Seven expensive stocks that are still outpacing Sensex
Stocks of cos such as United Breweries, Siemens, Delta Corp, Gillette India and Just Dial are all trading at close to earnings multiple of 100.
Stocks of companies such as United Breweries, United Spirits, Siemens, Delta Corp, Gillette India and Just Dial are all trading at close to an earnings multiple of 100. What this signals is that investors are valuing these companies at 100 times their previous 12 months’ profits as they expect strong earnings growth over the next two years.
But such high valuation multiples often deter many investors from buying into such stocks. For instance, if an investor had bought Nestle’s stock in the 1990s at a multiple of 65 then, he would have made a 20% compounded return till date on the initial investment.
Despite trading at high multiples, stocks of most of these companies have outperformed the Sensex which is trading only at an earnings multiple of 17 over the past one year. Here’s a list of such stocks which are surging despite high multiples and outperforming the Sensex:
With Diageo taking over, there are expectations that USL could undergo a transformation in a phased manner over the next five years which, in turn, could have a knock-on impact on USL’s profits, through various restructuring and deleveraging plans. For FY15, analysts are expecting the company’s profits to double, according to the Bloomberg.
The strong positioning of USL with a market share of 50% and Diageo’s aggressive DNA may well be a potent a combination to ignore. The stock has gained 31.5% in the past one year.
Most analysts are negative on this stock because of the high valuation, but Heineken does not seem to agree. It has been acquiring shares from the market over the past few months, as it reckons that the market will grow four-fold over the next five years. The logic is simple — beer consumption per capita is only 2 litres per year in India compared with over 70 litres in the West. Despite being so expensive, its stock has gained 28.5% in the past one year.
Since the time of its listing, the stock has given a return of 151%. Although expensive then and even now, the company could continue to outperform as it has been reporting a strong earnings growth of over 80%. The rising number of internet users on mobiles is also benefiting the company. Its transactions service business (yet to kick off ) could lead to higher earnings growth over the next few years. Besides, globally e-commerce companies such as Yelp have always commanded higher valuations.
Revenues from Macau have grown at over 25% CAGR from FY08-FY13, making investors believe that Delta Corp could witness a strong earnings growth once its casino business picks up. The company now derives revenues only from one casino but three new casinos will contribute to revenues next year. Once profits from these new casinos start pouring in, P/E valuations will moderate.
The stock market is betting on the company turning around its loss-making oral care business (Oral-B). Once the brand succeeds in establishing itself over the next few years, it will lead to a non-linear growth in profit. The company continues to enjoy almost a near monopoly in the men’s care or shaving business. Due to high marketing expenses in its oral care business, profits have declined by 40% yo-y in the last two quarters. Although, it lacks a trigger in the near term, valuations may be sustained. However, the stock is unlikely to go down as existing investors may not want to exit due to lower liquidity.
The continuing buzz of delisting, after the parent raised its stake from 55% to 75%, is keeping Siemens’ valuations high. However, the company’s financials do not support these valuations. Its profit moderated to Rs161 crore in FY13 from Rs756 crore in FY10. With low visibility on earnings revival in the near term, and considering that the stock has run up 27% in the past one year, it will have limited gains from current levels.
Localisation of operations has helped the company boost margins. Although, demand has remained muted over the past few quarters, there has been a substantial improvement in its margins, leading to a triple-digit growth in its earnings in the past six months compared to a year ago. This growth is likely to continue for the next few quarters. With an improvement in the operating margin profile, buzz that corporate capital expenditure may be revived and continued support to PE on its MNC parentage, the stock is likely to maintain a rich valuation.