Storm Warning: Only 8 cos. Make profit grade in 15 years.
The Economic Times — September 23, 2005

Investor optimism is directly proportional to index levels. At these heady levels of the BSE sensex, it is easy to forget gravity, or for that matter, the laws of economics. Corporate profits don't rise forever, and that ultimately pulls down markets. Here's an insight into how fragile corporate profits are. ET Intelligence Group checked data over the past 15 years to see how many listed companies have consistently shown net profit growth.

And what we found should stop many a bull in their tracks - of the 3,000-or-so listed companies currently getting actively traded, only eight companies have consistently grown net profits. It is hard to keep HDFC and Infosys away from any superachieving lot. These are the two expected names. The other six names - Container Corp, Cipla, Tata Investment, Infomedia India, Monsanto and Pidilite - are not so obvious. While all of these are regarded as well-run companies, they are certainly not in the hallowed league of an Infy or HDFC.

While this is no mean achievement, the fact that Indian industry faced a number of recessionary years during this 15-year period makes it an even bigger feat. The turbulent years after the initial opening up of the economy in 1991, the Asian currency crisis and its aftermath and the tech boom-bust were the major crises faced by industry during this period. To top this achievement, HDFC and Infosys maintained double-digit growth in profits for each of these years.

In overall growth terms, Container Corp has been the best performer with a growth of 82% compounded annual growth rate (CAGR) followed by Infosys at 68%. While minimum sales growth rate during this period is 13% CAGR, the figure is 29% for profits. Five of these companies are in the service industry while the remaining three are part of the manufacturing industry. IT and financial services contribute two each to this list. Another interesting feature of the list is that three of these companies are listed in the B1 group on the BSE.

What it indicates is that size does not matter when it comes to sustaining profit growth. Aggregate profits for these companies have grown at over 50% CAGR over the period, while sales have grown at 27%. While profits have moved up secularly, sales have fluctuated in some years for some of these companies although magnitude has been less than 10% on all occasions. If we look at only the past 10 years - companies which have grown net profits consistently in the period - then the list rises to 21. Some notable new names here are: Reliance Industries, Asian Paints, ICICI Bank and Hero Honda.

Some emerging companies in this list are i-flex and Bharat Electronics, Berger Paints and Wendt (India). There are quite a few insights in this data. One is that very few companies are worth investing in over the long term, since very few can grow consistently. Management quality is a very important criterion. For example, if mid-size companies like Pidilite or Infomedia India have grown net profits consistently, whereas many large or similar companies have not, management quality is perhaps superior.