February 2025 watchlist ideas: 2 high profit kings of capital efficiency

By Suhel Khan

Return on Capital Employed (ROCE) is an important metric that investors must take into consideration when evaluating a company’s performance.

Now, please do not confuse the ROCE with growth.

Growth refers to a company’s ability to increase its revenue and earnings over time. This can be achieved through ways like market expansion, new product launches, and acquisitions. While growth is seen as a positive sign, growth can sometimes come at the expense of profitability. Even long-term profitability.

ROCE on the other hand measures a company’s efficiency in generating profits from its invested capital. It is calculated by dividing operating profit by total capital employed. A high ROCE indicates that a company is effectively utilizing its resources to generate returns for its shareholders.

Effective capital allocation is especially important when it comes ROCE. While growth is expected, the market give emphasis on the importance of sustainable growth. Blindly pursuing growth without considering ROCE could lead to a lower valuation and therefore a lower market value. True value creation lies in achieving growth that is both efficient and sustainable.

To explain it simply, if a company spends Rs 100 as capital expenditure, the money it makes on it is determines the ROCE percentage.

If it spends Rs 100 and makes 90 on it, the ROCE will be 90%.

Here are 3 companies that could be called “Kings of Capital Efficiency” you can consider adding to your watch list.

Ksolves India Ltd

Ksolves is a 360-degree software solution provider, known in the industry for its expertise in Big Data (Apache Kafka, Apache NiFi, Apache Spark, Apache Cassandra), Data Science (Artificial Intelligence & Machine Learning), Salesforce, DevOps, Java & Microservices, OpenShift, Penetration Testing etc.

With a market cap of Rs 1,114 cr, Ksolves focusses on Data Sciences/Big Data/Al & ML as well as the Onshore presence of Sales and Client Management teams.

Its current ROCE is 199% which is high by any standard, especially if you compare it with its industry peers. The closest to KSolves in the case of ROCE is Tata Elxsi with a current ROCE of around 43%.

The 10-year average ROCE is also a big 144%.

Which proves that the company is doing a commendable when it comes to making money for the business as well the stake holders.

The company had made sales of Rs 108 cr in the 12 months of FY23-24. As per the latest investor presentation and the exchange filings, the company has already crossed 105 cr in the first 9 months of Fy25 (April to December 2024).

In the last 5 years, the sale for Ksolves have grown at a compounded rate of 82% from 5 cr to Rs 108 Cr. The profit in the same period has grown at compounded rate of 192%.

The EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) has improved form 0 cr in FY19 to 47 cr in FY24.

Its stock price has surged from its listing price in August 2020 of Rs 13 to the current price of Rs 931 (as on 28^th January 2025), which is a huge 7,061% jump in about 5 years.

The company’s share is trading at a current PE of 29x while the industry average is 39x. The 10-year median PE for the company is 33x and the industry median for the same period is 26x.

One of the benefits of a high ROCE is that it allows companies like Ksolves to intelligently spend the profits on buybacks and/or build investor trust by maintaining a high dividend payout.

Ksolves current dividend yield is 2.07% and the company is maintaining a healthy dividend payout ratio of over 67%.

What might come as a surprise to many, is that no super investor of India, or as we call them, Warren Buffetts of India has a stake in the company. Neither do any domestic or foreign institutional investor.

Waaree Renewables Technologies Ltd

Next up we have one of the largest vertically integrated new energy companies with a market cap of Rs 9,362 cr, that a subsidiary company of Waaree Group and spearheading the Solar EPC business.

Waaree Group is a leading renewable energy company that caters to Individual, Industrial, and Commercial customers.

With a current ROCE of 107% and a 10-year average ROCE of about 29%, Waree has secured a spot on the list of capital efficiency kings.

When it comes to market position, the company is the No. 1 Indian Module manufacturerand a Tier 1 Solar Module Manufacturer. No wonder the company’s clientele has names like Adani, Arcelor Mittal, Aditya Birla Group, Bharat Petroleum, Cello, Larsen and Toubro, Mumbai Metro MMRDA, Mondelez International, NTPC, Reliance Industries Limited, MSL, etc.

This market penetration has helped the company grow its sales from Rs 5 cr in FY19 to Rs 867 cr in FY24. That is a compounded growth of 180% in 5 years.

The profits too have seen a huge jump as the company was not reporting any profits as of FY19 but as of FY24 the company had profits of Rs 147 cr, which makes it a compounded growth of 244% in the 5 years.

The EBITDA grew from Rs 2 cr in FY19 to Rs 199 cr in FY24, which is a CAGR of 145%

And this jump in in revenue and profit helped Waree’s stock see a growth of, hold your breath, 25,557% from Rs 3.5 in January 2020 to its current price of Rs 898 (as on January 28^th, 2025).

Waree’s share is trading at a current PE of 50x which is as much as the current industry average. The 10- year median PE is however 67x while the industry median for the same period is 58x.

Once again, there are no Warren Buffetts of India, domestic or foreign institutional investors holding a stake in the company.

Add to watchlist?

The two kings of capital efficiency we saw today have everything going in their favour if you look at the numbers. They are killing it when it comes to making the most of the capital they have spent. Add to that the dividend payouts, it proves that they are willing to share wealth.

Now, with the increasing capital expenditure and growth plans, clubbed with the ability of these companies to make the most on every rupee invested, it makes more sense than ever to keep a very close eye on these stocks.

With the high profitability, these companies can give back to the investor in way of dividends. Plus, the need to borrow money goes down drastically, in some cases to zero.

And given the current bearish turn of the market, who knows, one might be able to grab them at a good discount.

Disclaimer

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information. 

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Suhel Khan has been a passionate follower of the markets for over a decade. During this period, He was an integral part of a leading Equity Research organisation based in Mumbai as the Head of Sales & Marketing. Presently, he is spending most of his time dissecting the investments and strategies of the Super Investors of India.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article. The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein.  The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors.  Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.