Looking for Consistently Compounding Stocks? Here’s a watchlist for you

But does this mean that you can invest in any stock and expect the returns to compound over time?

Unfortunately no.

For the power of compounding to do its job, you must continually invest in compounders.

what are frequent compounders,

Simply put, these are companies that have shown consistent growth in revenue and profitability over the long term.

They come with clean accounts, prudent capital allocation and strong competitive advantages, which make them the perfect low-risk route to generate long-term wealth.

The share price of such companies compound over time as the market rewards them for their consistent performance.

So, which companies have been consistently compounders over the years?

Here are four.

#1 Bajaj Finance

The first consistent compounder on our list is Bajaj Finance.

The company is one of the largest Non-Banking Finance Companies (NBFCs) in India with approx. 1.7 tonnes (AUM) of assets under management. It is the financial services arm of the Bajaj Group and a subsidiary of Bajaj Finserv.

Bajaj Finance (BFL) started its journey as a vehicle financing company in the year 1987 but later diversified into other sectors.

It operates in the housing finance segment through its subsidiary Bajaj Housing Finance and in the depository business through Bajaj Finance Securities.

It also gains synergy by being a captive financier for Bajaj Auto. Bajaj Finance financed nearly 36% of Bajaj Auto’s sales volume in FY21, over 20% in FY20.

The company has emerged as one of the largest retail asset financing NBFCs in India over the past decade, thanks to its two-pronged strategy of building scale and maximizing profits.

Segments such as mortgages, small business loans and commercial lending are focused on manufacturing scale, while consumer durable loans, personal loans and two-wheeler and three-wheeler financing are focused on maximizing profits.

As a result, the company has seen strong revenue growth of 29.6% over the past five years. Its profits have also grown at a CAGR of 28.2%.

In the times to come, the launch of digital platforms, which aim to provide a seamless shopping experience to the customers, is expected to bring significant benefits.

This will be done through a business transformation initiative in which the company will transition to a new app ecosystem of five apps.

The company has increased its efforts to diversify income by focusing on various fee-based income avenues, such as existing member identity cards, co-branded credit cards and third party product distribution.

In its latest quarterly results, Bajaj Finance reported a 53.5% year-on-year growth in net profit on account of higher net interest income. Net interest income grew 28% YoY to 53.5 billion during the quarter.

#2 Grasim Industries

The next consistent compounder on our list is Grasim Industries (GIL).

Grasim Industries is the global flagship company of the Aditya Birla Group. The company has several businesses ranging from chemicals and textiles to cement.

In 1947, the company started as a garment manufacturer in India. However, since then it has grown into a major diversified player with a leading presence in multiple sectors.

It is the largest producer of viscose rayon fiber in the world and one of the largest chlor-alkali, linen and insulator players in India.

In addition, through its subsidiaries, UltraTech Cement and Aditya Birla Capital, it is also India’s largest cement producer and a major financial services player.

As a result of its operational efficiencies over the years, investments in subsidiaries/related parties and despite ongoing capex, the company has a strong balance sheet.

Its revenue has grown at a CAGR of 20.3% over the last five years while its net profit has grown at a CAGR of 15.8%.

The company was a major agri-solutions provider to the agri-industry in India, but has recently decided to sell off its interest in its fertilizer business.

It has announced that it will enter the paint industry and plans to spend about 50 billion in the next three years in this direction.

Grasim had also pointed out 26 billion as Capital Expenditure (CAPEX) for Viscose Staple Fiber (VSF) business for the financial year 2022.

This expansion will increase Grasim’s VSF capacity by about 40%, which will meet the growing demand for sustainable man-made cellulosic fiber in the country.

In the long term, the company plans to create a meaningful specialty chemicals segment to grow its portfolio of value-added products. It aims to increase the share to 40% for both VSF and chlorine value added products by 2025.

In its latest quarterly results, Grasim Industries reported a 67% year-on-year growth in revenue 49.3 billion net profit jumped 180% year-on-year $9.8 billion on strong operating performance.

#3 Avenue Supermarts

Third in a row on our list is Compounder Avenue Supermarts (ASL).

