was simple. Calculating average of all individual sectors is a quick job in MS EXCEL.
As a result of this exercise, data analytics of most profitable sectors in India got collated.
Average operating profit margin (5Y average) of the sectors operating in India are as follows:
- Utilities – 25.88% (7% to 70%) – 21/500 companies.
- Financial – 24.72% (-15% to 91%) – 79/500 companies.
- Healthcare – 15.67% (-3% to 35%) – 40/500 companies.
- Transportation – 15.58% (-4% to 50%) – 13/500 companies.
- Services – 14.33% (-13% to 66%) – 43/500 companies.
- Consumer Goods (non-cyclical)– 13.02% (-2% to 29%) – 38/500 companies.
- Technology – 12.75% (-10% to 36%) – 37/500 companies.
- Energy – 11.56% (1% to 45%) – 15/500 companies.
- Basic Material – 11.49% (-5% to 55%) – 80/500 companies.
- Capital Goods – 11.47% (-50% to 77%) – 81/500 companies.
- Consumer Goods (cyclical)– 9.15% (1% to 19%) – 51/500 companies.
- Conglomerates – 1.86% – 1/500 companies.
Most Profitable Share for Investors
From investors point of view, which companies are best for investing? Large size companies having high profitability is best for investors.
How to know which company has high profitability?
There are several financial ratios which deals with this query. In this post we have already dealt with operating profit margins.
A very widely used profitability ratio is net profit margin. But it is not the best ratio to identify the most profitable share.
It is also true that my logic of identifying most profitable stocks via only operating profit margin was also partially flawed.
It inherently favoured companies of utility and finance sector. So what next?
To get a good answer, we will have to think like a business man.
If a business man wants to buy a stocks, he will pick which company?
The company which generates more profits for every Rupee of invested capital will be preferred.
Suppose I invest Rs.8Mn in Business-A and another Rs.10Mn in Business-B. Both the companies made Rs.1Mn of profit.
It means, Business-A generates Rs.0.125 for every invested-Rupee (12.5%). Business-B generates Rs.0.1 for every invested-Rupee (10%).
It means Business-A is more profitable than B.
A financial ratio called Return on Equity (ROE) evaluates profitability of companies using this same logic.
ROE = Net Profit / Shareholders Equity.
Shareholders Equity is all monies that has been invested in the business by the shareholders.
Shareholder’s Equity = Net Worth = Share Capital + Reserves.
The more profits a company generates, per Rupee of shareholders invested capital, the better is the company for its investors.
If one wants to find most profitable share, looking only into operating margin is not enough.
A stock which has a combination of high operating profit margin and high ROE can be tagged as the most profitable share in Indian market.
In this article, I will list down few high ROE and high Operating Margin stocks. Here I have tried to indicate name of at least one stock from each profitable sectors.
Most profitable Share in Indian Market 2017
(Updated on November’17)
|SL||Rank in Top 500||Company||Sector||ROE (%)||Operating Margin (%)|
|1||1||Dewan Housing Finance Corpn. Ltd.||Financial-Housing Finance||43.11||84.69|
|2||2||Gruh Finance Ltd.||Financial-Housing Finance||30.45||91.74|
|3||3||Credit Analysis & Research Ltd||Financial-Credit Ratings & Information||32.66||74.97|
|4||4||Eris Lifesciences Ltd||Healthcare-Drugs & Pharma||57.63||39.70|
|5||5||Bajaj Corp Ltd.||FMCG-Cosmetics & Toiletries||44.76||38.04|
|6||7||8K Miles Software Services Ltd.||Technology-Computer Software||46.21||34.87|
|7||8||Caplin Point Laboratories Ltd.||Healthcare-Drugs & Pharma||56.14||33.77|
|8||9||Castrol India Ltd.||Energy-Lubricants, etc.||115.24||32.40|
|9||11||Indiabulls Ventures Ltd.||Financial-Hire Purchase||26.47||75.33|
|10||12||Sun TV Network Ltd.||Services-Media & Entertainment||26.71||72.71|
|11||13||Adani Ports and SEZ Ltd.||Services-Shipping||25.09||79.77|
|12||15||Oracle Financial Services Software Ltd.||Technology-Computer Software||31.13||42.70|
|13||16||Symphony Ltd.||Cons Durable-ACs & Refrigerators||42.59||31.44|
|14||20||Eicher Motors Ltd.||Automobile-Commercial Vehicles||34.13||34.14|
|15||22||Hindustan Zinc Ltd.||Metals-Other Non-Ferrous Metal||24.39||64.97|
|16||25||VST Industries Ltd.||FMCG-Tobacco Prod.||37.07||29.92|
|17||26||Tata Communications Ltd.||Communication-Telecom.Services||200.30||26.33|
|18||27||Tata Consultancy Services Ltd.||Technology-Computer Software||33.64||30.97|
|19||28||Rural Electrification Corpn. Ltd.||Financial-SIDCs/SFCs||20.18||95.21|
|20||29||Advanced Enzyme Technologies Ltd.||FMCG-Food Processing||25.03||46.34|
|21||30||JM Financial Ltd.||Financial-Misc. Fin.services||20.48||82.57|
|22||33||ITC Ltd.||FMCG-Tobacco Prod.||24.27||40.24|
|23||34||Balrampur Chini Mills Ltd.||FMCG-Sugar||42.42||25.84|
|24||38||Triveni Turbine Ltd.||Engineering-Industrial Machinery||33.92||26.43|
|25||42||PI Industries Ltd.||Chemicals-Pesticides||33.14||25.98|
|26||43||Monsanto India Ltd.||Chemicals-Pesticides||31.29||26.55|
|27||44||GHCL Ltd.||Chemicals-Soda Ash||31.90||25.65|
|28||45||Balkrishna Industries Ltd.||Automobile-Tyres & Tubes||22.69||37.15|
|29||48||Dr. Lal Pathlabs Ltd.||Healthcare-Health Services||26.78||28.68|