Hello!!
If you keep 100 rupees in the bank and get 10% interest, you got a profit of 10 rupees on 100 rupees.
If you re-invest the same amount of profit of Rs 10, then your total investment becomes Rs 110.
This gives us a very important lesson.
That we can reinvest our returns and see the compounding return on our initial investment in the future.
Something similar happens in business as well.
When a company makes more profit, then it usually has 2 options,
then it should give its profit in the form of dividends, then reinvest in new projects and grow the company.
Now you will ask what will be the benefit of reinvesting in the company?
Well, it gave the company dividend. But imagine, if a company is in the shoe manufacturing business.
If it expands its capacity by investing in another shoe manufacturing plant than giving the profit of the year in the form of a dividend,
then maybe today you are not getting a cash dividend, but in the next cycle when new plant operation will start,
the company's profits could increase further and the stock price could rise sharply.
But we should also keep in mind that just because a company reinvests more money back does not mean that it has always been successful.
For this, the company's ROCE i.e. Return on capital employed should be good but return.
That is, whatever capital of the company is getting reinvested, the company should get good returns.
If the company invests in such projects, where the returns are not good,
it would be better if we distribute the cash to the shareholders in the form of dividends or share buyback.
So today we will tell you about 5 such companies which have the highest reinvestment rate.
We have listed only companies that have
Market Cap> 5000 Cr ROCE is more than 20%, 5-year revenue growth is more than 20%
Why have we chosen these screeners?
In our Groww Main Channel, we did a weekly Talk Show where last week we had Saurabh Mukherjee, who gave some tips to identify Compounding Stocks consistently.
How to understand a company's predictive power?
How to understand, how much will HDFC Bank, Asian paints, Zomato, and Reliance industries earn in long term?
So the first metric to check is the Return on Capital.
These companies will give you a big return if their Return on capital is more than the cost of capital.
If the Cost of capital is 15, and roce is 30/40/50 then the company will give you a good return in the future.
The second fundamental ratio which is important is the reinvestment ratio.
If the company has a good ROCE it means it has a good surplus.
And how much of this has been put back into the business or re-invested.
This is the other important metric.
The third metric is revenue growth.
Return on capital captures the depth of the bowl.
How big holes are near to keep the competitors away.
Revenue growth tells you how big this palace is growing.
If you want to know from which stocks you can earn then don't use your brain on the past 5-15 days' price.
You can see the return on capital from the annual reports.
Check for reinvestment rate in the annual reports.
So check for these metrics from the annual report freely available on the company's website.
So we can conclude that in long run, earnings depend on return on capital, reinvestment rate, and revenue growth.
In the short run, no one knows what it depends on.
Short-run is gambling and the long run is fundamental investing.
Short-run is speculation and the long run is fundamental investing.
There are different methods to calculate the reinvestment rate.
The reinvestment rate formula we have used here is derived from the lecture
"Fundamental Determinants of Growth" by Professor Ashwath Damodaran of Stern Business School.
Ashwath Damodaran says that there are 2 factors behind the net profit growth of any company:
First, how much money do they reinvest? How much return did he get on his re-invested capital on the second?
Increase in Net Profit = Reinvestment Rate * Return on Equity
From this we can derive that: Reinvestment Rate = Increase in Net Profit / Return on Equity
Here we have taken the last 5 years' reinvestment rate which we have calculated using the following formula:
5-year average reinvestment rate = (5-year net profit CAGR)/(5-year average return on equity)
In this video, we will cover all about the business of the stocks and also their key strengths and potential risks or weaknesses.
This will give a holistic view of the companies.
In addition, in the end, we will look at some key financial and technical metrics for all companies in one table.
Will we cover the list in ascending order with a 5-year average reinvestment rate
i.e. the company which has the highest reinvestment rate, we will cover it at the end.
The first company we are going to talk about is Apollo Tricot Tubes Ltd.
Apollo Tricot Tubes Limited is one of the leading branded steel tube manufacturers in the domestic market of India.
Applications of the company's products range from greenhouse tubing to rooftop sheds and electrical conduit construction.
And 77% of their revenue comes from their designer tube segment.
As you can see on your screen:
The 5-year average reinvestment rate of Apollo Tricot Tubes Ltd. is 364.67% and the ROCE of the company is 44.7%.
Now you are wondering how the reinvestment rate exceeds 100%.
This is because companies issue shares, then sometimes by converting their debt into equity, they can also increase new equity.
The company's biggest strength is the strong backing of its parent company, Apollo Tubes.
Along with a healthy balance sheet and operational support, the company also has access to Apollo Tubes' wide distributor network.
In addition, within a year from APL Apollo, the company has rapidly ramped up its business which is reflected in its high revenues and healthy margins.
The biggest weakness of Apollo Tricot Tubes is its Limited pricing power.
Rising raw material (steel) prices and increased competition in the industry have a profound impact on a company's margins and profitability.
