Find Some Growth Stocks Where Ratios Will Not Work

Some of the companies with negligible revenue from core business but mega plans under implementation are worth look. 

The Price to Sales Ratio is a valuation ratio that indicates how much investors are ready to pay for each rupee of sales.  It can be calculated as the market capitalization divided by sales.  The one with low ratio is considered as value pick.   However, the price to sales ration can not always be considered to pick the growth stocks.  In recent results, a few companies have little or nothing to show by way revenue and profit from their core business operations.  Many of these companies have mega future plans that could completely transform companies’ business profile and size of operations.  Such stocks are difficult to value as traditional parameters such as earning per share, price to earning multiple, dividend yield etc.

Some of them also present huge opportunities and these stocks could be multibaggers once project starts going on stream.  Investing in such stocks makes sense before their core business goes on stream and start contributing to the top line as immediately after this as it is most likely that such stocks would witness re-rating.  Generally, such stocks rally once plans start materializing or at least some visibility emerges on project implementation.

Investors should be clear on two fronts: first, these stocks are long term bests and there is no point expecting overnight results.  Second, before investing in such companies, investors should make some basic checks like management credentials, project implementation skills, experience, corporate governance norms, financial backing by group, industry dynamics and size of the business opportunity and so on.

One can look at the following companies from power sector can for long term investment:

·         Adani Power: Projects are under implementation for 10000MW.

·         Reliance Power: 16 large projects, combined capacity of 33,480MW

·         Indiabulls Power: 6,600 MW (thermal power), 167MW (Hydropower)

·         KSK Energy Ventures: Nine plants are under implementation with combined capacity of 8,900 MW

·         NHPC: 11^th plan target is 5322 MW.

·         Jaiprakash Hydro Power: Plans to add power generation capacity of 13,500 MW (mix of thermal & hydro).

This investment is only for the bravehearts who can take the risk of losing entire capital.  This is because project implementation is dicey and could lead even to company’s fall,  long gestation, project delays, funding issues, regulatory and policy issues, pricing barriers, market entry, volatile commodity prices etc.