Should You Invest in High-value, High-growth Theme Stocks?

High-growth potential multibaggers come with associated risks too, limit exposure to 10% of your portfolio, says Prashant Mahesh

High-growth businesses with no comparable listed peers often catch the fancy of equity investors. Many of these companies see their share prices zoom up fast and price-to-earnings (P/E) ratios sky rocket. Jubilant Foodworks (which runs Domino's Pizza) has seen its share price rise from . 750 at the start of the year to . 1,265, up 69% in seven months. Talwalkars Better Value Fitness, which runs health centres, has moved up from . 118 to . 173, a gain of 47%. Specialty Restaurant, listed in May this year, has moved up from . 150 to . 185 in a month and a half, up by 23%. As against this, the Nifty is up from 4,637 to 5,345, a return of 12.2%. 
Investors are often tempted to buy such stocks given the hype surrounding some of them and the high growth business that they are in. "Since these companies are in highgrowth areas, there is a lot of fancy amongst investors and many a time they trade at high valuations. Investors should buy such stocks only if they are available at reasonable valuations. You could allocate 5-10% of your portfolio to such companies," says Madhumita Ghosh, VP (research), Unicon Financial Intermediaries. 
ARE THE VALUATIONS REASONABLE? 
Companies like Jubilant Foodworks, Talwalkars Better Value, Specialty Restaurant or MCX are in high-growth businesses, where there are no other listed companies. They are also part of the consumption theme where growth rates are expected to be high due to the rising middle class in India. "Since there are only a few companies in these high-growth areas, investors tend to pay a scarcity premium and hence the high valuations," explains Dipen Shah, head of fundamental research at Kotak Securities. 
High growth is visible in the financial performance and future plans of these companies. For example, Jubilant Foodworks' sales grew from . 678 crore in 2011 to . 1,019 crore in March 2012, a growth of 50%. In the same period, net profit increased from . 71.73 crore to . 103.29 crore, a rise of 43%. The company also launched its first Dunkin Donuts store this year. Furthermore, the company has aggressive plans for Dominos Pizza and Dunkin Donuts. In the coming year, the plan is to roll out 90 stores; and the company expects to open 80 to 100 restaurants over the next five years. This has led to higher expectations from analysts. 
Even in the case of Talwalkars, sales grew from . 102 crore in 2011 to . 131 crore in 2012, while net profit increased from . 16 crore to . 22 crore, a rise of 32%. In the case of MCX, total income increased by 41% to . 629 crore from . 437 crore, while net profit rose 71% from . 173 crore to . 286 crore. High growth and future earnings visibility have lead to steep valuations. 
Today, Jubilant Foodworks quotes at a PE ratio of 78 based on March 2012 earnings, Talwalkars quotes at a PE of 21 and Specialty Restaurants is at a PE of 61, while MT Educare quotes at a PE of 44. 
"One should look at buying these companies only on a correction at reasonable valuations," says Madhumita Ghosh. She recommends investment in MCX — the only listed stock exchange, trading at a PE of 20 and offers a good entry point to investors. 
ONLY 5-10% EXPOSURE 
IN YOUR PORTFOLIO 
The steep valuations of these companies indicate that investors have a lot of expectations. From an investor's point of view this could be risky. "If anything was to go wrong with the business, or the results are not in line with expectations, the stock prices could come down sharply," says Jayant Mamania, director, Care Portfolio Advisors. SKS Microfinance is one such example where the stock price collapsed from . 542 a year ago to . 91.5, after the Andhra Pradesh government introduced a law to ban unfair debt collection practices. This made it difficult for the company to do business in Andhra Pradesh where it had a major focus. 
"When the valuations are high and something goes wrong, the stock could come crashing down," cautions Alok Churiwala, managing director, Churiwala Securities. Hence many investors prefer to buy them only if they are available at reasonable valuations. "Many companies with good past record are trading at reasonable valuations. Investors would do well to focus on such stocks, than chase these highgrowth companies," says Vijay Kedia, director, Kedia Securities. 
Considering the risk involved and the high valuations, it would be worthwhile if investors have only a small portion of their portfolio allocated to such stocks. "Equity investors cannot ignore such companies, as some of them could turn out to be multibaggers in the long run. Hence invest in them, but restrict exposure to 5-10% of your portfolio," advises Dipen Shah. 
prashant.mahesh@timesgroup.com