Why every investor should consider these 20 high-growth stocks

If you are among those who bought Zomato when it was trading at the price of 1kg tomato in 2023, then congratulations to you! For investors who may have missed the call, there are other small- and mid-cap companies that are exhibiting high growth, consistent free cash flow and stellar net profits. But we will come to them later.At first, what makes Zomato so special?This storied startup posted its first net profit and free cash flow of ₹351 crore and ₹780 crore, respectively, last financial year. As a result of this turnaround, Zomato saw its price-to-book ratio jump from 2.3x at the end of March 2023 to 8x. The stock is currently trading at a price-to-earnings (PE) ratio (trailing 12 months) of 409x, shows data from market data site Trendlyne.Zomato is no longer a small- or mid-cap stock, it is now part of the top 100 large-cap companies in the Nifty 500 Index. Zomato’s valuation is related to the fact that it has started generating free cash flow on the back of higher revenue growth.Let’s now compare the high growth story of Zomato to a mature growth stock like HCL Technologies.HCL Tech is one of the large-cap companies with free cash flow worth ₹21,140 crore. Its free cash flow is growing at 28% while its revenue is growing at a five-year compound annual growth rate (CAGR) of 13%. It is a classic mature company where free cash flow is growing faster than the revenues.“Price-to-free cash flow won’t necessarily work while valuing high-growth businesses or early-stage businesses as they are using all their operating cash flow to fund future growth. For mature companies, which are capital-efficient, price-to-free cash flow does justice,” says Pramod Gubbi, head of sales and part of the investment committee at PMS fund Marcellus.“But in capital-lite industries like IT and FMCG (fast-moving consumer goods), free cash flow becomes effective early as the quantum of reinvestment needed to support high growth rates is limited,” says Gubbi.While Zomato will continue to reinvest much of its cash for investment purposes in the future, HCL Tech is reinvesting at a much slower rate. While there is no fixed-rule approach to look at free cash flow, it is the only matrix that gives the true picture of a company's health. medium nocaptionhttps://youtu.be/ypGdod6DqC0?si=I96AcYpdhbSXTRmtThe company lifecycleValuation guru Aswath Damodaran often talks about the lifecycle of a company. In his latest book, the professor of corporate finance at Stern School of Business says there are six lifecycle stages for a company — startup, young growth, high growth, mature growth, mature stable and decline.In the startup phase, the founders are converting an idea into a product or service and the business model is evolving. This is a trial-and-error phase where many ideas may fail to convert. During this, investment is high, revenues are growing on a very small base and profitability is absent.The second phase that Damodaran dubs as the “young growth phase” is characterised by the business demonstrating very high revenue growth and high investment. During this phase, the professor warns that profitability both at cash flow level or net profit level often worsens.The next phase is the most interesting from the point of view of investors. It is a phase when stars are born. The third phase is called the “high growth phase”, where companies that have a history of high topline growth and unprofitability change for the better (think Zomato).The mature growth phase is next where revenue growth stabilises and the cash flow grows faster than revenues (like HCL Tech).“In businesses like software, where the additional unit sold has almost no cost, the company will see profits turn positive more quickly than in a business like auto manufacturing where there are significant costs associated with additional units sold,” says Damodaran in his book titled The Corporate Life Cycle: Business, Investment and Management Implications.ET Prime has filtered a list of 20 stocks from the Nifty 500 universe that had a five-year annual free cash flow, revenue and profit after tax (PAT) growth rate greater than 15% and the return on capital employed (RoCE) was higher than 15% for FY24. !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r=0;r High-growth stocksAt the top of the list is Affle India, a company engaged in the optimisation of mobile advertising, which has been growing at a CAGR of 50% for the past five years. Its cash flow has been growing at 43% while its net profit has risen at a CAGR of 44%.Affle is investing 30% of its revenue back in the business, while HCL Tech, for example, is investing just 6% of its revenue. In July, Citi initiated a ‘buy’ call on Affle with a target price of ₹1,600. A month later, Axis Securities also echoed Citi’s view.