Leading Companies Cornering Bigger Revenue Share: Deutsche Bank

The ongoing phase of growth adjustments has led to a broad-based consolidation across industries in India, Deutsche Bank Research said in a report.

Companies in the top quartile in over 70 percent of industries gained revenue share during the financial years 2012 to 2018, according to Deutsche Bank Research’s analysis of BSE 500 companies. The extent of revenue share consolidation is higher in hotels, capital market, media, real estate, and banks.

Here are some of the other trends from the report:

• Only a few industries saw relative loss in revenue shares of leading companies. These were electrical equipment, machinery, food products and consumer finance.
• Export-dependent sectors such as pharmaceuticals and information technology services have also seen revenue share consolidation for leaders.

Cyclical slowdown, regulatory transitions and a risk averse financial system are the key drivers for this consolidation, the report said.

Here’s what Deutsche Bank Research said on these three drivers:

• Cyclical dynamics seem to be the most dominant consolidation driver in sectors such as metals, infrastructure and cement.
• Regulatory developments were important consolidation driver in the real estate sector. Also, the impact of developments such as the implementation of the Goods and Services Tax will continue to have a formalization impact in days ahead.
• A risk averse financial system (especially the banks) also contributed towards the consolidation. Relatively lower cost of capital of better rated companies also aided the trend.

Preferred stocks in the brokerage’s model portfolio are: JSW Steel Ltd., Larsen & Toubro Ltd., Shree Cement Ltd., Dalmia Bharat Ltd., IndusInd Bank Ltd., HDFC Bank Ltd. and NTPC Ltd.

The brokerage believes that growth momentum is broadening in India and this was reflected in the first quarter corporate earnings. The advantage of operating leverage is likely to kick in now, the report said. Deutsche Bank Research’s recent indicators on higher capacity utilisation also imply that companies with higher operating leverage are likely to benefit from the reviving demand and also from selective return of pricing power.

Corporate India’s broader financial leverage situation has improved significantly. The median debt-to-equity ratio of BSE companies is at a decade low.

Key Changes In Deutsche Bank Research’s Model Portfolio:

• Stocks added: State Bank of India, ICICI Prudential Life Insurance Co. Ltd., Eicher Motors Ltd., and Bharti Infratel Ltd.
• Stocks dropped: SBI Life Insurance Co. Ltd., Bhart Airtel Ltd., and Maruti Suzuki India Ltd.
• Increased weight: NTPC, BHEL, Ashok Leyland Ltd., and Titan Co. Ltd.
• Reduced weight: Reliance Industries Ltd., ONGC Ltd., and HDFC Ltd.