Stock picking: Improving operating profit could signal long-term market outperformance

How do you pick winners when global equity markets are rocked by trade uncertainties and there is persistent weakness in domestic demand? One effective way is to closely check your company’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins. In a nutshell, these are fundamentally sound companies that effectively minimise value erosion amid periods of high market volatility.

Why EBITDA is a winner

EBITDA is calculated by subtracting operating expenses (excluding depreciation) from the sales revenue. On the other hand, EBITDA margin is calculated by dividing EBITDA by the sales revenue. For example, a company with an EBITDA margin of 10% means that the company is generating Rs.10 as operating profit on every Rs.100 worth of sales.

A study conducted by ET Wealth shows that the companies that have consistently improved EBITDA margins over the last four quarters have significantly outperformed the market benchmark in the last one year whereas the companies with consistent deterioration in EBITDA margins significantly underperformed the market benchmark.

An analysis of 1,508 companies (excluding those in banking, finance, and insurance) reveals that 29 companies have maintained positive EBITDA margins and consistently improved them over the last four quarters. In contrast, 28 companies have shown a steady decline in EBITDA margins during the same period. The latest data pertains to the March 2025 quarter and has been sourced from the Reuters-Refinitiv database.

In the last one year, the group of 29 companies (with positive EBITDA margins) has generated an equal-weighted average return of 30.3%, whereas the group of 28 companies (with negative EBITDA margins) has generated -9.8% returns. The Nifty 500 equal-weighted index delivered 7.8% returns in the last one year. The returns are based on 30 May 2025 closing prices.

Experts agree. “Improving EBITDA margins increases the RoE of the business, which in turn improves the growth and profitability of the business and the stock price of the company,” says Saurabh Joshi, Head of Research, Marwadi Shares and Finance Limited (MSFL).

Significance of EBITDA margins

EBITDA provides an accurate picture of the company’s competitive strengths as it excludes the effect of non-cash charges (or depreciation), varying capital structures and taxes. “EBITDA is the preferred metric for investors who want to know how a company performs at its core before financing decisions and accounting treatments cloud the picture,” says Om Ghawalkar, Market Analyst, share.market, a stock brokerage firm. A strong EBITDA indicates efficiency and the company’s ability to generate value.Analysts suggest that investors should consider EBITDA margins over a period of time to spot good quality companies with sustainable business models and sound financial health.

Corporate India performance
Corporate India saw a modest improvement in both revenue and EBITDA in the March 2025 quarter compared to the December 2024 quarter.

Based on a sample size of 1,508 non-BFSI companies. Growth is year-on-year.

“Consistent improvement in EBITDA margins signals superior execution, pricing power, cost control, and positive operating leverage. It reflects a company’s ability to increase profits faster than expenses,” says Sonam Srivastava, Founder and Fund Manager at Wright Research PMS.”.

EBITDA in a soft quarter

The recent quarter performance of corporate India indicates ongoing growth challenges. Despite muted revenue growth, the operating profit growth improved relative to the December 2024 quarter, helped by cost control initiatives, operational efficiencies and input cost benefits in certain segments (see graphic).

EBITDA climbers favoured by analysts

Going forward, analysts expect demand to improve, aided by rural revival, steady urban consumption, normal monsoons and increased government spending.

However, input costs present a mixed picture. Ghawalkar says the softer crude oil prices and the strong coal supply may ease costs for sectors like aviation and chemicals, but other sectors are likely to face pressures. While cotton MSP hikes will hit input costs in the textiles segment, rising logistics costs may squeeze margins in cement. Additionally, wage inflation in IT and healthcare is likely to keep operating costs elevated in these sectors. Here are the five companies from the group of 29 with rising EBITDA margins that have a strong analyst coverage:

Orient Electric

• The electrical equipment manufacturer specialises in home appliances, including fans, lighting and switchgears.
• The company has reported strong March 2025 quarter: revenue up 9% year-on-year (y-o-y), net profit up 144%.
• Growth was driven by the lighting and switchgears segment, on the back of distribution expansion, new products, and premium category demand.
• EBITDA margin expanded 390 bps y-oy, supported by cost optimisation and Project Sanchay.
• The fans segment is poised for market share gains via improved DTM strategy and Hyderabad plant scale-up.
• Centrum Broking cites DTM, premiumisation, alternate channels, and Hyderabad plant as key growth and margin drivers.

Affle 3i

• The global technology company specialises in mobile advertising, digital consulting, and software development.
• In the March 2025 quarter, revenue was up 19% y-o-y, net profit up 17.8%.
• Growth was led by developed markets (+27.3% y-o-y); India grew nearly 15.9%.
• EBITDA margin up 290 bps y-o-y, driven by lower employee costs and operational gains.
• Management targets 20% revenue growth in 2025-26 with gradual margin improvement.
• Ambit Capital sees tailwinds from integrated platform, stronger processes, sales push, premiumisation, and exposure to high-growth markets and segments.

Brigade Enterprises

• The Bangalore based real estate developer has a diversified portfolio, including residential, commercial, hospitality and retail projects.
• The March 2025 quarter pre-sales was up 9% y-o-y, driven by strong new launches.
• EBITDA was down 4% y-o-y, but margin expanded 307 bps on cost control and premium property sales.
• Robust launch pipeline in residential and commercial segments underpins 2025-26 growth visibility.
• It expects 15-20% pre-sales growth in 2025-26.
• Antique Stock Broking highlights geographic expansion beyond Bengaluru, strong launch pipeline, and rising rental asset occupancy as the key positives.

Jupiter Life Line Hospitals

• The multispeciality healthcare provider offers tertiary and quaternary care across various medical specialties.
• In the March 2025 quarter, revenue was up 12.5% y-o-y, EBITDA up 25.7%, driven by better case mix and higher ARPOB.
• EBITDA margin expanded 260 bps yo-y due to cost control and operational efficiency.
• It is on track to reach 2,500 beds across 6 hospitals in Western India in 3-4 years.
• Exploring growth via acquisitions and greenfield projects.
• Prabhudas Lilladher expects sustained growth from expansion, rising occupancy, margin gains, and strategic moves in high-density western markets.

National Aluminium

• The PSU company is engaged in in mining, alumina refining and aluminium smelting.
• In March 2025 quarter, revenue was up 47% y-o-y, EBITDA up 149%, driven by strong alumina and aluminium performance.
• EBITDA margin surged 2133 bps y-o-y, supported by lower costs and higher alumina realisations.
• Targeting 36-37% EBITDA margin in 2025-26 via volume growth and cost efficiencies.
• Axis Securities flags near-term EBITDA risk from falling alumina prices, but sees partial offset from strong cost control and higher alumina sales guidance.