Last Updated – December 2020
In this article, we will cover
– What are Growth stocks?
– Reasons for faster growth rate in the value of growth stocks
– Summary Table for best Growth Stocks to buy now
– Characteristics of Growth companies
– Growth stocks vs Value stocks
– Factors to consider to identify the best growth stocks to buy now
– Portfolio Companies
– Watch our video on how to analyse and pick Growth stocks for investments
What are Growth Stocks?
Growth stocks are stocks which are expected to grow at a faster rate than the industry average or the average rate of the industry in the given country. Growth stocks tend to be a bit more expensive than the average stocks, but the best growth stocks to buy can deliver humongous returns to the extent of creating a massive fortune, and completely overshadow the premium price tag.
The best stocks to buy for long term growth are stocks that generally does not distribute the earnings in the form of cash among its shareholders but plough back the gains in the company to facilitate or accelerate growth, and in the process provide huge returns to the shareholder. The best growth stocks to buy now are stocks that investors anticipate will give them considerable value in the form of capital gains when they eventually sell their stocks in the future.
Reasons for faster growth rate in the value of growth stocks
Faster growth means that the revenues and profits of the company are expected to grow faster than the industry average due to multiple factors such as:
- The company operates in an industry which is growing at a faster than average growth rate driven by increased penetration or adoption rate among its customers.
- The company has innovative products and/or services which are catching up in the market faster than their peers, thereby giving the company a competitive advantage over peers.
- The company employs new technology which is not only more productive but also more efficient than existing technology, thereby giving the company an edge over others and is driven by increased adoption.
The above-mentioned are just a few reasons among many which can result in companies growing at an accelerated rate.
Summary Table for best Growth Stocks
|COMPANY NAME||NSE CODE||BSE CODE||CMP||INDUSTRY||RATING||M-CAP (INR CR)|
|Bajaj Finance||BAJFINANCE||500034||₹ 4,875.4||Finance (NBFC)||4.5||₹ 316,656.0|
|Britannia Industries||BRITANNIA||500825||₹ 3,648.2||Packaged Food||4||₹ 89,669.0|
|Muthoot Finance||MUTHOOTFIN||533398||₹ 1,172.0||Finance (NBFC)||5||₹ 48,566.0|
|Petronet LNG||PETRONET||532522||₹ 262.1||Oil Marketing & Distribution||3||₹ 38,618.0|
|Coromandel International||COROMANDEL||506395||₹ 791.5||Fertilizers||2||₹ 22,956.0|
|Polycab India||POLYCAB||542652||₹ 1,000.6||Electrical Equipment||1||₹ 15,533.0|
|Gujarat State Petronet||GSPL||532702||₹ 221.3||Utilities||3||₹ 12,252.0|
|Deepak Nitrite||DEEPAKNI||506401||₹ 844.6||Commodity Chemicals||2||₹ 12,583.0|
|Avanti Feeds||AVANTI||512573||₹ 536.8||Food Products||3||₹ 7,487.0|
|Alkyl Amines||ALKYLAMINE||506767||₹ 3,965.6||Specialty Chemicals||0.5||₹ 7,859.0|
|Caplin Point Labs||CAPPL||524742||₹ 492.8||Pharmaceuticals||0.5||₹ 3,802.0|
|IOL Chemicals||IOLCP||524164||₹ 781.6||Pharmaceuticals||0.5||₹ 4,400.0|
|Bharat Rasayan||BHARATRAS||590021||₹ 9,539.4||Agrochemicals||0.5||₹ 3,963.0|
|KEI Industries||KEI||517569||₹ 430.2||Electrical Equipment||0.5||₹ 4,336.0|
Characteristics of Growth companies
Growth companies offer returns better and faster than peers and hence have different characteristics as compared to the broader industry, such as:
- Growth stocks usually trade at higher price multiples and valuations among peers, being valued at a higher premium justified by the better returns offered by these companies. Price ratios include P/E, EV/EBITDA and P/B ratios among others.
