Investors usually prefer companies with a high return on capital employed (ROCE) of over 20%, as they are able to efficiently use their capital to generate revenue. In this edition of Chart of the Week, we examine companies that have outperformed their sectors in terms of ROCE in FY23. These companies are from sectors with high ROCE that outperformed the Nifty 50.
The software and services sector outperformed the Nifty 50’s ROCE by the highest margin in FY23 - by 20.7 percentage points. Companies with the highest ROCE in this sector are Tata Consultancy Services (TCS), Tata Elxsi and Easy Trip Planners, standing at 57.6%, 41.7% and 49.9% respectively.
TCS’ high ROCE partly came from the sharp rise in its current liabilities, which rose at a three-year CAGR of 17.2%. This rise in current liabilities reduces the capital employed (total assets minus current liabilities), and in turn, boosts returns on capital. According to reports, 27% of TCS' business is currently funded by suppliers/short-term creditors.
Tata Elxsi’s ROCE increased due to robust growth in revenue (27.3% YoY) from software development & services and system integration & support services for FY23. These helped operating profit rise by 25.5% in FY23.
The FMCG sector has outperformed the Nifty 50’s ROCE by 13 percentage points in FY23. Companies with the highest annual ROCE in the sector are Nestle, Procter & Gamble Hygiene & Healthcare and Colgate-Palmolive, achieving 57.8%, 97.3% and 79.3% respectively in FY23.
To sustain and improve its already high ROCE, Nestle plans to spend a major portion of its Rs. 1,200 crore capex to reduce pressure on over-utilized plants and increase food and chocolates production over 2023. Colgate-Palmolive’s annual ROCE surpassed the sector by 47.5 percentage points in FY23. Despite outperforming the sector, the company's ROCE has been falling for the past two years.
The Food, Beverage & Tobacco sector has also outperformed Nifty 50’s ROCE by 11.3 percentage points on the back of strong ROCE posted by ITC, VST Industries and Bombay Super Hybrid Seeds. Their annual ROCE stands at 35.8%, 35.7% and 35.6% respectively.
The Textile, Apparel, and Accessories sector has showcased an impressive performance, surpassing the Nifty 50 by 10.2 percentage points in terms of ROCE. It was driven by strong ROCE from Page Industries, PDS and Titan, reaching 53.3%, 35.4% and 34.5% respectively in FY23. Despite a high ROCE, Page Industries posted a muted quarter in Q4FY23 due to increased inventory levels during the inflationary period. Its Q4 net profit fell by 58.9% YoY and revenue fell by 12.8%.
Jhunjhunwala’s top bet, Titan, outperformed its sector by 5.6 percentage points in Annual ROCE. For FY 24-25, the company plans to set up 40+ new stores in the jewelry division and increase its international presence to 25 stores by 2024. It has observed a 157% rise in capital employed (Total Assets - Current Liabilities) over the past five years. For FY23, growth in sales of jewelry and watches helped increase the EBIT margin and ultimately ROCE.
The diversified consumer service sector outperformed the Nifty 50’s ROCE by 6.8 percentage points in FY23. IRCTC, a miniratna PSU, surpassed its sector by 24.3 percentage points. Its EBIT increased in FY23 on the back of robust growth in the catering, rail neer and state teertha segments. By the end of FY23, IRCTC plans to set up rail neer plants in Bhubaneshwar, Vijayawada and Kota, which will increase the production capacity by 3 lakh litres, reaching a total capacity of 19.8 lakh litres.
Despite being capital-intensive industries, metals & mining and chemicals & petrochemicals have managed to outperform the Nifty 50 by 6.4 percentage points and three percentage points, respectively. In the metals & mining sector, Hindustan Zinc was the highest outperformer, while Fine Organic Industries excelled in terms of ROCE in the chemicals & petrochemicals sector.
Finally, CG Power & Industrial Solutions stands out as the top-performing company in the General Industries sector, boasting the highest ROCE among its peers. The company has planned to further increase the production capacity of motors at its Ahmednagar and Goa plants with an investment of Rs 230 crore, and transformers at its Bhopal and Malanpur plants with an investment of Rs 126 crore in FY24.
