We will see a list of *fastest growing companies* at the bottom of this blog post. Related to this topic we also have an article on “Indian stocks with highest returns in last 10 years“. You can also read about stocks with high EPS & their growth rates.

But before we read about growth stocks, will it not be good to understand the concept of “fast growth” first?

Which are the potentially fastest growing companies in India in 2019? How to answer this question? Upfront the answer looks easy. How?

Look at the historical price, sales, net profit, EPS, dividend, net worth, asset growth rates etc, and make a guess. Historical data related to these metrics can be easily found on internet (Economictimes etc). So what we have to do is, just put in the numbers in excel and here comes the value. But the question is, is it the right way?

**Handpicked related articles**:

- Best stocks to buy in India for long term.
- Investment growth calculator with contributions.
- List of most profitable stocks.

If one looks at a stock like a trader, this approach may seem right. But this is not the right way

A value investor will not use this approach. Why? *Because this is not the way business grows.*

Profit growth, EPS growth, dividend growth etc are all **after effects**.

The question is, **“what makes these numbers grow?”**

## How a business grows?

PAT, EPS, Dividend, Net Worth of a company cannot grow on its own. *It must be grown.*

In order for the company to grow, it must *take actions*. What are those actions?

**Reinvestment of Retained Profit.****Making Company More Efficient.**

What means by reinvestment of retained profit? What is retained profit? Net Profit minus Dividend.

It is that portion of net profit, which has not been paid to shareholders as dividends.

*Cumulative* of all passing years retained profits are shown in companies balance sheet as “**reserves**“.

Companies use its reserves to operate and grow its business.

So lets sum up, how a company grows?

Company Growth = Growth due to (Reinvestment + Efficiency improvement)

Formula-1

## How fast a company can grow?

Like growth is a factor of reinvestment & efficiency, **speed of growth** also has an interrelation.

Speed of growth is related to what? On two things:

**How much is reinvested?****How well it is reinvested?**

Estimating future growth is like acting god. Why? Future prediction is almost impossible.

No body can claim to know what will happen tomorrow. Neither Warren Buffett, companies, investors, nor you & me, no one.

But what can be done is this:

Estimate future growth based on business fundamentals of a company.

What does it mean?

Estimating future growth based on business fundamentals is **more maths than fortunetelling**. I am sure, you will agree that mathematics is more reliable.

But maths will only forecast high future growth numbers if the “business fundamentals” of a company is good.

**Good fundamentals**will lead to good growth.**Bad fundamentals**will lead to no or negative growth.

Which fundamentals will ensure fast growth?

#### First, how much is reinvested:

**Retention Ratio**[ (PAT-Dividend) / PAT ].**Reinvestment Ratio**[ (Net Capex+Change in WC) / {EBIT x (1-t)} ]

Out of the total profit that the company makes, a portion of its is paid to shareholders as dividends. The balance is retained by the company for reinvestment.

How company benefits from reinvestment? As the volume of **employed capital** goes up, company becomes richer.

**PAT net of dividend**, carried over to balance sheet means, the company’s equity base grows.

This brings down the companies Debt/Equity ratio. Here company becomes eligible to take more debt.

- Long term debt: will further increase the employed capital.
- Short term debt: will increase company’s current assets (in turn working capital).

These funds companies can use for its business operations and expansion plans.

#### Second, how well it is reinvested:

**ROE**(PAT / Book Value).**ROC**[ EBIT x (1-t) / (Equity+Debt-Cash).

[Read more on how to calculate ROE – Example.]

It is good that company is reinvesting money back into the business.

But how well this money is used by the company generate returns (profits)?

How to know this? By using ROE and ROC.

A combination of retention / reinvestment ratio with ROE/ROC respectively will give this answer.

Combination of the two formula will give rise to **speed of growth formula.**

Growth in company due to reinvestment =

= Retention Ratio x ROE

Formula-2.1

= Reinvestment Ratio x ROC

Formula-2.2

What the above formulas signify?

To grow, a company reinvests its profits back into the business.

This reinvested money ensured future growth. How fast will be the growth?

There are are two ways to look at it.

- A more general observation – though retention ratio and ROE.
- More specific observation – through reinvestment ratio and ROC.

