Stock Pick- 5 Growth stocks

5 Growth stocks to buy today

Sandeep Singh

Posted online: Monday , May 14, 2007 at 1213 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

When a market is racing, when its valuations are regarded as ranging from fair to high, the only thing that can keep it going is strong earnings growth. That was the backdrop in which India Inc presented its results for financial year 2006-07.

Looking backYet again, the overall numbers of the 283 companies from the BSE-500 — the set of listed companies that truly matter — that had declared their results till May 9 is stunning (See table given alongside and on Page 3). It’s more credible considering that it came at a time when borrowing money had become more expensive, input costs had gone up and exports had lost some edge. Net margin has increased from 12.6 per cent in 2005-06 to 14.2 per cent in 2006-07. Says Rajeev Anand, head of investments, Standard Chartered Mutual Fund: “This is the result of strong operating leverage and lower debt.”
Within the overall set, there are shades of performance. There are sectors that are seeing a burst of demand and are setting the price line, like cement and mobile telephony (most majors have more than doubled their net profit). There are sectors that are seeing an explosion in demand, but competition is nibbling away at margins (broking). There are sectors that continue to milk their competitive advantage (software). There are sectors that are impacted by rising interest rates and costs (auto).
Looking aheadIf growth is the marker, which companies will turn in performances the market likes and, in turn, be appreciated by it? In order to capture a high degree of safety, we hunted for companies that have done well in the past four years — the duration of this bull run. The reasoning was that if they are doing well, they have something going for them. If they have something going for them, they are more likely to keep it going.
In order to weed out companies whose growth might be magnified by their small size, we applied two filters: a market cap of at least Rs 500 crore and a net profit of Rs 50 crore in 2006-07. Then, we sought consistency: at least 25 per cent growth in net profit for each of the last four years. If a company grows its profits by 25 per cent a year, it doubles its profits in three years. We got 32 companies, to which we applied our judgement, seeking a blend of growth potential and worthy valuations. These five look good to continue with their winning ways.
Bharti AirtelIndia has about 200 million mobile subscribers. Most experts say this can easily increase to 400-500 million in the next three years. Companies are adding five to seven million subscribers a month, which is trickling down to their numbers — Bharti, the leader (39 million subscribers), doubled its net profit in 2006-07.Its average revenue per user fell, but the new additions more than made up. Bharti plans to invest Rs 15,000 crore this year to rope in more subscribers. Among our picks, Bharti is the most richly valued, with a trailing PE of 39. But if subscribers keep increasing at the current rate, as is expected, Bharti should post jumps in earnings for at least three years. And if earnings double, the PE halves.
Bharti ShipyardOne of the country’s leading ship builders does work for port trusts, the Indian Navy and private shipping companies in India and abroad. Ship-building is a labour-intensive industry, which explains India’s competitive edge. The current growth in the sector is being driven by an upturn in world trade and the shipping business. Also, there’s a directive of the International Maritime Organisation that requires single-hull tankers to be phased out by 2010-15.Bharti has an order book of Rs 3,100 crore, to be executed till 2009-10. It is investing Rs 450 crore on a new yard in Mangalore, which should be completed by end-2008, but will start manufacturing vessels by next month. The demand exists. So does the company’s ability to service it.
HDFC BankThe banking sector is a proxy for the economy. By a rule of thumb, good economy-driven companies grow at thrice the GDP rate. With the economy tipped to grow 8 per cent for several years, companies are rolling out big expansions, and most banks are looking good to grow their asset base by 20-30 per cent a year.HDFC Bank is India’s most efficient bank, by virtue of its low-cost deposit base (current account and savings account comprise 55 per cent of its deposit base), strength in retail lending and lowest NPAs. Its net margin of 17 per cent is the third highest among listed banks. For the bank, there are many new areas to go to and capture new business, which should keep the growth counters ringing.
Infosys TechnologiesInfosys is a classic case of a company growing fast to justify its high valuations. In May 2004, Infosys traded at a PE of 28.7. Since then, the stock has appreciated 203 per cent, but its PE is still almost the same, as it has doubled its revenues and net profit in the last two years. Given its ever-increasing size, growth becomes more challenging. For now, the signs are good.Global demand for IT services is buoyant, outsourcing is still a great story and Infosys is adding big numbers to its workforce. A few months ago, CEO Nandan Nilekani said the aim was to be among the world’s top four IT companies in 10 years. Its prospects look good, though profitability might suffer due to competition and a rising rupee. Still, there’s enough going for it.
Patel EngineeringPatel Engineering cut its teeth building tunnels, dams, bridges, flyovers and highways, executing projects like the 4-km tunnel in the Ratnagiri section of Konkan Railway. Now, it’s set to enter the real estate business. That diversified civil engineering expertise should stand it in good stead, as India builds her infrastructure.
Patel has an order book of Rs 5,000 crore, or about five times 2006-07 revenues. About half of this is from hydro power projects, which is a high-margin segment and where it is the second-largest player after Jai Prakash Associates. Patel has seen a PE expansion of four times in the last three years, as it was discovered by the market. From here on, it will be about growth, a lot of it which is visible.

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