- These companies usually do not declare dividends and even if they do, the dividends are very low. The reason for this being that these companies usually prefer investing their surplus cash into the business as it gives higher returns to shareholders rather than distributing the cash among them. Therefore, investors usually earn capital gains from the rise in their share price.
- Growth companies usually display a significantly higher growth rate because they tend to possess some kind of competitive advantage over other companies in the same industry. The competitive advantage gives growth companies a unique selling proposition (USP), which helps them sell and grow better than other companies within the same industry.
- Growth stocks usually trade with a stronger upward momentum over a longer term as compared to peers. The share price moves with the velocity as it adjusts to faster growth in revenues and profits earned by the company. While the momentum is strong, these companies may also exhibit more volatility among peers with average growth rates.
- Since growth companies usually enjoy a competitive advantage over other companies within the industry, they tend to enjoy a loyal, growing consumer base. The USP that such companies enjoy over their competitors ensures a constantly growing consumer base, which contributes to their increasing growth rate.
- While growth stocks are a very attractive investment option and can generate substantial profits over the long term, the level of uncertainty surrounding them in the short term contributes to a high-risk factor, thereby making them riskier as compared to more stable companies with average growth rate.
While growth stocks cannot sustain their rate of growth forever, as technology and trends change these companies stabilize their growth rates, these companies can provide investors with higher returns for a longer term such as 10-15 years as they penetrate and gain market share at a fast rate and generate strong profitability as the market around them develops and matures.
Growth stocks vs Value stocks
A very popular argument is of comparing growth stocks vs value stocks as they exhibit completely different characteristics when being evaluated. As mentioned earlier, a growth stock is characterized by higher price multiples and valuations and low dividend payouts while exhibiting a stronger and more volatile momentum in the market. As compared to this, value stocks trade at a lower price multiple, sometimes even lower than the industry average, while generating consistent and stable cash flows and regularly paying dividends to investors, ensuring consistent cash returns for shareholders.
Factors to consider to identify the best growth stocks to buy now
An investor needs to assess several factors to identify growth stocks for the long term which can consistently generate higher than average returns while ensuring that they sustain such growth over a longer period of time, supported by their business strategy and strong financials.
Assess the Sector/Industry Segment of the Company
An investor needs to first look at the sector the company currently conducts its business in. This is crucial to understand as the sector which has strong growth potential can offer higher growth to the investor. Strong growth potential can come from having scope to either expand or penetrate further into the market or both. If a sector also provides more headroom for increased pricing over time as it expands, that will only be beneficial for the given sector and the companies in it. The investor should also assess the number of participants in the sector and the intensity of competition to determine the growth opportunities for the company.
Industry Potential to Provide Growth
An investor needs to assess the position of the company in the supply chain of its industry and whether it can generate enough returns between its inputs and outputs to fuel growth. In the most basic sense, value addition is the difference between the value of raw materials and the value of finished goods. It is the value of the manufacturing and marketing processes that a company uses to convert raw materials into a finished product that it sells under its brand name to the final consumer as it adds value to the product/service it sells. For example oil marketing companies usually don’t have a large markup nor offer strong growth over the oil prices which move as per the regulation and crude oil prices, thereby making it a volume game and not one that adds much value on a per unit sale. Oil industry is also a pretty stable industry and exhibits a growth rate similar to India’s GDP growth rate. On the other end, the majority of participants in the NBFC sector have seen a higher than normal growth both in terms of financials and stock price movement.
Return Generation for Shareholders
To assess this aspect, an investor needs to calculate certain ratios to determine the return generation as well as the quality of earnings. One such ratio is the ROCE (Return on Capital Employed). The formula for ROCE is EBIT/ (Total Assets – Current Liabilities). The ratio aims to compute the operating earnings a company generates on the capital it has invested into the business. The ratio indicates the efficiency with which the company utilizes its capital and the return it generates on that capital. While this ratio is a good indicator, it should be used in conjunction with the cost of capital applicable for the company to determine the net return earned by the company. Another ratio to look at is the ROE (Return on Equity) which basically tells an investor how much of the profit is attributable to the shareholder and the quantum by which it grows the value of the company. This ratio is to be assessed in conjunction with the Cost of Equity, which is determined by assessing the required return on equity the investors have. The higher the ROE is over the COE, the better it is.
