In the last issue of Wealth Insight, under the Stock Ideas section, we had generated a list of companies that had stellar track records and were leaders in their segments. That selection was called “blue-blooded blue chips”. In this issue we shall focus on large-cap and mid-cap stocks that have grown their earnings per share (EPS) rapidly every year for the past five years, and are also low-priced. We shall call this selection “low-priced growth stocks”.
The rationale behind this selection is simple: EPS growth is the prime driver of stock prices. But fast growth companies also come at a hefty price tag. One of the ways to avoid paying too high a price for growth stocks is by looking up its price-earnings to growth (PEG) ratio. Let us turn to the screening criteria we have used for selecting these stocks.
The initial universe from which we have chosen these stocks is BSE 500 companies. The most important characteristic of this set is that the companies herein have been able to consistently increase their EPS over the last five years. In addition, their EPS growth rate has been high - a five-year compounded annual growth rate (CAGR) of more than 30 per cent.
For this selection we permitted a higher then normal PEG ratio of 1.5 times. By allowing this higher PEG, we were able to include those stocks that have maintained a high growth momentum in the past and hence command a high valuation.
To ensure that these companies are able to meet their interest-payment obligations, we have tested them for adequate interest-coverage, and not-too-high debt-to-equity ratio.
Altogether a list of 14 stocks met all our screening criteria.
Bharti Airtel. A group company of Bharti Enterprises, it is among Asia's leading integrated telecom service providers with operations in 18 countries across Asia and Africa. The company has four strategic business units - Mobile, Telemedia, Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh. The Telemedia business provides broadband, IPTV and telephone services in 89 Indian cities. The Digital TV business provides Direct-to-Home TV services across India. The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to telcos.
Recently, the company signed a deal with Kuwait-based Zain Telecom to buy its African business for $10.7 billion, the largest ever telecom takeover by an Indian firm. With this deal Bharti Airtel is set to become the world's fifth largest wireless company with operations across 18 countries. The stock of the company is currently trading at a 12-month trailing price-to-earnings ratio (P/E) of 11.06.
Blue Star. This company is primarily into central air-conditioning. The company also offers electrical contracting and plumbing, and fire fighting services. Other businesses include marketing and maintenance of high-tech professional electronic and industrial products.
It has business alliances with entities such as Rheem Mfg, USA; Hitachi and Jeol, Japan; Eaton-Williams, UK and Thales e-Security, UK. The company has manufacturing facilities at Thane, Dadra, Bharuch, Himachal and Wada in India.
Its order book stood at Rs 704 crore in Q4FY10, representing a 43 per cent increase over the order book size of Q4FY09. The company plans to diversify into power and steel with a planned capital expenditure of Rs 30 crore in FY11.
Coromandel International. Its key business segments include fertilisers, speciality nutrients, crop protection and retail. It is part of the Rs 15,907 crore South-based Murugappa Group.
It has multi-location production facilities and manufactures and markets a wide range of phosphatic fertilisers, crop protection products and speciality nutrients such as sulphur pastelles, water soluble fertilisers, micro nutrients and organic fertilisers. It also provides agri input solutions to farmers and sells lifestyle products through its rural centres. The company is eyeing strong growth in the non-subsidy fertiliser business. It aims to increase its revenues from this segment to over Rs 3,000 crore in the next three years.
The company has consistently increased its return on capital employed (ROCE) over the past five years. In FY09, it posted an ROCE of 26.2 per cent. The stock is currently trading at a 12-month trailing P/E of 12.7.
Exide Industries. The company manufactures a wide range of storage batteries ranging from 2.5 Ah to 20,400 Ah capacity, covering a broad spectrum of applications. The company is India's largest power storage solution provider and one of the biggest in South-East Asia. It also manufactures submarine batteries. It has six factories located across India - two in Maharashtra, two in West Bengal, one in Tamil Nadu, and one in Haryana.
Currently, it has a domestic market share of 45 per cent in industrial, 72 per cent in auto original equipments manufacturing, and 73 per cent in replacement auto.
The company has entered into technical collaboration agreements for certain new products like ISS Batteries for supplying to the automotive sector. It is expanding its production capacity by setting up a new plant at Ahmednagar, Maharashtra. The company expects to incur capital expenditure of atleast Rs 350 crore during the current financial year.
Mphasis. An HP-owned company, it delivers infrastructure technology outsourcing, application services outsourcing, and business process outsourcing services. It services clients in domains such as financial, manufacturing, healthcare, communications, media and entertainment, government, transportation and logistics, energy and utilities, and consumer and retail industries worldwide.
Recently, the company acquired Fortify Infrastructure Services, a global provider of offshore based Remote IT Operations and Management (ROM) Services. This move is expected to boost its non-HP revenue in remote infrastructure services. To further expand its infrastructure outsourcing capability, the company recently launched its global command and control centre in Pune. This will enable it to extend its services to customers in India and in global markets including the US, Europe and Asia-Pacific-Japan.
The stock has exhibited consistent growth in ROCE over the past five years and is currently trading at a 12-month trailing P/E of 12.8.
