The Economic Times daily newspaper is available online now.

    6 reasonably valued stocks with solid financials

    Synopsis

    As apprehensions about steep valuations and declining economic performance gain ground, investors should opt for the reasonably valued stocks with decent future prospects.

    stock-9-gettyGetty Images
    The concept of percentiles is used for identifying such stocks.
    Increasing global liquidity, easing trade wars and expectations of an income tax cut in the upcoming Budget are some of the factors making investors optimistic. The BSE Sensex has gained over 5,400 points since the corporate tax cut was announced in September 2019. However, experts are apprehensive about the steep valuations that are increasing the risk profile of equities. The estimated 2019-20 PE of BSE Sensex is 23.5 times and it is trading slightly above its 5-year historical average of 22.9. Moreover, such estimated PE creates a valuation premium of over 1.5 times relative to the MSCI Emerging Market Index, that trades at 2019-20 PE of 12.6 times.

    Further, there are macroeconomic issues ranging from declining consumption, weak investments, likely fiscal slippage to falling GDP growth and looming stagflation. According to a release by CMIE, sluggishness in tax collections that includes customs duty, excise duty and GST and declining corporate taxes consequent to the tax cut has made fiscal slippage in 2019-20 increasingly inevitable.

    It is expected that the gross fiscal deficit could reach 3.85% of the GDP in 2019-20.

    Increasing government deficits can create upward pressure on bond yields and borrowing costs, which can significantly delay the economic recovery by hurting both consumption and investment. In addition, the recent spike in consumer inflation has increased the likelihood of a pause in future rate cuts. Such developments could contribute to increased erratic market movements in the future. Therefore, direct equity investors will have to select stocks cautiously. Moderately valued stocks with strong past performance and robust future prospects could prove effective under such market conditions. A moderately valued stock is defined as the one with valuation that is neither in the top defined fraction and nor in the bottom defined fraction of the market.

    The concept of percentiles is used for identifying such stocks. A percentile is a statistic that indicates the percentage of values that fall below a defined value. For example, in case of listed companies, if a company has sales revenue of Rs 18,000 crore, which is 80th percentile, it implies that 80% of the listed companies have sales revenue less than Rs 18,000 crore. In other words, the company’s sales revenue is greater than that of 80% of the listed companies.

    The above concept is applied to two widely used valuation ratios, the PE multiple and EV/EBITDA multiple. PE compares the price with the earnings per share and generates an equity multiple. On the other hand, EV/EBITDA takes into account a company’s debt and cash levels and generates a firm multiple. Although both the ratios are extensively tracked by analysts in determining the worth of the stock, the latter is considered more superior. This is because, EV/EBITDA is based on the notion of most successful investors, who propose that equity investing is not just buying/selling shares, but buying/selling the business.

    There are 763 companies that have a market cap of greater than Rs 500 crore and with visible values for PE and EV/EBITDA. Stocks whose ratios (both PE and EV/EBITDA) fall in a range which is more than 25th percentile of the market but less than 75th percentile of the market were filtered out. In other words, the valuations of such companies are neither in the top 25% nor in the bottom 25%.

    To identify financially sound companies from the above-defined percentile universe, the trailing 12 months (TTM) year-on-year growth was calculated for sales revenue, operating profit and net profit. Only those companies were included where all the three defined financial parameters were in a range that is greater than the 75th percentile of the market. In other words, the financials are in the top 25% of the market. Further, to look at the future prospects of such companies only those that are covered by at least four Bloomberg analysts and with a one-year forward price potential greater than 10% were included. Let us look at six such companies:

    This universal bank offers a range of banking and financial services to urban, semi-urban and rural customers. It has 4,288 outlets in India with 485 ATMs. In the December quarter, the bank’s credit growth was muted amid tensions in the North-east region and its asset quality weakened due to a change in NPA recognition norms of the Gruh housing loan portfolio.

    According to a report by KRChoksey, the bank management believes global economic slowdown and uncertain political challenges would be regular events and would be areas of concern for the microfinance business. However, the impact of these events would be minimal to its operations. Moreover, its diversified loan portfolio will minimise associated risks. Further, the gradual shift from borrowings to deposits will improve source of funding and its cost to income ratio is likely to increase in coming years. The brokerage says the bank’s valuation will improve going forward with growth in advances followed by stable asset quality.

    • 2019-20 PE: 22.6
    • Current price (Rs): 477
    • 1-yr target price (Rs): 627
    • Potential upside: 31%

    Bandhan-Bank

    Analysts’ recommendations
    • BUY: 14
    • HOLD: 3
    • SELL: 3

    • Sagar cement
    The Telangana-based cement manufacturer produces various a variety of cement like Ordinary Portland Cement, Portland Pozzalona Cement, and Sulphate Resistant Cement. The company improved its operating performance with cost optimisation measures like thermal plant efficiency, reduced lead distance, softening of input prices, commissioning of the captive power plant and favourable fuel mix.

