Growth stocks dominate BSE200 multi-bagger list

7 of 10 stocks have seen a significant valuation re-rating in the past three years

While bellwethers CNX Nifty and S&P BSE Sensex scaled new highs on Thursday and have enriched investors, broader indices such as BSE200, which hit its all-time high levels earlier this month, have done better. Data points suggest investors who had bought into stocks in the BSE200 during the pre-election wave of 2014 would be richer on Thursday by a huge margin. If the BSE Sensex rose by 45 per cent from January 1, 2014, till date, the BSE200 index has gained over 65 per cent during this period. 

A finer reading of individual stock performances indicates 170 of 200 stocks in the BSE200 basket have seen an average price appreciation of about 170 per cent. While Bajaj Finance, TVS Motor, SRF, Eicher Motors, Ashok Leyland and Natco Pharma have seen their stock prices increase by 400–960 per cent from January 1, 2014, till date, Dalmia Bharat is a clear winner in the pack with gains of more than 1,377 per cent during this period. 

Not just that, the steep rally has resulted in 142 of the 170 stocks which figure in the list of gainers since January 1, 2014, to witness a significant re-rating in valuations. Bajaj Finserv (now at 8x price-to-book or P/B versus 4.8x in 2014), Max Financial (up from 1.8x P/B to 8.9x P/B), Cadila Healthcare (at 51x price-earnings or P/E versus 22.7x in 2014), Hindustan Petroleum (8.7x P/E versus 1.2x), UPL (49.6x P/E versus 26.9x), and JSW Steel (13.2x P/E versus 9.9x in January 2014) are a few of them. 

What is equally interesting and also offers comfort to investors is that the appreciation in valuations is backed by strong earnings growth. Of the 142 stocks which have witnessed valuation re-rating during this period, 135 stocks have seen good expansion in their earnings per share (EPS) from January 1, 2014, till date. This would include names such as IRB Infrastructure, Indraprastha Gas, LIC Housing Finance, Shree Cement, Muthoot Finance and Bharat Electronics, which have witnessed earnings per share (EPS) expansion of 22-70 per cent during this period. 

Pramod Gubbi, head of equities, Ambit Capital, sums up the logic behind money chasing these higher-valuation stocks. “Over the years, there is a structural shift in investor preference. Good quality stocks which can demonstrate growth are preferred over value stocks,” he said. Pankaj Pandey, head of research, ICICIdirect.com agreed with Gubbi and added this was the reason why India remained a preferred market for foreign investors despite the high valuations. “While the Nifty stocks may not demonstrate earnings growth, one needs to look into the broader market for the growth-oriented stocks. Therefore, growth over value has become the preference for investors across the board,” he said. 

But when asked if this phenomenon could continue Gubbi and Pandey said there weren’t many reasons to believe the narrative could change any time soon. “In an environment of no liquidity shortage, unless the capital expansion cycle revives, investors may continue to stay with high-growth stocks,” Pandey said. Gubbi felt the secular trend in favour of growth stocks may continue for a while. “Unless capacity utilisation picks up sharply, this pattern of investment will stay,” he said. There was, however, a word of caution. Experts suggested that with sharp gains over the years, investors wanting to take fresh exposure in high-valuation stocks may have to await a price correction to buy these.