These 5 ‘hold-forever’ stocks offer high returns on equity and capital employed

ROE and ROCE are key financial metrics that measure a company’s ability to generate profits from its capital, helping investors assess how efficiently a company is using its resources to grow. A high ROE and ROCE typically signal a strong competitive position, effective management, and the potential for sustainable profits over time.

A high ROCE indicates that a company makes a sizable profit on every penny invested into the business. Generally, companies that operate in traditionally defensive sectors such as consumer staples, information technology and insurance offer a high ROCE. Such companies are generally less affected by changes in economic growth as they deal in essential products and services that have almost no correlation to economic swings. These companies not only excel in using their capital to generate robust returns but also operate in sectors with favourable growth trends, making them attractive investment opportunities.

Today we will explore five stocks with high ROE and ROCE that are well-positioned for long-term growth.

#1 Nestle India

Nestle India Limited is a subsidiary of a Swiss multinational corporation Nestle..

It is among the top two players in most of its product categories, including milk products and nutrition, beverages, prepared dishes and cooking aids, and chocolate and confectionery.

Nestle owns brands such as Nescafe, Maggi, Milkybar, Kitkat, Bar-One, Milkmaid and Nestea. It has a network of more than 10,000 distributors and more than 5.2 million outlets. It derives 96% of its revenue from the domestic market and the remaining 4% from exports.

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It has nine manufacturing facilities in Moga (Punjab), Choladi (Tamil Nadu), Nanjangud (Karnataka), Samalkha (Haryana), Ponda (Goa), Bicholim (Goa), Pantnagar (Uttarakhand), Tahliwal (HP), and Sanand (Gujarat).

Nestle has launched 130 new products in the past seven years and many new projects are in the pipeline. Recent launches include Maggi Korean noodles, Maggi oats noodles with millet magic, and Gerber puffs.

Net sales grew 6.6% year-on-year in the six months to September. Ebitda growth came in at 14.5% year-on-year, with margins at 24.4% in the first half of FY25 versus 22.7% in the first half of FY24. It reported an ROE of 135% and ROCE of 169% for FY24.

Management believes sustained rural growth, premiumisation, and an increased focus on innovation and cost efficiency will allow the company to deliver better results in FY25. Shares of Nestle India Ltd are down 6% over the past year owing to its muted financial performance.

#2 Life Insurance Corporation of India

LIC is the largest insurance provider company in India, with a market share of more than 66.2% in new business premium (the amount of money an insurance company collects from new policies during a specific period).

The company offers participating insurance products and non-participating products such as unit-linked insurance policies, saving insurance, term insurance, health insurance, and annuity and pension products.

LIC is rankedfifth globallyby gross written premium life insurance, which is the total amount of money an insurance company receives from policyholders for their insurance coverage before expenses or commissions are deducted. It’s also ranked 10th globally in terms of total assets. It’s the largest asset manager in India with ₹53.5 trillion in assets under management as of June, which is18% of India’s GDP. The company’s investments in listed equity represent about % of the total market capitalisation of NSE.

LIC has an omnichannel distribution platform that comprises individual agents, bancassurance partners, alternative channels (corporate agents, brokers, and insurance marketing firms), digital sales (through its website), micro insurance agents, and point-of-sale products.

With about 1.33 million agents, the company has the largest agent network of any life insurance company in India. It has 2,048 branch offices and 1,559 satellite offices in India, covering 91% of all districts.

LIC reported revenue growth of 13.5% year-on-year in the first half of FY25, while operating profit was up by 2.3%. Ebitda margin deteriorated from 8.6% in the first half of FY24 to 7.8% in the first half of FY25. Its ROE was 63.4% and ROCE was 73% in FY24.

Management remains confident of adapting to market demands and regulatory changes while ensuring customer-centric product offerings.

The stock is up 36% over the past year owing to its robust financial performance.

#3 Titan Company

Among India’s most respected lifestyle companies, Titan has established leadership positions in watches, jewellery and eyewear, led by its trusted brands and differentiated customer experience.