Gujarat State Petronet. The company, a Gujarat State Petroleum Corporation (GSPC) subsidiary, develops energy transportation infrastructure and connects natural gas supply basins and LNG terminals with growing markets. The company is also focusing on developing a systematic and seamless pipeline network across Gujarat, connecting various suppliers and users.
In future, the company intends to expand its grid to 2,200 kms so that all the 25 districts of Gujarat are connected.
Sesa Goa. It is the country's leading private sector iron-ore producer and exporter, with mining and processing facilities at various locations in India. It currently has access to 240 million metric tonnes (MMT) of iron-ore reserves. For more details refer to our last issue under the Stock Ideas section.
Bharat Heavy Electricals. It is a leading engineering and manufacturing enterprise in energy-related and infrastructure sector. The company manufactures over 180 products under 30 major product groups. Its operations are organised around three business domains - namely power (including transmission), transportation and renewable energy.
The company had an order book of Rs 1,44,312 crore as on 31 March, 2010. It plans capital expenditure amounting to Rs 1,000 crore in 2010-11. Indian Railways is setting up special purpose vehicles and public private partnerships (PPP) for new factories in Bihar and West Bengal. The company has already participated in some of the tenders and plans to participate in future tenders as well. It is currently trading at a rather high 12-month trailing P/E of 27.4.
Crompton Greaves. The company is engaged in the design, manufacturing and marketing of technologically advanced electrical products and services related to power generation, transmission and distribution. The company also undertakes turnkey projects from concept to commissioning. It is part of the US $4 billion Avantha Group.
The company is organised into three business groups - power systems, industrial systems and consumer products. Presently, the company offers a wide range of products such as power and industrial transformers, HT circuit breakers, LT and HT motors, DC motors, traction motors, alternators or generators, railway signalling equipment, lighting products, fans, pumps and public switching, transmission and access products.
It entered into an arrangement for the acquisition of Power Technology Solutions Limited (PTS) based in United Kingdom (UK) at an approximate enterprise value of £30 million (about Rs 210 crore) during the fourth quarter of 2010. PTS is a high voltage electrical engineering company which provides consultancy, technical and engineering support to Regional Electricity Companies (RECs). The company is currently trading at a rather high 12-month trailing P/E of 27.2.
Redington. The company is engaged in providing supply chain infrastructure management and management information system solutions. It provides supply chain solutions for IT and non-IT products. The company operates and distributes its services across Asia Pacific, Middle East and Africa.
The debt-to-equity ratio of the company stood at 0.47 at the end of FY09. It has registered a five-year CAGR of nearly 35 per cent in EPS. The stock is trading at a rather high P/E of 30.3.
Siemens .Siemens AG, the German parent, holds 55.18 per cent stake in Siemens. It is in the field of electrical and electronics engineering. It deals in business segments like energy, healthcare, information and communication, lighting and transportation.
The company provides a range of products and services. In the energy sector, it offers expertise in areas ranging from power plants to metres. In industry sector it builds airports, and also produces contactors. In transportation, the company delivers complete high-speed trains, right down to safety relays, whereas in lighting, it illuminates large stadiums and also manufactures small light bulbs. In healthcare, the company executes complete solutions for hospitals and also makes hearing aids. In the communication segment, it provides a complete spectrum of products from large public networks to mobile phones. Some of the products manufactured or traded by the company are switchgears, electric motors, generators, control boards, x-ray equipment, electro-medical equipment, measuring and control instruments, and accessories.
Siemens plans to invest more than Rs 1,600 crore in India over the next three years. A major part of this will be invested in establishing its footprints in the renewable energy market and to expand its presence in value for money segment. It is currently trading at a rather high P/E of 26.7.
Titan Industries. It is the world's fifth-largest integrated watch manufacturer. The company was formed as a joint venture between the Tata Group and Tamil Nadu Industrial Development Corporation. Its businesses include watches, jewellery, eyewear, and precision engineering. For details refer to our last issue of Wealth Insight.
On the valuations front, the stock is trading at a rather high P/E of 38.9.
Torrent Pharmaceuticals. The company is owned by the Torrent Group. Its products belongs to segments such as cardiovascular drugs, central nervous system drugs, gastrointestinal drugs, anti infective drugs, anti-diabetic drugs and pain management drugs. The company's research and development centre has collaborations with Novartis Pharma AG (Switzerland), Astra Zeneca (Sweden and United Kingdom) and National Chemical Laboratory (Pune). The stock is currently trading at a P/E of 20.9.
Voltas. A part of the Tata Group, Voltas offers engineering solutions in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, mining and construction equipment, materials handling equipment, water management and treatment, cold chain solutions, building management systems, and indoor air quality. It is actively engaged in turnkey projects in fields such as electro-mechanical works comprising HVAC, electrical systems for buildings, plumbing, fire fighting, ELV and specialised systems, building security and other utilities.
The domestic order book of the company has increased to nearly Rs 1,500 crore while the international consolidated order book stood at around Rs 3,200 crore at the end of Q4FY10. The company is eyeing projects in Saudi Arabia, Oman (new joint venture signed) and in Hong Kong. Diversification into new regions may lead to significant order inflows during FY11. The stock of the company is trading at a P/E of 20.4. WI (P/E figures are as on June 11, 2010)