As we all know, there are 2 factors which are largely responsible for share price performance of any company over the long term, i.e. valuation and EPS(earnings growth). If we can find some companies which are cheaper(15-20 P/E) and growing PAT at 25%+ rate, it might turn out to be big wealth creator.
Coming to PAT growth, they are 3 drivers for PAT growth: topline growth, margin expansion and debt reduction. If we have some company with all 3 triggers, PAT growth will be much higher than topline growth. And if by chance market re-rates it, share price performance will be way better than EPS growth.
I am trying to find such companies which can have all these triggers:
Revenue growth > 15%
Margin expansion
Debt reduction (not a must)
P/E < 15-20
I came across 3 companies where these triggers could be there:
Shankara building products: guidance of 25-30% topline growth, margin improvement (0.5-1% YoY),
P/E lower than the 3yr and 5yr averages.
Talbros Automotive: guidance of group revenue of 2200Cr, margin of 15-16% by FY27 as export share
will increase, P/E rerating already played since the time i started buying at P/E of 15.
Goodluck india: guidance of 5000Cr revenue by FY26, margin improvement as value added product
share is increasing, debt reduction and P/E at 24 which is already played out but can be further re-rated.
We might not find companies with low P/E right now as market has run up a lot but this will help us in being ready with watchlist and as and when opportunity arrives, we can pounce on it.
I have used P/E as it’s easier to calculate expected returns from the P/E calculations. This won’t be applicable to banks and NBFCs.
Please correct if there are any mistakes and please give your suggestions. Thanks
Objective of starting this thread is to find out companies where possibilities of CAGR returns in share price is much higher than sales growth.
Most of the companies where sales growth guidance is 20%+, have already run up and margin of safety is not there. There is already a thread for such companies: Companies with 20%+ growth guidance for next few years.
What I am trying to find out is companies where sales growth maybe negligible or in single digit, but EPS growth can be north of 20%+ and available at cheaper valuations. Companies mentioned in my starting posts are those where EPS growth will be faster than topline growth but their guidance is also on the higher side only.
There are some companies which are cyclical/turnarounds where sales growth may not be much but due to margin expansion EPS can grow very fast and that could lead to rerating. Here is one example:
Sportking India: Margins seems to be bottomed out, some improvement seen in last quarterly results. They have done peak margins of 30%. If margins go back to even 20%+, EBIDTA can almost triple even if sales are flattish. Also if they reduce debt, then it will significantly improve PAT. This company is highly cyclical, we have to keep allocation in check. Discl: Invested.
Any views are welcome, I am still in learning stage only and trying to figure out the investing world.
Another company which is falling under this category is Angel one. Though regulatory changes are big overhang for the company but it’s growing at blitz scale.
Revenue growth 70%+.
PAT growth 30%+.
PATH growth is slower due to higher Marketing expenses (mostly due to IPL) and addition of new business which are not contributing to topline. I feel PAT margins can increase once other verticals start contributing.
Trading at P/E of 15 which is lower than median P/E of 20.