The company was founded in 1984 as a joint venture between Tata Group and Tamil Nadu Industrial Development Corporation (TIDCO).

Titan derives 90% of its revenues from jewellery, 7% from watches and wearables, and 3% from eyecare. It is India’s leading organised jewellery retailer with 898 exclusive brand outlets across Tanishq, Mia, Zoya and Caratlane. It has a 7% share of the jewellery market. The watches division has 1,080 exclusive brand outlets and more than 8,000 multi-brand outlets. It owns brands such as Titan, Fastrack, Sonata and Anne Klein.

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Titan is looking to expand Tanishq’s presence from 265 to 300 towns in the next couple of years. During FY23, the company opened 14 stores overseas including six in the UAE, one in Singapore and two in the US.

Net revenue grew 19.2% in the first half of FY25 owing to strong festive demand. Operating profit, however, fell 2.1% and margins deteriorated substantially from 13.7% in the first half of FY24 to 9.8% in the first half of FY25. Titan reported an ROE of 32.9% and an ROCE of 22.7% in FY24.

Management expects margin to improve in the second half of FY25, driven by operational efficiencies and demand recovery.

Shares of Titan Ltd are down 4% over the past year and 0.8% over the past month.

#4 Infosys

Infosys Ltd is the second-largest information technology company in India. It provides consulting, technology, outsourcing and next-generation digital services.

Its digital services are rated among the best in the industry. Infosys derives 57% of its revenue from digital services and the remaining 43% from traditional services.

The key business verticals for Infosys are the same as TCS, barring life sciences and healthcare. Infosys instead has an energy, utilities and resources division.

The company caters to about 185 of the Fortune 500 companies. Its clients include companies such as ICICI Bank, Daimler Mercedes-Benz, HSBC Bank, Goldman Sachs, J&J, Accenture, Lockheed Martin, IBM Corporation and Deutsche Bank.

It reported 4.4% growth in revenue in the first half of FY25 owing to slow decision-making by clients, leading to slow execution. Operating profit also grew by 4% during the first half, with margins improving slightly from 25.6% in the first half of FY24 to 25.9% in the first half of FY25.

Management has guided for 1-3% revenue growth in constant currency terms in FY25. The company expects growth in financial services and telecom to accelerate on the back of large deal wins. Infosys also has a positive outlook on European markets. It reported an ROE of 31.8% and ROCE of 40% for FY24.

Shares of Infosys are up 33% over the past year owing to its improving operating performance.

#5 Hindustan Zinc

Incorporated in 1966, Hindustan Zinc is in the zinc, lead and silver business. It is the world’s second-largest integrated zinc producer and the third-largest silver producer with an annual capacity of 800 million tonnes. It has a share of about 75% of India’s growing zinc market and is headquartered in Zinc City, Udaipur.

Hindustan Zinc derives 75% of its revenue from the domestic market and 25% from exports. It earns 62% of revenue from zinc, 14% from lead, 19% from silver, and 5% from other businesses.

It has a mined metal capacity of 1.2 million tonnes per annum and runs an integrated zinc-lead-silver operation with zinc, lead, and silver smelting capacities of 913,000 tonnes per annum., 210,000 tonnes per annum and 800 tonnes per annum, respectively.

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Hindustan Zinc reported 15.8% growth in revenue in the first half of FY25 owing to an increase in volumes and better price realisation. Operating profit grew by 24.4%, with margins improving from 49.7% in the first half of FY24 to 52.5% in the corresponding period of FY25. It reported an ROE of 55.2% and ROCE of 46.2% for FY24.

Management remains optimistic about achieving production and cost guidance in FY25, despite geopolitical tensions and market volatility.

Shares of Hindustan Zinc Ltd are up 66% over the past year on the back of improving operating performance.

Conclusion

Investing in stocks with consistently high ROE and ROCE can be a great strategy. By focusing on such high-performing businesses, investors can identify opportunities that promise sustainable profits and have the potential to outperform over the long term.

However, investors should remain vigilant, conduct thorough research, and keep abreast of market trends to ensure they make informed decisions.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com