Which Stocks are the likely candidates to make it to the Sensex in the next 5 years?
Recently, there was an article in The Economic Times about which stock they think are likely to make it to SENSEX by the year 2020. The article mentioned criteria like growth, more disposable income etc. that would drive the growth for the next 5 years.
“One key factor is the speed with which consumer focus will shift to branded and high-priced products, also called premiumisation. A study of global markets shows that rising per capita incomes led to a significant increase in the consumption of premium products – cars, motorcycles, apparel, watches and consumer staples. “ says the article.
It mentioned high growth companies like TTK Prestige, Page Industries and Nestle as the beneficiaries over the next five years and likely to be included in the index.
Today, let’s briefly analyze these companies to see if it makes sense to invest in them, considering that they are indeed growing very rapidly.
“TTK Prestige Limited has emerged as India’s largest kitchen appliances company catering to the needs of home makers in the country. It has transformed itself from a pressure cooker company to a ‘total kitchen solutions’ provider, catering to the needs of home makers in the country.” The company is indeed a household name in India. As the disposable income grows, more and more of their products are purchased, even in rural areas.
Mr. Jagannathan, the executive chairman has been with the company since 39 years. Mr. Raghunathan, vice chairman has been with the company since 20 years. Mr. Kalro, the MD, has been with the company since 30 years. Clearly, these gentlemen have shown that they can manage a fast growing company.
However, the last year has not been that great for TTK. 1-year sales growth is less than 8% and 1-year net profit growth is -15%.
Against this backdrop, the current PE is just about 50. This means, buying the shares at the current price means paying Rs. 50*100 = 5000 for each Rs. 100 of earnings. If the earnings grow at 40%, Rs. 100 of today’s earning will grow to Rs. 275 in 3 years, at which point the current valuation looks justifiable.
In addition TTK Prestige is a debt free company.
However, one or two more bad quarters, and the valuation will look very lofty. If you buy TTK prestige, you are betting on the fact that the company will start growing rapidly again.
At current valuation this is not a value stock or even a GARP stock. The current market cap is about 5100 Cr. Hence there is still a lot of space to grow.
For my value averaging / value investing portfolio, I will skip this stock, but keep an eye on its valuation.
Page industry is also a high growth company. It is the exclusive franchisee of JOCKEY International Inc. for manufacturing and distribution of the JOCKEY® brand Innerwear/Leisurewear for Men and Women in India, Sri Lanka, Bangladesh ,Nepal and UAE. Page Industries is also the exclusive licensee of Speedo International Ltd. for the manufacture, marketing and distribution of the Speedo brand in India. Page has been in business for the last 20 years.
Page industry trades at a lofty PE of 77. It is justifiable to some extent because of the strong growth numbers. 3-year CAGR Sales and Profits growth are above 35%. 1-year Sales and Profit growth is also above 35%. ROE and ROCE are extremely good at 58 and 61 respectively. Debt equity ratio is manageable at 0.5.
The current price is justifiable for the current growth rate. However, one or two slow quarters and the stock could come crashing down. This is another stock which is really great, but I do not have the guts to pull the trigger. Truth be told, I did the same thing with Google right after it went public, and still regret it even after 12-13 years. My justification (to myself) is, I am not chasing high growth; I am building a stable portfolio that consistently beats inflation by 3-4% annually.