As you can see on your screen, we have shown some key financial and technical ratios of the company.
ROCE or Return on Capital Employed is a financial ratio that tells you how much profit the company has generated on capital raised from debt or equity.
This ratio tells us how efficiently the company uses capital to generate profits for the business.
We have also included the prices of 2 technical indicators so that you can see the stocks from a technical perspective as well.
We have used 2 indicators- 200 days simple moving average i.e. 200 days SMA and RSI (14).
If a company's stock price is trading above the 200 DMA, the stock can be considered bullish.
And if the price is trading down than the 200 DMA then the stock can be said to be bearish.
In terms of RSI, RSI values ​​above 30 are generally considered oversold, and thus a trend reversal ie a downtrend can lead to an uptrend.
Similarly, an RSI value above 70 is considered overbought, and a trend reversal is likely.
The second company on our list is Saregama India.
Saregama India Limited is one of the oldest music label companies in India.
The company recorded the first song in India in 1902.
The company currently has a music library of 1.3 lakh songs.
Saregama India Limited has an average 5-year reinvestment rate of 516.78% and a ROCE of 22.2%.
The company's biggest strength is its high-margin licensing business which is growing at 20% annually due to digital penetration.
The company's licensing revenue grew by 20.2% for FY21 despite the negative impact of COVID-19.
The biggest threat to the company's business is music piracy.
The company's revenue generation is dependent on the monetization of its Music IP (Intellectual Property).
Due to the piracy of these IPs, the company loses a lot of revenue every year.
As you can see on your screen, we have shown some key financial and technical ratios of the issuing company.
The third company on our list is Jindal Stainless Limited.
Jindal Stainless Limited is one of the largest Stainless Steel Manufacturers in India.
78% of the company's revenue comes from India and the rest from export markets, which include countries in Europe, Southeast Asia, and the Middle East.
The 5-year average reinvestment rate of Jindal Stainless Limited is 545.89% and the ROCE of the company is 37.8%.
A positive factor for the company is improving its balance sheet and risk profile.
The company's high capacity utilization, good sales, volume growth, and good cash accumulation have resulted in its long-term debt declining,
with net debt to equity improving to 0.5 times in FY22 from 1.4 times in FY20.
Similarly, EBITDA has also seen a significant improvement with the company's net debt reaching 0.9 times in FY22 from 3.1 times in FY20.
The major weakness of the company is the import of stainless steel.
It is a top player in the stainless steel segment within India but has faced strong competition from these low-cost manufacturers from Indonesia and China.
This is because cheap nickel deposits are available to the exporters, which enables them to manufacture at a low cost.
As you can see on your screen, we have shown some key financial and technical ratios of the company.
The fourth company on our list is BASF India Limited.
BASF is one of the largest chemical manufacturers in India.
This company is a subsidiary of BASFSE which is the world's largest chemical company.
The business portfolio of BASF India comprises 6 market segments whose revenue break-up is as follows:
The 5-year average reinvestment rate of BASF India Limited is 634.92% and the ROCE of the company is 33.8%.
The biggest strength of BASF India is its strong association with the parent company BASF SE which has resulted in good operational and financial support.
There is a high degree of integration between do parent company and the subsidiary which provides good synergy.
At the same time, their diverse revenue streams are also a strong point that helps in reducing market cyclicality and competitive pressures.
The biggest weakness of BASF India is its dependence on crude oil.
Crude derivatives are an important raw material for the company, and they are mostly imported from outside.
So whenever there is an adverse effect on the value of crude oil and USD, there could be a negative impact on the profitability of the company.
As you can see on your screen, we have shown some key financial and technical ratios of the issuing company.
And the fifth and last company on our list is Jindal Steel & Power Ltd.
Jindal Steel & Power is India's leading steel producer.
The company is engaged in the production of a wide variety of Plates & Coils, Wire Rods, Track Rails, and Structural Steel Products such as Beams & Columns, Channels, Angles, etc.
Jindal Steel & Power has an average 5-year reinvestment rate is 668.47% and the ROCE of the company is 21.7%.
The biggest strength it's large-scale operations and value-added product profile with relatively little impact on the industry-wide demand slowdown in the downcycle.
JSPL is primarily involved in the long steel infrastructure products segment, in which it is also a preferred supplier of specialty products for Indian Railways and other Metro projects.
The company's major weakness is the heavy foreign debt financing for foreign subsidiaries.
The company has invested in mines in Australia and Africa through debt funding.
At present, due to relatively low cash flow from operations of these sites, their overseas subsidiaries may have to resort to debt refinancing or earning of the Indian entity for financial assistance.
As you can see on your screen, we have shown some key financial and technical ratios of the issuing company.
So these were the 5 companies that have the highest reinvestment rate in the Indian stock market at present.
We remind you that these videos are for educational purposes only, and do not recommend any kind of buy/sell.
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