Value picks? 25 Nifty stocks trade at a discount to respective 10-year average P/Es

Nifty50 rallied to a fresh record high of 11,856 in April but since then the momentum has fizzled out. The index is down about 3 percent from las month’s high and it has also breached its crucial short-term moving averages at 5-days exponential moving average (EMA), 13, 20 and 50-days EMA in May.

A large part of the fall can be attributed to selling seen in the largecap stocks and about 25 such companies, or 50 percent, of the Nifty50 constituents are trading below their respective 10-year PE averages.

PE multiple, or price-to-earnings ratio, is a valuation metric which measures the current stock price relative to the company’s earnings. It is also sometimes referred to as earnings multiple.

As many as 25 companies in the Nifty50 basket are trading below their respective 10-year average earnings multiple. These include Eicher Motors, Hero MotoCorp, L&T, Axis Bank, Yes Bank, SBI, NTPC and Power Grid, according to a report by Motilal Oswal.

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But does that make these stocks a buy?

Investors could look at cyclical names and refrain from adding metals as well as oil & gas stocks, suggest experts.

“No doubts above mentioned stocks are blue-chip and have a strong fundamental and dividend yield history. From long-term perspective, one could go for buying in the above scrips but with a pyramid type of strategy,” Sumeet Bagadia, Executive Director, Choice Broking told Moneycontrol.

“Gradually, we are seeing good steam in a cyclical manner amongst the sectors, based on which the belonging scrips will outperform the index.”

Companies which are available at a discount suggest that there is room for upside. But, can they all be called value bets?

The thumb rule does suggest that companies which are trading below their historical averages could be potential value bets, but other parameters should also be studied to make the investment call, suggest experts.

“Each company has different investment thesis context and valuation is just one part of the equation in an overall investment framework. We like some of these names – Coal India and Power Grid,” Gautam Duggad, Head of Institutional Research, MOFSL told Moneycontrol.

Companies which are trading at a significant discount to their historical averages include Tata Steel (-49%), ONGC (-42%), Coal India (-38%), Power Grid (-31%) and NTPC (-30%).

“In the case of Tata Steel, it is worrying about global growth, but I would buy this stock at current prices as balance sheet de-leveraging is the theme Tata group across its holding has been doing. Coal India is a good dividend yield play while Sun Pharma will look at lower levels,” AK Prabhakar, Head of Research at IDBI Capital Markets & Securities told Moneycontrol.

Analysts advise investors to look at stocks which might be down due to external factors and the fall is not structural in nature.

“Not all companies could be value picks. Metals and mining’s fortunes are driven by changes in global growth prospects and news around US-China trade tensions,” Naveen Kulkarni, Head of Research, Reliance Securities told Moneycontrol.

“So, metals and mining sector we will continue to avoid. While it is worth looking at the pharmaceutical sector and there are good value picks in the sector. Similarly, PSUs are good dividend plays and can be considered post the elections,” he said.

Investors should not avoid business fundamentals which are responsible for delivering consistent growth. Valuations at 19x FY20E EPS for the Nifty do not provide any material cushion.

“We believe this is a year of consolidation and accumulation for pharma companies. The downside pain on earnings seems to be bottoming out. Realisation pressure & channel cartelisation in the US seems to be through. FY21 onwards, most of the pharma companies would be back on a double-digit growth trajectory,” Dharmesh Kant, Head-Retail Research, IndiaNivesh Securities Limited told Moneycontrol.

“The benefits of repositioning in the domestic & overseas market will start trickling in. Aurobindo Pharma is our top pick from the segment. One can look at Cipla and DRL from an investment perspective as well,” he said.

Disclaimer: The above report is for information only and not necessarily buy or sell ideas. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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