**Retention Ratio * ROE**: talks about how much a company **adds to its equity** and generate extra returns.

**Reinvestment Ratio * ROC**: talks about how much a company **adds to its assets** and generate extra returns.

One can use either of the above formula to estimate growth rate of company due to reinvestment.

Abbreviations used:

- PAT = Profit After Tax.
- CAPEX = Capital Expenditure.
- WC = Working Capital.
- EBIT = Profit Before Interest & Tax.
- t = Effective Tax Rate.
- ROE = Return on Equity.
- ROC = Return on Capital.

## Efficiency improvement and companies growth…

Lets try to understand this with an example.

Suppose there is a company whose total asset is say Rs.100 Crore. This company generates PAT of Rs.10 Crore.

What is its ROC? 10% (PAT/Asset).

[**Total Capital (Equity + Debt) = Total Asset.]**

This company has target to improve its ROC from 10% to 12%.

But it does not intend to grow though “reinvestment” route.

What it can do to improve ROC? By cutting down on its cost.

This way companies PAT will go up.

But this growth in PAT has happened without adding anything to its asset base (zero capital expenditure).

Here we can say that the company has been able to increase profit *by improving its efficiency*.

Ideally, this is the best way to ensure growth. But such growth has **two major limitations**:

**One**: Only small companies, which has smaller ROE/ROC (say < 20%) can grow like this.

**Second**: Companies cannot continue to grow its profit through efficiency improvement only. This can continue only till a limit

Beyond that, growth can only happen from reinvestment (by asset enhancement).

What is the formula that can be used to quantify growth due to efficiency improvement?

Growth in company due to efficiency improvement =

= (ROE2 – ROE1) / ROE1

Formula_3.1

= (ROC2 – ROC1) / ROC1

Formula_3.2

So this brings us to our final conclusion.

Total growth of a company can happen in two ways (both included).

- By reinvestment of its profit back into the business.
- By efficiency improvement.

This way the total growth formula comes out to be like this:

**Total Growth = Formula_2.1 + Formula_2.2 or**

**Total Growth = Formula_3.1 + Formula_3.2**

## Conclusion

Lets conclude the topic of “companies growth”.

Using ROC Formula, growth rate of a company is represented as:

**Total Growth = Reinvestment Ratio * ROC + (ROC2 – ROC1) / ROC1**

#### Case-1 : Company is not reinvesting.

If the company is not reinvesting its capital, CAPEX + Change in working capital is zero.

Mens, its reinvestment ratio is zero.

In this case, growth is totally dependent on efficiency improvement.

**Growth = (ROC2 – ROC1) / ROC1**

#### Case-2 : Company is only reinvesting.

If the company is only reinvesting, its growth due to efficiency improvement will be zero.

In this case growth is totally dependent on reinvestment.

**Growth = Reinvestment Ratio * ROC**

What we can conclude from this blog post?

Companies which reinvest its money, and also has higher ROE / ROC is more likely to grow faster in future.

## Example of future growth estimation…

We will dig into companies financial reports and first pull out the necessary numbers.

Once we have all the numbers, we will use the above formulas to calculate growth.

But these growth rates represents what happened in the past.

Hence we will try to make an informed guess about the future growth rate based on past results.

#### Step #1. Pull out the numbers…

Which numbers to be obtained from the companies financial reports?

We need to pull-out specific data from companies “profit and loss a/c” and from the “balance sheet”.

The numbers that I am talking about are these:

#### Step #2. Calculate…

In this step we will do the calculations.

These calculations will be based on the values we pulled from reports in step #1.

Typical calculation done on an Indian stock is shown below:

Please note that in row “ab” & “ac” which is Efficiency Growth (ROE/ROC), will be zero if the preceding years ROE/ROC is more than 0.20. Why?

Because, I have assumed that a company which already has a high ROE/ROC, cannot grown more on basis of efficiency improvement.

Such companies must reinvest for future growth.

Total growth of such companies will be a factor of reinvestment.

In the above example, we have two total growth numbers:

- Total Growth (ROE based).
- Total Growth (ROC based).

Which one to be referred?

Frankly speaking, there are no hard and fast rules here. The selection is totally based on the researcher’s judgement.

I generally prefer ROC based total growth calculation. Why?

Because it is based “**net capital expenditure and change in working capital**“.

These are more specific numbers highlighting actual reinvestment done by the company.

