Fund manager Aditya Khemka shares 5-point checklist for picking quality stocks
Speaking to Business Today, Aditya Khemka emphasised the importance of consistent topline growth, margin stability, cash conversion, valuations and return on invested capital as key parameters.
- Jul 29, 2025,
- Updated Jul 29, 2025 2:56 PM IST
Aditya Khemka, Fund Manager at InCred Asset Management, on Tuesday outlined his five-point investment checklist that guides his stock selection process. Speaking to Business Today, Khemka emphasised the importance of consistent topline growth, margin stability, cash conversion, valuations and return on invested capital as key parameters.
"First, secularity of topline growth is important," Khemka said. "How consistently the company has been able to grow in the past decade. If you notice the topline growth of unbranded generic companies, some years it may do 40 per cent growth and the next year it could be down 30 per cent because it had launched a differentiated product and then later lost market share and pricing to competitors. For a branded player, it will grow every year -- maybe 5 to 15 per cent -- but you won't see a 40 per cent spike followed by a decline. So, the consistency of topline growth is very important to us."
The second factor he considers is the company's ability to maintain margins. "If you have pricing power, then it should reflect in the fact that your gross and EBITDA margins are very stable and less volatile," he noted.
Third on his checklist is the company's ability to convert profit into cash. "EBITDA to operating cash conversion is important to us. If you're earning Rs 200 crore of EBITDA but generating only Rs 20 crore of cash flow, that EBITDA holds little value for me. On the other hand, if you're making Rs 100 crore of EBITDA and converting Rs 80 crore to cash, that's the kind of asset I want to hold," he explained.
The fourth parameter is valuations. "We look at EV (enterprise value) to operating cash flow," Khemka said. "EV accounts for debt and net cash, while operating cash flow includes the impact of working capital, which is often ignored when only EBITDA or PAT is considered."
Finally, Khemka highlighted the importance of cash return on cash invested, which is cash RoCE (Return on capital employed). He explained, "There are many companies today with Rs 200 crore of PAT but just Rs 20 crore of operating cash flow. Conversely, there are companies with Rs 50 crore of PAT and Rs 100 crore of operating cash flow. As an asset manager, I care only about the cash being generated -- not the accounting profits being reported."
Aditya Khemka, Fund Manager at InCred Asset Management, on Tuesday outlined his five-point investment checklist that guides his stock selection process. Speaking to Business Today, Khemka emphasised the importance of consistent topline growth, margin stability, cash conversion, valuations and return on invested capital as key parameters.
"First, secularity of topline growth is important," Khemka said. "How consistently the company has been able to grow in the past decade. If you notice the topline growth of unbranded generic companies, some years it may do 40 per cent growth and the next year it could be down 30 per cent because it had launched a differentiated product and then later lost market share and pricing to competitors. For a branded player, it will grow every year -- maybe 5 to 15 per cent -- but you won't see a 40 per cent spike followed by a decline. So, the consistency of topline growth is very important to us."
The second factor he considers is the company's ability to maintain margins. "If you have pricing power, then it should reflect in the fact that your gross and EBITDA margins are very stable and less volatile," he noted.
Third on his checklist is the company's ability to convert profit into cash. "EBITDA to operating cash conversion is important to us. If you're earning Rs 200 crore of EBITDA but generating only Rs 20 crore of cash flow, that EBITDA holds little value for me. On the other hand, if you're making Rs 100 crore of EBITDA and converting Rs 80 crore to cash, that's the kind of asset I want to hold," he explained.
The fourth parameter is valuations. "We look at EV (enterprise value) to operating cash flow," Khemka said. "EV accounts for debt and net cash, while operating cash flow includes the impact of working capital, which is often ignored when only EBITDA or PAT is considered."
Finally, Khemka highlighted the importance of cash return on cash invested, which is cash RoCE (Return on capital employed). He explained, "There are many companies today with Rs 200 crore of PAT but just Rs 20 crore of operating cash flow. Conversely, there are companies with Rs 50 crore of PAT and Rs 100 crore of operating cash flow. As an asset manager, I care only about the cash being generated -- not the accounting profits being reported."