Value Troika
How HDFC Bank, RIL and TCS have held the markets aloft
On the day RIL results were announced, the company touched a record market cap of Rs.900,000 crore.
This is a record of sorts and immediately led to worries in the market about rich valuations.
Currently, 3 Indian companies; RIL, TCS and HDFC Bank are the most valuable in terms of market cap.
The big question is if the troika is overvalued and what is it that differentiates them from the pack.
Value Troika – hard numbers
Over the last few months 3 Indian companies have either reached close to the $100 billion market cap mark or have crossed it.
While RIL and TCS have decisively entered the $100 billion club, HDFC Bank is hovering around these levels.
Let us look at this value troika in forward P/E terms.
The 3 companies have a combined market cap of $320 billion.
But what one must remember is that these 3 companies are also the most profitable companies in India.
If you take the combined net profits of these 3 companies for the last 4 rolling quarters, it is close to $15 billion.
That gives a combined valuation of 21X P/E for these 3 companies put together.
But these are historical P/E ratios and markets work on forward P/E.
Assuming a conservative 12% growth, we are looked at net profits of $18.82 billion by March 2021.
That gives a forward valuation of 17X.
Even RIL, which has commanded the lowest P/E in the troika quotes above that P/E. Hence, worries over valuations may be misplaced.
Focus on margins and growth
What has differentiated this troika to make them the biggest value creators?
Each of these companies is a clear leader in their respective industry and has benefited from the “Winner takes it all” philosophy of the market.
HDFC has maintained over 20% growth with sub-1% NPAs for over 40 quarters now.
RIL boasts of the highest gross refining margins (GRMs) in the world and this is nearly twice the Singapore benchmark.
Even in the digital business, Reliance Jio is the only company that is adding new subscribers even as others are seeing depletion.
TCS has operating margins that have consistently held a lead of 300-400 bps over Infosys and also has the lowest attrition.
It is this relentless focus on growth and margins that has set this troika of value stocks apart.
Staying ahead of the curve
What also separates the troika is the ability to stay ahead of trends.
HDFC Bank had shifted out of corporate lending and into retail financing much before the NPA crisis started.
TCS made a clear shift to digital business well before the rest of the IT pack.
This allowed them to widen the valuation gap over Infosys since 2014. Finally, RIL has a history of inventing opportunities like petchem, plastics, value refining etc.
Even in the digital foray, it has captured the ecosystem best. That perhaps sums up the story most eloquently.
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