“From a long-term perspective, we believe Affle has strong device and client additions. The company also demonstrates superior penetration in the international business and holds significant revenue growth potential moving forward,” Axis Securities said in its report.Another IT company, KPIT Tech, has also grown at a five-year CAGR of 48%. Its free cash flow has been rising 41% while its profit rose at a CAGR of 61%. Traditionally, KPIT Tech, which specialises in automotive software, was dependent on the US and European markets but has now diversified its revenue base by focusing on markets like China, South Korea, Thailand and India. Eleven out of 17 analysts have a ‘buy’ rating on the stock.Since the start of the financial year, PhillipCapital has assigned a ‘buy’ rating on KPIT Tech and has set the target price at ₹2,210 per share. The stock is currently trading at ₹1,791.ObservationsHere are some more findings from the data.1. Low price-to-free cash flow ratios are generally associated with banking and finance companies. They have ratios as low as 2x such as Bandhan Bank and 5x at ICICI Bank. However, the list of companies featured in our list had a higher price-to-free cash flow ratios of more than 20x to as high as 200x.2. Astral manufactures building materials such as pipes, adhesives, bathware and paint. It trades at a price-to-free cash flow ratio of 220x. The stock trades at a PE of 93x. The company has grown at a modest rate of 18%. The promoters reduced 1.5% of their stake in the company and foreign portfolio of investors (FPIs) have been buying more shares of the company in the past few quarters. Mutual funds and retail shareholders hold close to an 8% stake each in the company.3. Sona BLW Precision Forgings is an automotive technology company that designs, manufactures and supplies mission-critical automotive systems and components across all vehicle categories. The stock trades at a price-to-free cash flow of 116x and PE of 77x. The company has shown high revenue and PAT growth rate at 35% in the past five years and the stock has run up 18% in the past year.4. Only two other companies had low price-to-free cash flow ratios, namely Bajaj Holdings and Mahanagar Gas. Their price-to-free cash flow ratio is between 12x and 16x and their PE is also between 14x and 16x. Both companies have seen a healthy free cash flow generation of 20% annually in the past five years. While Mahanagar Gas moved up in the past year by 64%, Bajaj Holdings has been moving up by 30% annually in the past three years.5. RailTel Corporation of India listed on the bourses recently. A ‘Navratna’, this central public sector service enterprise is an ICT provider and one of the largest neutral telecom infrastructure providers in the country owning a pan-India fiber optic network. The company has a high free cash flow growing at the rate of 60% annually for the past five years. It has 20% revenue growth rate too. But ICICI Securities in its August research report downgraded the stock to ‘sell’, citing margin pressure. medium nocaptionhttps://youtu.be/qbGaXMnhbuU?si=l5CBX2qtKVO1lTWb“RailTel’s Q1 FY25 net profit grew 27% YoY (year-on-year), which is within the company’s guidance of growth of 25-30%. RailTel expects telecom revenue to grow 9-10% while projects’ revenue is anticipated at ₹2,000 crore, driving total revenue growth of 25-30% in FY25E. Considering the project business’ Ebit margins are only 5-6%, achieving guided stable margin for FY25 can be challenging arithmetically. Maintain ‘sell’. Aggressive bidding in railway projects could be a potential downside risk,” the ICICI Securities report said.6. Mazagon Dock Shipbuilders’ free cash flow is growing at the rate of 31% in the past five years. The company observed huge free cash flows in the past two years at ₹1,943 crore and ₹1,747 crore in FY23 and FY24, respectively. ICICI Securities has a ‘sell’ rating on Mazagon too owing to reducing Ebitda margins.“The margins of Mazagon have improved in recent times leading to lower cost being incurred compared to budgeted. We expect high margins to sustain until FY27E as major deliveries are planned over the next 2-3 years. However, once it starts executing new orders, its revenue recognition is likely to be milestone based, and hence, Ebitda margin could taper off to 12-15%. We are still expecting higher margin than FY17-23 phase due to cost efficiencies and internal competencies that the company has built over a period,” the report said in August.7. Tata Elxsi has a high RoCE of 47% as of FY24, five-year free cash flow growth rate of 27% and trades at a PE of 59x. This stock shot up during the bull run of 2021 and since then has remained flat. In the past year, the stock has just returned 1.75%. Just like Mazagaon and RailTel, margins are a concern here too.“Tata Elxsi reported profitability lower than estimated with margins shrinking by more than 200 basis points YoY. The company reported marginal growth QoQ (quarter-on-quarter) in the media and communication segment but faced a consecutive quarterly decline in healthcare segment revenue QoQ. The effective tax rate for FY25E is anticipated to rise due to changes in SEZ benefits affecting one of the facilities. Following the performance in Q1 FY25, there is growing uncertainty regarding the company’s future topline and earnings growth for both FY25E and FY26E,” said a KRChoksey research report in July.