ETIG100 FASTEST GROWING SMALL COMPANIES

Catch Them Young

For a successful investor it is thrilling to catch a potential multi-bagger before others spot it. While there is no foolproof way, you can still make a beginning by making a portfolio of ETIG's 100 Fastest Growing Companies

The economy is on a recovery mode and the bulls in stock market have once again taken the centre stage. The pundits in market have started predicting Sensex to reach 20K and beyond. Is this the beginning of another bull run? In last bull run which started in 2003, many small- and mid-cap companies broke into the large-cap club by the time rally came into an abrupt end in early 2008. While no one can guarantee about the future performance of current companies, the past performance is an essential tool to predict the future.

The economy is on a recovery mode and the bulls in stock market have once again taken the centre stage. The pundits in market have started predicting Sensex to reach 20K and beyond. Is this the beginning of another bull run? In last bull run which started in 2003, many small- and mid-cap companies broke into the large-cap club by the time rally came into an abrupt end in early 2008. While no one can guarantee about the future performance of current companies, the past performance is an essential tool to predict the future.

ET Intelligence Group, in a bid to help its reader find out tomorrow's gems, has come out, like every year, with the list of India's fastest growing small companies. The stocks of few of these companies are definitely going to turn out to be multi-baggers of tomorrow. Even if investors can't pinpoint on such particular stocks, a portfolio approach, based on the performance analysis of individual companies, would definitely yield good returns.

We had brought out a similar list last year and it generated tremendous interest amongst our readers. With the audited balance sheets of most companies are out, we thought of updating this list. Here, we present the 2009 Edition of ETIG's 100 Fastest Growing Small Companies. (Log on to www.etintelligence.com to access the complete list )

We have excluded the large sized companies from the list for the simple reason that we keep on hearing much about such companies. We have also excluded companies with total revenue of less than Rs1 crore, companies from banking sector and pure-investment companies. We feel that such companies (with less than Rs 1 crore of revenue) are at a very nascent stage. Similarly, the companies in financial services space work in a different environment and face unique set of regulations compared to the companies from other sectors and the usual comparison may not hold true for them.

The top 100 companies appearing in our list mostly belong to the old economy sectors. Around 90% of the top 100 companies are from manufacturing sector, clearly indicating the dominance of manufacturing in small and medium enterprises. Some of the sectors to which these companies belong are capital goods, cement, pharmaceuticals and metals among others. Topping the list are capital goods and cement sector with 14 and 10 companies, respectively.

The company that topped our list is Sulzer India followed by Oil Country Tubular. Sulzer manufactures pipe and other engineering products and is subsidiary of a Swiss multinational. Similarly, Oil Country Tubular is a manufacturer of drill pipes, tubing and other such high-end engineering products. The other companies that appeared in the top 10 list are Tata Sponge Iron, Zydus Wellness, Liberty Phosphate, Rain Commodities, Engineers India, India Infoline, Crisil and Praj Industries among others. Barring India Infoline and Crisil, majority of these top 10 companies belong to high-end manufacturing sector.

So how did we arrive at this interesting list of 100 companies? There are nearly 5,000 companies listed on the BSE out of which around two-thirds are traded on a regular basis.

Finding 100 out of these 5,000 companies was not an easy job. We took a two-pronged approach to find out these 100 companies.

Initially, we considered a sample of close to 2,300 companies whose stocks are actively traded and historical data is readily available. We wanted to focus on mainly small- and mid-sized companies. At the same time we didn't want to consider very small companies. It is a better idea for retail investors to leave such smaller companies to venture capitalist and look at them only when they attain a minimum size.

Keeping all these factors in mind, we generated two lists, one based on revenue (annualised) and the other one based on market cap, both in descending order. All those companies which figured among the top 10% and bottom 50% of these two lists were knocked-off. This process essentially removed around 1300 companies from the sample.

The remaining 1,000 companies became our universe for further analysis based on growth in annualised revenue, operating profit and net profit in last twelve quarters. We also included other quantitative parameters like debt-equity ratio, interest coverage ratio, operating cash flow and return on capital employed (ROCE) among others.

While filtering the companies based on growth parameters, we considered only those companies, which beat the average growth rates of all the 1,000 companies. Also, we eliminated those companies that have a debt-equity ratio of more than 2.0 in their latest financial year and relatively lower interest coverage ratio. After this process, we were left with almost 300 companies. At this stage, we decided to rank the companies based on the their 3-year growth rates, the ratio of operating cash flows (actual) to cash profit (reported) and 3-year average return on capital employed (RoCE). First we arrived at rankings based on individual parameters and then came out with a composite ranking (to be read as final ranking). While arriving at the composite ranking, we assigned 50% weightage to the quality parameter ?cash flow ratio and RoCE? and rest to the revenue and earnings growth. Finally, we weeded out companies, which reported losses in recent quarters or whose growth was too dramatic.

Our emphasis on quality factors ensured that the companies in our final list are not only growing fast but the growth has not come at the cost of putting their financial future in peril. The cash flow from operations has kept pace with the growth in earnings and their balance sheet remains out of danger. Besides, a high RoCE ensures surplus is left over for re-investment and sharing with shareholders even after paying off the creditors and bankers. This in turn ensures the sustainability of their business model.

However, investors should not take their investment decisions solely based on these rankings. They can use this list as a stepping-stone but readers are advised to do their own research and due diligence while betting their hard earned money on any of these stocks. And always remember, past returns are no guarantee for future performance.

The forthcoming issues of Investor's Guide will have a detailed analysis of select companies from the current list.