A higher ratio indicates stronger return generation from these companies which is critical in identifying growth stocks that are characterized by higher return ratios as well as higher price multiples over the industry average.
Among the most important factors in evaluating a business is the quality of its management. Efficient management teams will not only see through the various challenges facing an industry and navigate through them, but also transform their business models towards more attractive industries and higher growth of the business. Assess whether the board of directors and the management are different from each other as the BOD is responsible for larger company decisions while the management is engaged in the daily activities. Hence, the process of running a company involves balancing relationships and interests between the board, the promoters, the management, minority shareholders, auditors as well as other stakeholders. The efficient handling of this balance indicates the strength of corporate governance. The higher and better the standards of corporate governance are, the better protected the minority shareholders of the company are and can be assured that the management will act for the benefit of shareholders. This can be ascertained by going through the annual report.
This is key for growth companies as these companies usually operate in high growth, high risk industries and a stronger management team will not only ensure maintaining a strong rate of growth over a longer term and delivering strong financial performance, but also ensure that the company is strong enough to weather through difficult times if any.
Given its strong fundamentals, India’s chemical industry is expected to keep growing at a fairly strong pace after absorbing the shock in FY 2020 due to COVID-19. Also, the pace for the chemical industry’s adoption of technology continues to be on the rise. Looking towards an optimistic future, India’s chemical industry is set for sustained growth receiving impetus with capital investment and affirmative Government policies. Deepak Nitrite is a prominent chemical manufacturer in India. The company manufactures Basic Chemicals, Fine & Specialty Chemicals, Performance Products, and Phenolics. The company supplies its products across a diverse range of industries and big names such as Reliance Industries, Bayer, BASF, Hindustan Petroleum, Emami and Good Year among others, indicating a strong diversified portfolio of customers.
On financials, the company has an excellent record of delivering above average returns. The company delivered a strong growth in Net Profit at 63.3% CAGR over the past 5 years. The company has also delivered a strong ROE of 46.6%, indicating a strong return for the shareholders of the company. Despite the strong growth in returns, the company currently trades at a P/E ratio of 21x which values the company attractively among peers.
Deepak Nitrite faces the risk from regulations regarding chemicals changing as certain chemicals may be controlled or banned under the law, thereby affecting the revenues and profits of the company.
Agrochemicals are chemicals that help boost crop productivity through prevention of destruction of crops by pests such as insects, weeds, fungus, etc. The global economy, in general, and Indian, in particular, is facing a multitude of challenges such as to feed an ever-growing population, reducing arable land banks and dealing with adverse climatic changes. Under such circumstances, the traditional methods of growing more crops are rendered inadequate. There is a growing acceptance to launch advanced agrochemical solutions to achieve higher field productivity.
Indian agriculture is on a growth path, with an increase in investments and private funding in the past few years. The sector is expected to grow with better momentum in the next few years, owing to an increase in investment in agricultural infrastructure such as irrigation facilities, warehousing and cold storage. Factors such as reduced transaction costs, time, better port gate management and fiscal incentives will also contribute to this upward trend. Furthermore, the increased use of genetically modified crops is also expected to better the yield of the Indian farmers. Advancement in agriculture and allied sectors is positive for inclusive economic growth at the national level. India is the largest producer, consumer and importer of pulses in the world. As farmers find themselves in a more comfortable situation, the agriculture sector will gather further momentum.
Apart from the loyal customer base that the Company is enjoying since the last several years now, many newer domestic as well as overseas customers are added to their portfolio during the year & same is expected to increase in near future due to their commitment of supplying high quality products in a time bound manner. Moving ahead, Bharat Rasayan remains poised to implement key initiatives across functions to enable itself to face market challenges and leverage the emerging opportunities. It remains focused on improving revenue growth and profitability, driven by high growth segments such as seeds and nutrients.
