We love to buy stocks of fastest growing companies, aren’t we?
In a more colloquial term, we call such stocks as “growth stocks”.
How to get maximum benefits from growth stocks?
Identify, buy, and then hold them for long term (5-7 years).
Try for early inclusion of fastest growing stocks in your investment portfolio.
The longer will be the holding period, better will be the returns.
How to identify fastest growing companies?
Which indicators can help us to identify growth stocks?
“EPS growth rate” is one of the most reliable indicator of growth.
I personally love to track stocks of companies whose EPS is like ever-increasing.
Such companies can attract more investments.
#1. EPS and Growth…
Earning per share (EPS) has direct influence on market price of its stocks.
It has been observed that EPS and market price moves in sync:
- When EPS grows, stock price also moves up.
- When EPS diminishes, stock price also falls.
This is what makes EPS the most tracked financial parameter of companies.
What is EPS?
EPS is nothing but net profit of company per share.
EPS = Net Profit (PAT) / No of shares outstanding.
Suppose a company has PAT of Rs.6 Crore.
Its number of share outstanding is 1.5 crore nos.
In this case its EPS will be Rs.4 (6/1.5).
If PAT is not tampered with, EPS is one of the most important stock data for investors.
I believe, no other data influences stock price more directly than EPS.
Every change in EPS is readily reflected in market price of its stocks.
Hence it is advisable to keep an eye on EPS movements.
#1.1 EPS History is more important
Standalone EPS may not be as effective.
But historical EPS gives lot of insights into the company.
For investors, EPS is more important than PAT. Why?
PAT gives only a feel about the company.
PAT does not directly effect the market price of stocks.
Its impact is felt only when it is converted in EPS.
Why it is so?
The reason is simple:
Stocks try to maintain their P/E ratio
#1.2 EPS, P/E ratio and market price
Stock tries to hold on their P/E ratios.
If external factors does not change a lot, stock’s P/E will remain same.
What is P/E ratio?
It is a ratio between market price and EPS.
P/E = market Price / EPS.
Lets assume that P/E is constant. Market Price and EPS is directly proportional.
If EPS goes up, market price must also move up to maintain the same P/E.
Similarly, EPS goes down, market price must also go down.
Lets see the P/E formula with EPS growth factor (R) included in it:
Market Price_1 = P/E x EPS_1
Market Price_2 = P/E x EPS_1 x (1+R).
[Note: P/E is assumed as constant]
So this way, if EPS is growing its market price will also appreciate.
[Note: P/E ratio of Sensex is 23.62, and of Nifty50 is 25.35]
#1.3 EPS and sales Growth
To improve EPS, sales growth is essential. Why?
EPS is a product of companies net profit (PAT).
It is difficult for company to improve EPS if its sales does not improve.
Why I say so?
Another way of improving Profit is by stepping up the “profitability”.
But profitability enhancement is not so simple.
Not that “sales growth” is simple. But profitability increase is tougher.
Lets see a formula for Profit:
Sales x Profitability = Profit.
Consider a case where companies profitability remains constant at 10%.
So what one can do to improve profit?
Companies sales volume must grow.
This is one reason why, companies which values shareholders interest, gives priority to sales growth.
Sales growth, leads to more EPS, leads to higher market price.
Higher market price means, shareholders are happy.
#2. Growth and Competitive Moat
Almost all good companies increase their sales every year.
But companies with competitive moat do it faster than others.
What is competitive moat?
In common terms it is also referred as “competitive advantage”.
It is an “advantage” that a company enjoys over its competitors.
This advantage allows the company to capture a bigger market.
Few examples that gives competitive advantage to companies are:
- Cheaper products:
- Access to cheaper raw materials.
- More efficient process & equipments.
- Bigger brand name.
- Efficient distribution.
- Quality products:
- Unique product.
- Patented technology.
- Better service:
- Deeper after-sale service network.
- Customer friendly warranty terms.
Companies which dominates the market can improve sales year-on-year.
Which company can dominate the market?
Companies which enjoy’s competitive moat.
How companies with higher “Moat” helps investors?
Bigger moat > Sales growth > EPS growth > Price growth.
#2. Growth and Net Worth
A portion of companies PAT is distributed as dividends to shareholders.
The balance profit (PAT – Dividend), which remains with the company is called Reserves.
Companies “Reserves” are declared in companies balance sheets.
Investors like to see a continuously increasing Reserves.
Growing Reserves makes companies more self reliant.
The bigger are the Reserves the better. Why?
Hindustan Zinc Ltd. (HZL) has a Reserves worth Rs.29,900 Crore.
It total expense in year FY ending Mar’17 was only Rs.11,072 Crore.
Reserve/Expense Ratio (RER) = 2.7
Means, HZL has a reserves which is 2.7 times its annual expense.
Total Debt : Rs.7,908
Debt/Reserves Ratio is only 26%
Reliance Industries Ltd. (RIL) has a Reserves worth Rs.285,062 Crore.
It total expense in year FY ending Mar’17 was only Rs.209,957 Crore.
Reserve/Expense Ratio (RER) = 1.35
Total Debt : Rs.101,303 Crore
Debt/Reserves Ratio is 36%
These examples proves what?
The bigger will be the “RER”, lesser will be the dependency on debt.
In this backdrop, lets see the “Net Worth growth” in a perspective.
A company which is growing its Net Worth at a faster pace, will soon become more self reliant.
Hence, such companies can earn the tag of “fastest growing companies”.
Fastest Growing Companies in India 2018
(Updated on April’2018)
- Sunteck Realty Ltd.
- Vakrangee Ltd.
- Avanti Feeds Ltd.
- Indo Count Inds. Ltd.
- Himachal Futuristic Communications Ltd.
- Aurobindo Pharma Ltd.
- Ajanta Pharma Ltd.
- Suven Life Sciences Ltd.
- Natco Pharma Ltd.
- Motherson Sumi Systems Ltd.
Check this link to get more details related to the fundamentals and price valuation of above list of stocks in tabulated form…