These are more real numbers if we have to predict future growth.

In the above example, Total Growth based on ROC for last 4 years has been shown.

Based on this data, how to estimate future growth?

For me a safe assumption for future growth rate is **7.5%.**

The rationale behind this decision is shown below:

## List of fast growing companies (in Nifty 500 Index)

**(Updated for: February’2019)**

These are stocks shortlisted from Nifty-500 index.

Why I picked stocks from this index?

Because these are top 500 prime stocks of Indian stock market, and that’s why they are included in Nifty-500 index.

I feel that it is worth keeping track of these stocks past performances. Based on past performance, we can estimate their future growth potential.

I al listing down here 15 such stocks that I will include in watch list for sure.

There are stocks which has shown following charasteristics:

- They are highly profitable (ROE, ROC, O.Margin), and
- Has gives great past returns.

SL | Stocks | Market Cap (Rs.Cr) | ROE (%) | Operating Profit Margin (%) | ROC (%) | Return in Last 3Y (%) |

1 | HEG Ltd. | 9,543 | 75.62 | 63.05 | 65.42 | 159.26 |

2 | Hindustan Unilever Ltd. | 3,81,465 | 74.85 | 22.18 | 74.85 | 29.14 |

3 | Graphite India Ltd. | 11,049 | 44.97 | 46.93 | 40.90 | 96.88 |

4 | Hindustan Zinc Ltd. | 1,10,091 | 27.8 | 62.27 | 27.80 | 17.44 |

5 | Tata Consultancy Services Ltd. | 7,55,955 | 30.29 | 29.37 | 30.20 | 18.93 |

6 | Info Edge (India) Ltd. | 21,321 | 31.51 | 35.6 | 31.50 | 29.98 |

7 | Procter & Gamble Hygiene & Health Care Ltd. | 32,136 | 57.17 | 26.04 | 57.17 | 21.12 |

8 | Adani Transmission Ltd. | 23,343 | 31.95 | 74.45 | 11.74 | 79.45 |

9 | Pidilite Industries Ltd. | 56,708 | 27.37 | 24.51 | 26.45 | 25.44 |

10 | Colgate-Palmolive (India) Ltd. | 34,805 | 48.32 | 27.49 | 48.32 | 14.23 |

11 | Page Industries Ltd. | 26,038 | 45.86 | 22.07 | 42.43 | 24.45 |

12 | Britannia Industries Ltd. | 76,805 | 33 | 16.82 | 31.16 | 33.37 |

13 | Dabur India Ltd. | 78,291 | 26.26 | 24.87 | 22.55 | 20.9 |

14 | ITC Ltd. | 3,41,454 | 24.07 | 42.21 | 24.05 | 9.26 |

15 | Sun TV Network Ltd. | 20,892 | 25.53 | 72.43 | 25.53 | 11.78 |

**P.Note**: The above list of stocks has been valued based on rough estimates about ROE, ROC, Margins and future returns.

I prefer to do a deeper analysis of my shortlisted stocks using my stocks analysis worksheet.

**Handpicked Articles:**

- High EPS stocks and their Growth Rates.
- Debt Free Companies in India.
- Fundamentally Strong Stocks in India.
- Best stocks to buy in India for long term.
- PEG Ratio of Indian Stocks.

Dear Mr. Mani

Your pursuit for financial independence has forced you to passionately research into the arena of share trade which is really an intellectual booster for people who would like to know more and more and become financially independent like you! I appreciate the effort. The best thing is the daily research along with the change in perception as time passes. Yes, there is not one single formula for success in this field. Thanks for helping us to save our time from doing individual research. Please continue your contribution in this field. It would be great if not many emails are not sent to the emails given while posting the comments. Maybe weekly or fortnightly newsletter will do.

Thanks for posting your feedback.

Regarding emails, you must have subscribed to the comments feed. Probably this is why receive updates as it happens. I will suggest you to unsubscribe from it. For updates you can subscribe at twitter and facebook.

sir, I a list of best managed companies and companies which are listed based on their market share in their respective segments. esp. growing market share. can you help>

Thanks Sir,all your articles are excellent, want to gain more knowledge from you.

Thanks for posting your awesome feedback.

Wonderful,

Excellent Analysis

Thanks a lot for your feedback.