High ROE Stocks in India

Created on 28 Jun 2022

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Updated on 12 Sep 2023

As investors with a long-term investment horizon, it becomes crucial to understand company fundamentals. Doing so ensures a good return when it comes to your investment. There tend to be many parameters one may use to assess the firm. One key measure is called return on equity, or simply ROE. It is always favourable from an investor’s point of view to choose stocks that provide them with a high ROE.

Checking the ROE allows investors to know how much can they expect to gain in the long term, and plan the attainment of their financial goals accordingly. As a part of this article, we intend to cover aspects associated with choosing high RoE stocks and key points to keep in mind while doing so in the context of Indian markets.

What is Return On Equity (ROE)?

Return on equity or ROE is a ratio that indicates the financial performance of a firm. Technically speaking, it is calculated by taking the net income of the firm by shareholder’s equity and is expressed in the form of percentages. This is generally useful while measuring a firm’s ability to generate profits and overall operating efficiency.

This ratio gives one an idea of the firm's ability to convert investments into capital gains by taking into account factors such as net income from the income statement and the shareholder’s equity from the balance sheet. All in all, it is considered a positive sign when the return on equity has gone up consistently year on year. This serves as a reflection of the management's capability to reinvest earnings from its businesses with the intent to grow the value added to its shareholders.

Like other financial ratios and indicators, the ROE of a firm derives meaning only when compared to its peers. This is because market conditions and standards may vary from industry to industry. The industry ROE may be used as a means of benchmarking. Although, as investors,  ROE is only one of many indicators that investors may leverage to make a decision and may use the insights gained from ROE along with other financial ratios.

Top 4 Indian Companies With a High ROE

Companies publicly traded in the stock market are widely divided into large, mid, and small-cap, based on their market capitalization. Hence, we have picked out a few high ROE stocks in India from each of these segments.

Large Caps with a High ROE

Generally, companies with a market capitalization of over ₹20,000 crore are classified as large-cap companies. Given below are two large-cap firms that investors may want to look into-

Nestle India

Nestle India is the Indian arm of Nestle, a company of Swiss origin. Being a key player in the food and beverages sector, it has offerings such as Maggi, Kit Kat, Milo, and Milkmaid—to name a few. Overall the firm is debt-free. Its financial growth has consistently exceeded expectations over the past few years.

The one-year return on equity for Nestle India stands at a staggering 104.53% and its five-year ROE is 72.51%. The firm has posted a high return on equity, providing its shareholders with an exceptional bang for their buck. With superior market returns and recognition of the brand, Nestle certainly has an edge, making it a high ROE stock.

This stock is a true reflector of what legendary investor Warren Buffet says, “Price is what you give, value is what you get”!

Before World War II, Nescafe was a relatively new brand. It grew in popularity during this time to become a staple drink for the US military. 

Procter & Gamble

Procter & Gamble Hygiene and Health Care, much like Nestle, is a multi-national firm headquartered in the US. It is one of the leading producers of fast-moving goods. Its product offerings focus primarily on the hygiene & personal care industry. The products offered by the firm include the likes of Pampers, Gillette, and Old Spice, to name a few. 

The firm features a one-year ROE of 71.64% and a five-year average return on equity of 52.26%. The consistency of its growth may be credited to its high focus on consumer-centric innovations in addition to robust advertising, making this a go-to for investors looking for a high ROE stock in India.

Mid Caps with a High ROE

Companies with a market capitalisation of between ₹5,000 crore and ₹20,000 crore fall under the classification of mid-cap. Although they tend to be a riskier investment compared to large-cap stocks, they tend to have a lower risk profile compared to small-cap stocks.

Castrol India Limited

Castrol India Ltd focuses primarily on the production of industrial lubricants. It is positioned as the second-largest firm in its industry with a market share of roughly 20%. It is worth noting that the company is debt-free. Thus, it is a share that features both high ROE and low debt in India.

Its one-year ROE stands at 50.64% and in the past five years, Castrol India has had an ROE of 58.94%, which has been highly favourable for its shareholders. It has an increased focus on optimising costs and improving cash utilisation that has allowed it to achieve this. It has also pushed to invest in the implementation of the latest technology, through which it has launched several brands.

Small Caps with a High ROE

Firms that fall under this classification are those that have lower than ₹5,000 crore of m-cap. 

TAAL Enterprises Ltd.

TAAL Enterprises is a niche engineering and technology solutions firm that is worth keeping an eye on. It has been the go-to partner of choice for those looking for air charter solutions. Its one-year ROE has been 72.81%, which is quite impressive among its peers. The firm focuses on tailor-made solutions in the area of product engineering. 

The Bottom Line

With the ever-changing business landscape in India, it is important to invest available capital wisely. That said, there are certain tools and methods one may leverage to capitalise on long-term returns consistently. ROE is one such parameter that may be used in tangent with other factors to help drive efficient investment decisions.

In this article, we tried to uncover investment decisions that may be driven by ROE as a key parameter and the benefits of doing so. This metric is important to understanding company fundamentals. However, it should be used along with other available information such as the industry ROE,  P/E Ratio, and the debt taken on, among other things. Happy investing!

*Disclaimer: The stock(s) discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.

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If people could be named after idioms, Deb would be called "I'm all ears." His brain is a storehouse, ever overflowing with derelict information. So, while most things he talks about are as useless as occasion-less greeting cards, everything he writes has the potential of bagging you multiple diplomas!

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