The company has delivered strong financial performance over the years, while delivering a strong Net Profit growth of 38.2% CAGR over the past 5 years. The company has delivered a strong ROE of 32.9% for FY20 as well. It has also been growing its operating profit margins from 6% in 2010 to 19.5% in 2020, driven by cost optimization and operational efficiency. The company trades at an attractive valuation of 27.4x P/E given the strong growth delivered by the company.
Despite the strong growth drivers, Indian agrochemicals industry faces challenges in terms of low awareness among a large number of end users spread across the geography. Managing inventory and distribution costs is a challenge for the industry players in the wake of volatility in the business environment.
The Government’s huge push to develop infrastructure will fuel the need for quality cables and wires, which will boost the development of the C & W (Cables and Wires) industry in India. As per the industry report by Yes Securities, the C&W industry grew by a whopping 23% CAGR in volume between FY 2013-14 and FY 2017-18 to touch 14.5 million kms. In terms of sales value, it recorded 11% CAGR over the same period. The market size of the C & W industry is expected to grow by 15% CAGR from ₹525 billion in FY 2017-18 to ₹1,033 billion in FY 2022-23. This is primarily due to abundant growth in the affordable housing segment and increasing electrical product-related distribution activities.
Power and Infrastructure form the most critical end-user industry of C&W and are also crucial for the sustained growth of the C&W industry. As per the Economic Survey 2018-19, total installed capacity of power in India has increased to 356.1 GW (Gigawatt) in 2019 from 344 GW in 2018.
KEI Industries Limited is amongst India’s top three wire and cable manufacturers, with a comprehensive product portfolio ranging from housing wires to Extra High Voltage (EHV) cables. The company has been integrated into Engineering, Procurement and Construction (EPC) services for power and transmission projects as well. The high-quality solutions have made the company a trusted and preferred provider in the Retail, Institutional and Export segments. It stands to benefit from multiple venues such as wire requirements from the Power & Infrastructure sector, which is touted to develop as the energy generation and distribution develops in India. Another segment of demand comes from rising development from Housing. Retail segment sales are also gaining more traction owing to faster offtake and higher margins for the company.
The company has performed well financially, with the company seeing a strong rise in the revenues as well as profitability, with revenues growing by 19.2% CAGR over the last 5 years while the Net Profits grew at an industry leading pace at 51% CAGR over the same period. The company has generated an average ROE of 22.8% over the past 5 years, indicating a consistent return for shareholders. While KEI has delivered a strong and consistent growth, the stock trades at a P/E of just 18.2x, indicating it being attractive, given the huge growth prospects it offers to investors.
The Company’s EPC and EHV segments are majorly exposed to government policy changes. The Company has major business involvement in power utilities, infrastructure, real estate and industrial sectors which are again cyclical in nature. Thus, its product revenue and demand are exposed to interest rate fluctuations and capex cycles which can affect the profit growth of the company.
The NBFC sector primarily entails lending activities such as consumer loans, gold loans, personal loans, etc. but are different from banks as they do not take deposits from people. These companies rather borrow money from one institution and lend it out to consumers, thereby earning the interest differential between its lending and borrowing activities. This segment has been seeing rapid growth as the country sees an increase in disposable income and shift towards consumerism by Indians.
Bajaj Finance primarily operates in the consumer lending space, wherein it gives consumers loans for personal consumption purposes. The company has therefore seen a massive rate of growth driven by a fast rate of adoption and penetration of their lending, driven by their strong network across the country. Bajaj Finance has delivered strong performance aided by a diversified product mix, robust volume growth, prudent liability management, efficient operating costs and effective risk management. With a standalone AUM of ₹116,102 crore and a consolidated AUM of ₹147,153 crore for FY20, the Company has emerged as one of the leading diversified NBFCs in the country today.