    Analysts believe increased volumes from eastern markets, stable pricing environment, augmented production from new plants, ramp-up in waste-heat-recovery-systems (WHRS) capacity and hydel power are factors that will contribute to the company’s growth. According to Bloomberg consensus forecasts, the company is expected to deliver adjusted net income growth of 55.1% in the December quarter. In terms of Bloomberg’s 2019-20 estimated PE, the stock is trading at over 20% discount to the estimated average PE of the BSE500 index.

    • 2019-20 PE: 17.8
    • Current price (Rs): 550
    • 1-yr target price (Rs): 716
    • Potential upside: 30%

    Sagar-Cement

    Analysts’ recommendations
    • BUY: 9
    • HOLD: 0
    • SELL: 1

    • Kei Industries
    The wires and cables manufacturer with a global presence offers a range of cabling solutions. Analysts feel the company’s earnings momentum will remain strong due to improved penetration in the domestic market, better exports and expected contribution from the newly expanded capacities. Its current order book provides strong revenue assurance for the next 2 years and the management is planning to raise funds through the QIP route to sustain growth.

    Moreover, KEI’s focus on various brandbuilding exercises, leading position in institutional cables, rising share of EHV cables, exports and house wires, strong balance sheet and expansion of dealer network are key growth drivers. Its optimal product mix will help strengthen financials with the likely improvement in demand consequent to the measures taken by the government for economic revival. According to Bloomberg consensus forecasts, the company is expected to deliver revenue growth and adjusted EPS growth of 19.6% and 36.3% respectively in the December quarter. The current 2019-20 estimated PE is trading at a 30% discount to the average estimated PE of the BSE500 index.

    • 2019-20 PE: 15.8
    • Current price (Rs): 531
    • 1-yr target price (Rs): 629
    • Potential upside: 18%

    KEI-Industries

    Analysts’ recommendations
    • BUY: 12
    • HOLD: 1
    • SELL: 0

    • PSP PROJECTS
    This construction company offers a diversified range of construction and allied services across industrial, institutional, government and residential projects in India. It enjoys a reputation of completing projects ahead of time, which has helped it to secure repeat orders from existing clients. The current order book provides strong revenue visibility and analysts believe that it will continue to remain a net cash company going forward.

    Robust profitability, well-managed balance sheet and efficient working capital management will aid in improving the return ratios. Focus on geographical diversification, large projects and proven execution capabilities are significant growth drivers for the company going forward. According to Bloomberg consensus forecasts, the company is expected to deliver operating profit growth and adjusted EPS growth of 48.2% and 25.8% respectively in the December 2019 quarter.

    • 2019-20 PE: 15.8
    • Current price (Rs): 531
    • 1-yr target price (Rs): 659
    • Potential upside: 24%

    PSP-Projects

    Analysts’ recommendations
    • BUY: 8
    • HOLD: 0
    • SELL: 0

    • Deepak Nitrite
    This chemical manufacturing company makes organic, inorganic and fine chemicals. All three segments of the company: performance products, basic chemicals and fine and specialty chemicals continue to do well helped by better exports, improved volumes and higher realisations. According to a latest research report by AnandRathi, the company’s increased focus on adding high-value products and moving higher in the value chain bodes well for its base business which should continue to show improvement in margins.

    The brokerage house believes the company will be a key beneficiary as the global chemical industry is shifting gradually to the emerging Asian regions where the Indian chemical industry offers huge scope of growth. High per capita consumption, increase in agri-inputs, and growth in the pharma industry are some of the factors that will contribute to the growth of the Indian chemical industry. Further, the company is likely to improve margins from phenolic business going forward as signs are visible for the improvement in crack spreads from its historical levels. According to Bloomberg consensus forecasts, the company is expected to deliver revenue growth of 20.8% in the December 2019 quarter.

    2019-20 PE: 11.3
    Current price (Rs): 390
    1-yr target price (Rs): 453
    Potential upside: 16%

    Deepak-Nitrite

    Analysts’ recommendations
    • BUY: 7
    • HOLD: 0
    • SELL: 0

    • Gateway Distriparks
    This integrated logistics service provider operates three verticals: container freight stations (CFS), inland container depots (ICD) with rail movement of containers to major maritime ports, and cold chain storage and logistics. The container segment is expected to maintain a strong growth trend in the future and provides opportunities to the company for expansion and improvement in profitability from India’s growing foreign trade.

    Analysts believe that risk-reward is turning favourable as the risks are reflected in the current distressed valuations. Moreover, the company’s focus on reducing debt by selling some of the non-core assets is another key positive factor. According to Bloomberg, the stock’s 2019-20 estimated PE trades at over 25% discount relative to the estimated average PE of the BSE500 index.

    • 2019-20 PE: 16.8
    • Current price (Rs): 134
    • 1-yr target price (Rs): 150
    • Potential upside: 12%

    Gateway

    Analysts’ recommendations
    • BUY: 12
    • HOLD: 2
    • SELL: 1

    Stock and index values have been normalised to a base of 100. Current price as on 21 Jan. Source: ACE Equity & Bloomberg.

    (Your legal guide on estate planning, inheritance, will and more.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    ...more

    (Your legal guide on estate planning, inheritance, will and more.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    ...more
    The Economic Times

    Stories you might be interested in