Are you chasing growth? Or are you satisfied with historical returns? Well, if you belong to the former camp then you are heading in the right direction as this is something that was elusive from the balance sheets of India Inc for the past 3 years.
Although December quarter earnings were not blockbuster, they did display green shoots of growth for India Inc, which is a positive sign. Hence, the target to achieve double-digit growth in FY19 could become a reality soon.
To find out stocks that are displaying signals of growth we need to zero down on stocks that are displaying high Earnings Per Share (EPS) in the near future. This is one important parameter in filtering stocks in the long term.
Before we go to stocks, let’s understand what Forward EPS is and why is it important?
A forward EPS is purely based on analyst projections for certain period of time in the future, typically the coming two-four quarters. But, most of the information is practically in the current price, because markets usually factor everything in advance.
“The value of a company is the present value of expected future cash flows generated by it. Hence future earnings/cash flows are important to arrive at a fair value. The forward EPS is derived out of the expected profit and denotes among other things as to whether the company is expected to grow in terms of bottom line and at what rate,” Deepak Jasani, Head – retail research, HDFC securities told Moneycontrol.
“This can be compared with the growth rate of its peers or the growth rate of broader indices including the Nifty 50 or Nifty 200. This will help give appropriate valuation multiple to the company,” he said.
Most investors track forward EPS since they want to know about the future earning a potential of the company. But, investors will have to check whether higher earnings expectations in FY19 are already discounted in current prices before getting excited about buying them.
Stocks with higher earnings potential according to Reuters estimate include the likes of Graphite India, Raymond, Magma Fincorp, Future Life, GE Power, Quess Corp, Welspun Corp, Century Textiles, Thomas Cook, Tata Motors and Avanti Feeds among others.
The sharp growth rate seen in these stocks from FY17 EPS and FY19 EPS could be due to a number of factors including a low base in FY17 and some of them have already run up in the last one year, highlight experts. Hence, other factors should be considered before making any investment decision.
“It is extremely important to look at the valuation paid for a stock. Generally, stocks with extremely high P/E require perfection to deliver. In rare situations, there are genuine companies that demand high multiples because of their unique competitive positioning; however, the common outcome usually is that most companies struggle to deliver from high valuations,” Sunil Sharma, CIO – Sanctum Wealth Management told Moneycontrol.
“The final point is that investing isn’t as simple as purchasing stocks with high earnings growth. It is extremely important to understand the macro environment, the position of the economy in the business cycle. In a growing economy, these stocks will likely outperform. In a peaking economy or a peaking market, these stocks could drop sharply,” he said.
What should investors do?
In a rising market like 2017, almost everything performed well. However, today’s environment is more challenging and investors need to understand business models as valuation does look stretched, suggest experts.
“In market, investors are more interested in future earnings because our market runs on expectation and try to discount future events,” Goldi Jain, AVP – Advisory, Sharekhan told Moneycontrol.
“Most of the stocks are not in our coverage hence we can’t comment on it. However, these shares have run up significantly in the last 1 years, therefore one should take informed a decision by analyzing company on various parameters and not make investment decision just based on Forward EPS,” he noted.moneycontrol