Equity market rewards companies with good consolidated numbers. Here are 4 such stocks

Companies with subsidiaries report two sets of numbers in quarterly and annual disclosures. Almost all financial variables that appear have two variants— standalone and consolidated. A subsidiary company is the one in which the holding company controls the board of directors and exercises or controls more than half the total share capital either on its own or together with one or more subsidiaries. Separating business structures into different verticals, gaining tax advantage and access to international markets are some of the reasons a parent company creates subsidiaries.

When a parent or a holding company declares its financial result, it is a standalone result. The combined financial result of the parent company and subsidiaries is the consolidated result. One should consider consolidated numbers while evaluating a company as these provide a better picture of the group’s strengths or weaknesses. The numbers may look good at the standalone level but loss-making subsidiaries could mean poor consolidated numbers. Similarly, a company may appear weak at the standalone level, but healthy at the consolidated level due to profit-making subsidiaries.

Markets reward companies that perform better as a group. There are 608 companies with market cap greater than Rs 500 crore that declare both consolidated and standalone numbers. The annual standalone and annual consolidated adjusted EPS were extracted for these companies for the past five fiscals, starting 2014-15. Forty four companies reported annual consolidated adjusted EPS higher than the standalone adjusted EPS by over 25% in all five years. The 3-, 4- and 5-year average returns of this group were 48.2% (42 companies), 78.9% (38 companies), and 121.8% (38 companies) respectively.

In 47 companies, the annual consolidated adjusted EPS was less than annual standalone adjusted EPS in all five years. The group delivered 9.23% (42 companies), 13.8% (41 companies) and 41.9% (40 companies) average returns in the past 3, 4 and 5 years respectively. The number of companies of which share price data was available in respective time frames is mentioned in brackets. The BSE500 delivered 41.5%, 47.3%, and 43.7% returns respectively during the same period.

Markets reward companies that perform better as a group
Consolidated numbers provide a better picture of a group’s strengths or weaknesses.

PE and ROE (%) estimates for 2019-20. Current price as on 3 December 2019. Source: ACE Equity & Bloomberg.

The 44 companies with consolidated adjusted EPS higher than standalone adjusted EPS were further evaluated on future potential by including only those covered by at least five Bloomberg analysts and with a one-year forward price potential of more than 10%. Let us look at four such companies:

IRB Infrastructure
This infrastructure company operates on the hybrid annuity model (HAM) and build-operate-transfer (BOT) space. The company reported healthy revenue in the September quarter, helped by strong growth in EPC revenues. The management is confident of the revenue momentum in 2020-21 due to the strong order backlog. Analysts believe deal with GIC will improve the company’s cash flow potential.

Firstsource Solutions
It provides customised business process management services and covers customer lifecycle across verticals. The company reported steady revenue in the September quarter and the management has guided 7-9% revenue growth in 2019-20. This will be led by healthy growth momentum in BFSI, healthcare providers, healthy deal pipeline, and new digital offerings. SBICap Securities is bullish on the stock considering its attractive valuation, healthy cash generation, and 4% dividend yield.

Allcargo Logistics
The company provides integrated logistics solutions and operates in three segments: Multimodal Transport Operations (MTO), Container Freight Stations (CFS), and Project and Engineering Solutions (P&E). In the first half of 2019-20, the company’s MTO and CFS segments saw continuous volume growth. However, the P&E segment is awaiting a pick up. A report by MayBank Kim Eng expects double-digit EBITDA growth in 2019-20 and 2020-21. The stock is trading at attractive valuations.

Redington (India)
The company is engaged in IT product distribution business, supply chain solutions and after-sales services. The company’s India business improved in the September quarter. Sunidhi Securities expects with gradual expansion in the African market, the company will see improvement in overseas business and arrest the margin shock at the consolidated level. The short term pain of high provision and problems in Turkey will remain an overhang.