Investors often are on the lookout for companies with a high return on capital employed (ROCE), as this indicates how efficiently the company is able to generate profits from the money it spends.
While ROCE tells us how effectively a company utilises its debt and equity funds, the return on equity (ROE) metric tells us how effectively a company creates value for its shareholders. By focusing on companies with both high ROCE and ROE, investors can identify firms that are good at generating profits and in creating substantial value for shareholders.
In this edition of Chart of the Week, we take a look at companies that have outperformed their industry peers in ROCE and ROE in FY24. We have selected the top eight stocks from a screener of Nifty 500 companies with the highest ROCE.
FMCG companies have the highest return ratios among Nifty500 stocks
Colgate-Palmolive (India), a personal products company, outperformed its industry ROCE of 31.3% by delivering an ROCE of 92.3% for FY24. The company posted an ROE of 70.6%, higher than the industry average of 28.4%. Colgate aims to build value for its shareholders by focusing on premiumisation as the growth strategy.
Similarly, packaged foods company Nestle India exceeded its industry ROCE of 63.6% by delivering an ROCE of 82.7% for FY24. The company posted an ROE of 117.7%, higher than the industry average of 78.3% driven by growth in its instant noodles and chocolate products. To maintain its impressive returns, Nestle India plans to launch its high-margin premium coffee brand Nespresso by the end of 2024. The company has also formed a joint venture with Dr. Reddy’s to bring nutraceutical products to Indian consumers.
Finance companies gain from rising investor interest in the Indian economy
Capital markets company ICICI Securities outperformed its industry ROCE of 46.1% by delivering an ROCE of 70.4% for FY24. The company also posted an ROE of 43.3%, higher than the industry average of 29.9%. Buoyed by the rising investor interest in the Indian markets, the company witnessed growth in its broking business and investment banking arm.
Public infrastructure finance company REC outperformed its industry ROCE of 41.4% by delivering an ROCE of 68.6% for FY24. However, the company posted a lower ROE of 20.4%, as its debt capital is eight times more compared to its shareholder's capital as of March 2024. The company in FY24 reported its highest-ever loan sanctions at over Rs 3.6 lakh crore, up 33.7% YoY. Loan disbursements in the previous fiscal also rose 66.7% YoY, with a significant portion allocated to the renewable energy sector at Rs 1.4 lakh crore, up 539% YoY.
Part of the Murugappa Group, Cholamandalam Financial Holdings outperformed its industry ROCE of 24.1% by delivering an ROCE of 50.3% for FY24. The company posted an ROE of 17.3%, higher than the industry average of 13.6%.
Metals & mining companies reduce their debt and plan to fund their capex through internal accruals
Despite belonging to a capital-intensive industry, mining company Lloyds Metals & Energy, outperformed its industry ROCE of 38.9% by delivering an ROCE of 58.7% for FY24. The company also posted an ROE of 44.2%, higher than the industry ROE of 26.3%. The miner’s share price has posted gains of 110% in the past year. The company incurred a capex of Rs 1,690 crore in FY24, primarily funded through internal accruals. In a bid to further boost its operational efficiency, Lloyds is constructing an 85 km slurry pipeline to reduce its freight costs.
Coming to an iron and steel products company, Jai Balaji Industries outperformed its industry ROCE of 14.2% by delivering an ROCE of 55.9% for FY24. The company posted an ROE of 58.5%, significantly higher than the industry ROE of 12.1%. Jai Balaji created more value for equity holders by significantly reducing its debt from over Rs 4,000 crore as of March 2022 to Rs 1,502 crore in March 2024. In addition, total shareholders’ funds have tripled compared to a year ago to Rs 1,504 crore in FY24.
Tata Consultancy Services (TCS), an IT consulting and software company, outperformed its industry in terms of ROCE despite the headwinds in the IT sector. For FY24, TCS achieved a ROCE of 63.5%, higher than the industry average of 42.9%, driven by 32 bps rise in operating profit margin after falling for two consecutive years. Their banking and financial services segment which contributes most (37.7%) to their revenue posted a growth of 5.6% YoY to Rs 90,928 crore. The company posted a ROE of 50.7%, surpassing the industry average of 34.4%. The IT firm has been consistently improving the value it generates for its shareholders with ROE CAGR of 10.6% in the past three years.
