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Growth stocks: High on valuations, but higher on returns

These stocks may be a tad expensive, but they could easily live up to those valuations and deliver returns.

November 04, 2021 / 02:20 PM IST

Growth stocks are shares of companies that are expected to potentially see faster growth in revenues and earnings versus the average industry or market growth. Now, unlike value stocks, growth stocks typically trade at higher valuations comparatively as the market tries to capture the anticipated growth potential.

With the easing of restrictions and revival of the economy, growth prospects look bright for a whole range of sectors. Here we pick three stocks: one is a play on the India consumption story; the second is a story of deepening penetration for a product that literally offers life cover; and third is a bet on changing industry dynamics and gaining back of pricing power when most consumer companies may be struggling to raise prices.

SBI Life Insurance Co

Shares of India’s largest private life insurer, SBI Life Insurance Co Ltd, have risen around 30 percent so far in 2021. Investors have taken note of the firm’s superior performance metrics. Brokerage target prices for the stock indicate that there is more upside left.

SBI Life has a strong distribution network of 200,190 trained insurance professionals across 947 offices in the country. Plus, the firm has strong parentage and low-cost structure, which augurs well.

Analysts see scope for margin improvement in future. “Strong APE (annualised premium equivalent) growth driven by ULIP, non-par savings and protection segment along with improving margins (better persistency, cost-efficiency and product mix) should continue to drive VNB (value of new business) growth over medium term in our view,” points out a report from PhillipCapital (India) Pvt. Ltd on October 27.

For the September quarter (Q2FY22), SBI Life saw healthy acceleration in business momentum led by ULIPs, protection and non-par savings. Note that there was 1.49 times increase in the number of claims reported from Q1FY22 to Q2FY22 for SBI Life. SBI Life’s COVID claims are expected to moderate ahead. “Stress on margin improvement as a strategy, guidance on increase in non-par mix, and launch of new protection product has set up strong expectations for H2FY22,” ICICI Securities Ltd said.

Bharti Airtel

A strong growth outlook, thanks to market share gains, makes Bharti Airtel Ltd a good bet in the Indian telecom sector. The government’s relief package announced in September ensured three private firms in the Indian telecom industry, for now. Airtel benefits from the telecom measures, albeit to a lesser extent than Vodafone Idea Ltd. Further, investors await potential tariff hikes, the next big trigger for the Airtel stock.

“We believe Bharti is well-hedged to gain from any move towards either market consolidation (duopoly) or market repair (sharp tariff hikes, further relief measures) in the India wireless business,” said analysts from Nomura Financial Advisory and Securities (India) Pvt Ltd in a report on October 29. “Bharti’s rights issue (Rs 21,000 crore), cashflow relief from the moratorium on government dues (about Rs 48,000 crore), along with over Rs20,000 crore in annual free cashflow generation over FY21-25, not only abates debt concerns, but also ensures that Bharti would be well-placed to compete with R-Jio in the upcoming 5G rollouts.”

Having said that, more-than-expected delays in tariff hikes could be a dampener for investor sentiment.

Bharti Airtel saw a quarter-on-quarter increase in its net debt as on September 30, owing to an increase in deferred payment liability. But leverage is manageable, point out analysts. Net debt to EBITDA (earnings before interest, tax, depreciation and amortization) ratio stands at around 3 times.

Westlife Development Ltd

Westlife Development, the operator of McDonald’s, is a play on the consumption story. With the easing of COVID-related restrictions, this quick-service restaurant made a strong recovery in the second quarter led by 95 percent recovery in per-store revenues and 2 percent in addition to store count. The September recovery was even stronger at 103 percent, surpassing pre-COVID levels. Better recovery has been led by a strong 70 percent growth in the convenience channel, while dine-in recovery was 60-65 percent, both compared to Q2FY20 levels.

Inflationary pressures on commodities impacted the gross and EBITDA margins. Gross margins were up 120 bps on a YoY basis but declined 70 bps from previous quarter to 64.7 percent. Restaurant Operating Margin (ROM) stood at 17.4 percent as against 3.7 percent in 2QFY21. The EBITDA margin stood at 11.5 percent compared to -0.6 percent in the same quarter last year. This was about 200 bps lower than the EBITDA margins that the company earned between the period after Lockdown 1 and before Lockdown 2. But the continued sales momentum would drive operational leverage and result in margin expansion in the future.

The company has raised its expansion targets and now expects to double its store network in the next 3-5 years with a capital investment of Rs 800-1,000 crore.

“The company is well placed to capitalise on the COVID-led accelerated shift towards organised players with strong emphasis being laid on menu-innovation, network expansion and digital/omni channels,” Emkay Research said. The large penetration opportunity, increased pace of expansion and margin gains keep us optimistic, it said.

“We remain optimistic about the medium-term opportunity for WLDL, especially after the lifting of the COVID-related restrictions,” said Motilal Oswal.

Pallavi Pengonda
Gaurav Sharma
first published: Nov 4, 2021 12:13 pm

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