On financials, the company has delivered a strong ROE of 20.2% for the year while seeing a robust growth in Net Profits of 42.4% CAGR over the last 5 years. The company has also delivered a strong growth in the AUM at 27% CAGR on a consolidated basis as of 2020 (CAGR 35% for the nine months of FY20, with the decline coming in due to COVID-19) . Despite the strong profit and AUM growth, it has maintained the quality of the book with an industry leading low net NPA of just 0.65% for FY20 (consolidated), indicating that the loan book remains strong. Bajaj Finance employs a strategy of maintaining a longer duration for liabilities than assets, coupled with an optimal mix of borrowings between banks, money markets, external commercial borrowings and deposits which have helped the company effectively manage net interest margins (NIM) at 11.5% for FY20.
The company faces risk in case of defaults from customers, resulting in the deterioration of the AUM quality of the company. Another risk may emerge from the interest rate cycle movement, which may impact the NIMs of the company, and therefore the income earned. Investors need to carefully observe the interest rate nature as well as the overall economic condition to assess the performance of the company. Due to the onset of COVID-19, The financial industry has been under stress which is expected to affect financial companies due to moratoriums and increased defaults, which can affect the quality of the assets as well as the profits of the company. While the company commands a high quality book, the recovery from this situation is expected to be slower. Investors willing to take risk and hold on for the longer term can invest in the stock.
The FMCG sector is one of the most resilient and among the fastest growing segments in India. The food segment is among the fastest growing segments in FMCG, driven by rising penetration of processed food consumption driven by penetration in both urban and rural demand and rising disposable incomes of households in India. Britannia is one of the largest FMCG companies in India, with a portfolio across multiple products such as Biscuit, Bread, Cake, Rusk, Dairy and Adjacencies. Biscuits, from which the company derives over 75% of its revenues, is India’s largest food category and is considered as an essential, in practically every Indian family’s consumption basket. It is one of the most deeply penetrated categories in the country, reaching over 90% of the households.
The per capita consumption of biscuit in India is comparatively low at 2 kgs versus 10 kgs in certain developed countries. The low per capita consumption and high levels of penetration provide a good base to increase consumption through appropriate business strategies. Bread is considered as a staple food in many parts of our country. Consumer preference for healthy & premium products is providing significant opportunity in this category. The company derives about 15% of its revenues from this segment which includes bread and other bread based products. India is the largest producer and consumer of dairy products and currently contributes approx. 20% of the global production. In the past few years, the processed milk products market has witnessed sustained growth due to increasing urbanization, rising disposable income and proliferation of retail outlets beyond Tier 1 cities.
The Company uses the intrinsic strengths of its brands, innovation capabilities, strong distribution network and cost efficiency programs to maintain an edge among peers in the industry. While being well positioned with a strong management team, technology interventions and robust processes.
Financially, the company has delivered a robust set of numbers, with strong net profit growth of 20.1% CAGR over the past 5 years. It has also delivered a strong ROE of 32.5% while the ROCE stands at 37.4%, indicating a strong return on capital deployed by the company. Britannia has strong cash flow generation with the OCF/EBITDA ratio at 68.6% while OCF/NI stands at 87.5% as of FY2020. It trades at a P/E of 50.4x which is justified given the strong growth prospects the company has.
The company faces risk from any changes in trends towards its product offerings such as a trend wherein people move away from biscuits towards other products, thereby affecting the business of the company. Another risk the company faces is from any changes in food regulations which might cause it to change its ingredient and product mix, thereby possibly affecting its margins earned. Any impact on the input costs, such as volatility and rise in grain prices can also have an adverse impact on the company profits and result in a business slowdown as well.