The company is into organized retail business and operates supermarkets under the brand name D-Mart. It was incorporated in 2000 and is promoted by Mr. Radhakishan Damani, an equity market investor.

It has a strong market position in the domestic organized F&G (Food & Grocery) retail market through its subsidiaries – Align Retail Trade (ARTPL) and Avenue Food Plaza (AFPL).

ARTPL procures grocery items from local agricultural produce market societies and supplies them to ASL while AFPL operates fast-food counters outside DMart stores.

The company also has a wholly owned subsidiary dedicated to its e-commerce business called Avenue E-commerce (AEL).

The company’s market position over the years has been reinforced by its steady same-store growth, retail productivity, and short time for new stores.

Strong purchasing efficiencies, lower priced products as well as higher cost controls have driven higher growth while higher inventory turnover and revenue per square foot (sq ft) translated into industry-leading retail store productivity.

As a result, in the last five years, the company’s sales have grown at a CAGR of 22.4% while the net profit has grown at a CAGR of 28%.

Going forward, its strong sales and value proposition and the benefits of economies of scale is expected to strengthen its market share in the medium term.

The company recently announced an expansion plan that will see a massive growth of around 20% per annum in the existing retail area to over 10m square feet by 2023. The company will continue its cluster-based approach by investing in areas where they are already in. Understand.

For the September 2021 quarter, Avenue Supermarts reported a 46.8% year-on-year growth in revenue. The company’s net profit also more than doubled during the quarter.

#4 HDFC Bank

The last consistent compounder in the list is HDFC Bank.

The bank is the largest private sector bank in India by assets and market capitalization. In this approx. 10% market share of the total banking industry.

The bank is present in the broking business through HDFC Securities, which also acts as a third party distributor of mutual fund products, insurance, initial public offering, fixed deposits, bonds and non-convertible debentures.

In addition, HDB Financial Services, a non-deposit taking non-banking financial company, offers products such as property, commercial vehicle and construction equipment loans, and financing of small and medium-sized enterprises.

When it comes to servicing retail customers, the bank relies on the model of a wide franchise and low cost deposit base. This ensures good pricing power and above-average NIM (Net Interest Margin) stability.

While sourcing home loans to parent HDFC is a huge advantage for the bank, it cannot be underestimated. But still being extremely conservative with margin and provisioning policies has been very beneficial.

As a result, the bank’s net profit has grown at a CAGR of 20% over the last five years. Revenue growth has also been steady at a CAGR of 15.3%.

HDFC Bank holds the distinction of reporting more than 20% annualized profit growth every quarter for over 40 quarters. Amidst all this, its net NPAs have never crossed 0.5% of loans!

Even in the year 2020, where the entire banking industry was affected due to the pandemic, HDFC Bank reached out to large corporates for their financial needs, which it could do due to its strong balance sheet.

Going forward, margins are expected to be supported by an improvement in asset mix, strong growth at CASA and a strong recovery in credit card issuance. Given the superior interest spread and decent fee income, the bank is likely to maintain relatively high profitability.

In its latest quarterly results, HDFC Bank reported a year-on-year growth of 14.7% in revenue on account of increase in net interest income. Net profit also grew 17.1% year-on-year.

Snapshot of Compounder stocks continuously from Equitymaster’s stock screener

Here is a quick look at the above mentioned companies based on some important financial parameters.

Please note that these parameters are subject to change as per your selection criteria.

Why you should consistently invest in compounder stocks

The spectacular rally we have seen over the past few months may tempt investors to buy the stock for short-term gains.

However, it makes more sense as well as pays to buy quality businesses (persistent compounders) and keep them for a longer period.

With market volatility at all-time highs, investing in compounders consistently will ensure stable returns in the short term and market-beating returns in the long term.

Investing in such companies also removes the stress of timing the market. As long as you are patient and willing to let compound interest do its work, you will be able to create immense wealth.

Note that while we’ve talked about the wealth creators of the past, the real genius lies in finding the big wealth creators of the future.

If you are interested in investing in such stocks, you can sign up for Equitymaster, Tanushree Banerjee’s recommendation service – Co-Head of Research at Forever Stocks.

The service will provide you with a tenor of around 20 shares, which can be bought and held for very long periods, up to several years or even decades.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com