The stocks included in this selection have all grown from small to big and are expected to grow bigger. The aggressive growth of these businesses is expected to drive their valuations in future. These stocks might not come cheap, but their high growth rates justify their valuations.
Screening criteria
Reasonable-sized companies are more likely to sustain their high growth rates than the smaller ones that have not yet acquired critical mass. We have, therefore, restricted the stock universe to companies that comprise the first 70 per cent of the cumulative market-cap of the Bombay Stock Exchange (BSE). These stocks are also a part of the BSE 500 Index. This downsized the list of prospects to 279 companies.
Of this set, we chose those companies whose sales and EPS growth rates were better than the highest growth rate among the companies comprising the BSE Sensex. These companies were then tested for consistent increase in sales and EPS over the past three years. Further, to ensure financial health, companies that had a debt-equity ratio of more than two, or those with interest coverage ratio of less than two in the past four quarters were removed.
Shree Renuka Sugar
Shree Renuka Sugar (SRS) produces sugar and ethanol and is also engaged in the generation of power.
Its revenue has grown in recent times mainly because of increase in sugar sales from Rs 2,682 crore in December 2008 quarter to Rs 9,257 crore in December 2009 quarter. The company's sales underwent a major increase in 2008 when it increased its crushing capacity.
However, the increased share of sugar manufacturing from cane in the past four years has made the company vulnerable to fluctuations in the availability of sugarcane. Growth in sugarcane production depends mainly on two factors - land and water - and the availability of both will be a concern in future. Increasing cane prices have caused the company's core raw material expenses to rise. To reduce its dependence on domestically available sugarcane, it recently acquired a Brazil-based sugar manufacturer, Equipav SA. Brazil is the world's largest producer and exporter of sugar. This takeover is expected to insulate SRS from unfavourable movements in domestic cane prices.
Lanco Infratech
Lanco Infratech is engaged in infrastructure development and in engineering, procurement and construction (EPC). Through its wholly owned subsidiaries, it is also present in the power sector.
The company's total order book on December 31, 2009 totalled more than Rs 20,000 crore, which is about five times its FY09 sales of Rs 4,051 crore. This provides strong visibility on the company's revenue.
The country needs to upgrade its inadequate infrastructure to support the targeted 9 per cent growth for FY11. The government has been allocating more funds for infrastructure development, which is expected to benefit this infrastructure stock.
Torrent Power
With a significant demand-supply mismatch and 10 per cent shortfall in electricity supply in February 2010, there is a lot of scope for power companies to grow. To achieve “Power For All by 2012”, nearly 30 per cent more capacity needs to be added over the current installed capacity.
Torrent Power is in the business of generation, transmission and distribution of power. The company has adopted a two-pronged approach of both buying existing distributors and building its own power generation capabilities. It has been aggressively entering into tie-ups with state governments to develop new generation facilities and for the expansion of existing facilities. It also has the lowest transmission and distribution (T&D) losses (approximately 10 per cent ) in India.
In order to reduce transmission and distribution loss, UP State Government decided to bring in private players. Torrent Power has been a major beneficiary of this initiative. It has also obtained the distribution licences for Ahmedabad, Gandhinagar and Surat. Through an additional investment of Rs 1,500 crore, the company plans to go in for phased capacity expansion of its Sugen plant by 3,000 MW. This will create the country's largest gas-based generation facility at a single location - 4,500 MW. Due to its expansion drive, the company's interest cost has been rising, but it still enjoys a high interest coverage ratio of more than four times.
Educomp
Educomp is India's largest technology-driven education company. It uses digital content for teaching and learning. It operates through four business segments: smart-class, instructional and computing technologies (ICT), professional development, and retail. The company aims to address student needs at every stage of education. It has been on the fast track, making acquisitions and striking new public and private partnerships. Recently it acquired a popular education portal, Studyplaces.com, which provides information to students about higher education in USA, UK, India and other countries, adding to its earlier acquisition, learnhub.com. Together they will make one of the largest portals for students heading abroad.
Through its 50:50 joint venture with UK-based Pearson, Educomp plans to launch 100 centres that will offer vocational training in tier-II and tier-III cities. It also plans to open 75 Leap Centres in FY11 that will provide coaching to students preparing for engineering exams.
Mphasis
According to Nasscom, India's IT and BPO exports are projected to grow at 13-15 per cent in FY11. Next fiscal will see greater public spending on e-governance, in addition to private automation demand in retail, healthcare and BFSI (banking and financial services industry).
Mphasis is a subsidiary of Hewlett-Packard (HP). It provides end-to-end technology solutions to companies in capital markets, insurance, healthcare and telecom. Its association with HP has helped its growth in a big way. HP has also been leveraging Mphasis' strength in application development and BPO. The association with HP has also helped the company expand and has ensured sustained deal flow. The company is virtually debt free.
A concern, however, is its high revenue dependency on HP. With more than 50 per cent of its revenues now accruing from HP or its clients, Mphasis is making an effort to reduce this dependency.
- On the fast track
- 3-year CAGR in net sales > highest 3-year CAGR in net sales of Sensex companies
- 3-year CAGR in EPS > highest 3-year CAGR in EPS of Sensex companies
- Consistent increase in net sales and EPS for the past three years
- Interest coverage ratio > 2x
- Debt-equity ratio < 2x
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