Watch our video on how to analyse and pick Growth stocks for investments
In order to get exposure to best stocks for the long term, you need a total of ₹57,000 for the below curated portfolio as of 4th Dec, 2020.
|COMPANY NAME||WEIGHTAGE||CMP (as of 4th Dec, 2020)||NO OF STOCKS||AMOUNT|
The below table covers some of the most important factors while evaluating Growth stocks such as return ratios including RoE and RoCE, operating margins, sales and earnings growth and market cap among others.
|COMPANY NAME||NSE CODE||BSE CODE||CMP||INDUSTRY||RATING||MARKET CAP (INR CR)||NET WORTH (INR CR)||P/E||EV/EBITDA||ROE||ROCE||DEBT/EQ||REV GROWTH (5 YR)||NI GROWTH (5 YR)||OP PROFIT MARGIN||DIVIDEND YIELD|
|Bajaj Finance||BAJFINANCE||500034||₹ 4,875.4||Finance (NBFC)||4.5||₹ 316,656.0||₹ 34,285.0||70.5||27.0||20.2%||12.0%||3.6||37.4%||42.4%||59.3%||0.2%|
|Britannia Industries||BRITANNIA||500825||₹ 3,648.2||Packaged Food||4||₹ 89,669.0||₹ 2,674.0||50.4||34.6||32.5%||37.4%||0.9||8.1%||20.1%||18.5%||2.2%|
|Muthoot Finance||MUTHOOTFIN||533398||₹ 1,172.0||Finance (NBFC)||5||₹ 48,566.0||₹ 13,499.0||13.9||10.5||29.1%||16.0%||3.4||17.4%||36.4%||78.9%||1.2%|
|Petronet LNG||PETRONET||532522||₹ 262.1||Oil Marketing & Distribution||3||₹ 38,618.0||₹ 11,490.0||15.6||8.5||25.8%||28.1%||0.3||-2.2%||26.0%||14.2%||4.9%|
|Coromandel International||COROMANDEL||506395||₹ 791.5||Fertilizers||2||₹ 22,956.0||₹ 4,832.0||17.2||10.9||27.8%||26.4%||0.1||3.1%||21.4%||14.9%||1.5%|
|Polycab India||POLYCAB||542652||₹ 1,000.6||Electrical Equipment||1||₹ 15,533.0||₹ 4,214.0||20.3||13.8||22.6%||29.3%||0.1||13.4%||35.6%||13.0%||0.7%|
|Gujarat State Petronet||GSPL||532702||₹ 221.3||Utilities||3||₹ 12,252.0||₹ 5,490.0||6.6||4.0||55.7%||34.2%||0.4||63.0%||35.7%||29.8%||1.0%|
|Deepak Nitrite||DEEPAKNI||506401||₹ 844.6||Commodity Chemicals||2||₹ 12,583.0||₹ 1,840.0||21.0||13.2||46.6%||37.7%||0.4||26.1%||63.3%||25.5%||0.5%|
|Avanti Feeds||AVANTI||512573||₹ 536.8||Food Products||3||₹ 7,487.0||₹ 1,617.0||18.8||13.6||29.1%||36.6%||0.0||19.2%||26.9%||11.6%||0.9%|
|Alkyl Amines||ALKYLAMINE||506767||₹ 3,965.6||Specialty Chemicals||0.5||₹ 7,859.0||₹ 634.0||35.9||24.3||42.0%||41.1%||0.1||15.8%||33.0%||30.4%||0.5%|
|Caplin Point Labs||CAPPL||524742||₹ 492.8||Pharmaceuticals||0.5||₹ 3,802.0||₹ 1,056.0||16.9||10.7||30.8%||37.7%||0.0||37.9%||52.1%||29.5%||0.4%|
|IOL Chemicals||IOLCP||524164||₹ 781.6||Pharmaceuticals||0.5||₹ 4,400.0||₹ 1,095.0||9.9||6.5||56.9%||68.9%||0.0||37.6%||49.3%||31.8%||0.5%|
|Bharat Rasayan||BHARATRAS||590021||₹ 9,539.4||Argochemicals||0.5||₹ 3,963.0||₹ 645.0||27.4||17.4||32.9%||34.2%||0.1||22.6%||38.2%||19.5%||0%|
|KEI Industries||KEI||517569||₹ 430.2||Electrical Equipment||0.5||₹ 4,336.0||₹ 1,628.0||18.2||9.5||22.4%||28.1%||0.2||19.2%||51.0%||10.4%||0.3%|
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