Stocks

‘Rolls-Royce’ stocks of D-Street: Expensive to own, but pack a punch

Kumar Shankar Roy | Updated on August 01, 2021

95% of top 20 high-priced stocks a decade ago have at least doubled in value

Retail equity investors usually hesitate to buy stocks with a four- or five-digit price tag. But they may be a goodd bet as a majority of these stocks have delivered market beating returns by a wide margin in the last decade, shows a BusinessLine analysis.

Had you bought the 20 most highly priced stock, a.k.a the Rolls-Royce scrips of Dalal Street, 10 years ago and held on to them, 75 per cent of them would have beaten the bellwether Nifty 50’s meteoric rise since. Indeed, five of these stocks have individually given more than ten-fold returns.

 

Costly club

High-priced stocks appear so because of the number of outstanding shares being low relative to the company’s total market capitalisation. For instance, MRF has just 42.4 lakh outstanding shares compared to peers Balkrishna Industries (19.33 crore shares) or Apollo Tyres (63.51 crore shares).

Typically, many companies opt for regular stock splits to keep the share price affordable. But consistently high priced stocks result from some companies being impervious to stock price. The reasons for this could be many such as wanting to cap fresh equity supply, attracting long-term institutional investors or making the counter difficult for price manipulation by operators, if any. Barring a few exceptions, the list of Rolls-Royce stocks of Indian market 10 years ago and today is quite similar. In 2011, shares of tyre-maker MRF cost over ₹7,500 apiece. The stock of auto ancillary major Bosch India was about ₹7,000. Shares of 3M India, Nestle India, Honeywell Auto, TTK Prestige and Page Industries were between ₹2,000 and ₹4,500 each. In fact, the cheapest stock of this ‘costly club’ was Abbott India at ₹1,477.

Fast forward to July 2021 and one share of MRF costs around ₹80,000, making it the ‘Berkshire Hathaway’ of Indian stock market. Honeywell Auto is priced at ₹42,000 and Page Industries at ₹33,000. A one-share basket of these stocks was worth ₹55,000 in 2011 and the same is worth nearly ₹3.5 lakh today.

Price performance

On a price return yardstick, the Rolls-Royce stocks have given great value to shareholders (see table).

If you bought the 20 expensive stocks as a pack, they would surely prove to be a punchy offering. An equal weight portfolio of the 20 highly-priced stocks over July 2011 to July 2021 would have provided over 500 per cent gains, easily beating the Nifty 50, the Nifty 100 and Nifty 500.

Earnings and valuation multiple changes have contributed to expensive stocks becoming more expensive. On revenue growth front, these stocks, on an average, generated close to twice the rate (121 per cent) notched up by Nifty 50 companies (70 per cent).

Higher sales have boosted the bottomline as well. Over the last 10 years, the average profit growth for these 20 costliest stocks is 154 per cent versus 63 per cent for the Nifty 50 companies, per Bloomberg data.

In some stocks, such as Page Industries and Abbott India, the profit rise between 2011 and 2021 has been close to 500 per cent. This has also led to a sharp Price-to-Earnings (PE) valuation re-rating for these stocks, with Page Industries trading at 109 times one-year trailing earnings compared to 44 times in 2011 while Abbott India trades at 55 times trailing PE in 2021 versus 26 times in 2011.

In some cases such as Lakshmi Machine Works and Wendt India, the impact of Covid on earnings has been bigger, thus leading to a fall in profit when compared with 2011.

In stocks such as Bosch, Hero Motocorp and Oracle Fin Serv, the 10-year profit growth has been below average or lower than Nifty, and this could explain why their respective stock prices have lacked the same enthusiasm as others. In case of Hero and Oracle, there has been no PE re-rating as well with the 2021 valuation multiples being similar to 2011.

Published on July 31, 2021

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