Stocks to buy: Consider reasonably valued companies; 5 stocks with up to 38% upside potential The stocks that are trading at a valuation discount in terms of their PBV multiple relative to their respective five-year average were identified. To look for fundamental soundness, only those that have surpassed analysts estimates in the June 2024 quarter were considered
Global factors intensified volatility in the equity markets in the first week of August. After closing at a historic high of 25,010 on the first trading day of August, the benchmark Nifty 50 index had lost over 2.5% by 9 August. Geopolitical tensions in the Middle East, slowdown in China’s growth, strengthening of Japanese yen, and renewed fears of recession amid weak macroeconomic data from the US are some of the factors that spooked investors worldwide.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Apart from global factors, expensive valuations, especially in the mid-cap and small-cap segments, and the tepid June quarter earnings performance of corporate India are contributing to the rising volatility. The TTM (trailing twelve months) PE of Nifty Midcap 100 and Nifty Smallcap 250 indices is trading at a premium of 28.5% and 35%, respectively, relative to their five-year average, according to the data compiled from Trendlyne.
Research by Capitalmind Financial Services indicates a higher probability of correction in the BSE Smallcap 250 index if earnings don’t catch up. “The PE multiple of BSE Smallcap 250 has expanded by 63%, whereas EPS is flat at -3 %. This expansion is mostly due to the price increase. The continued flat trajectory in the earnings could escalate to a high probability of price correction,” states the study. The study is based on one-year data ending 11 July 2024.
The higher valuations are mainly driven by sustained liquidity flows and analysts are concerned about their sustainability. “Pockets of high valuations supported by easy global liquidity over the past few years could be at risk,” says George Thomas, Fund Manager, Equity, Quantum AMC.
Looking at the June quarter earnings, the interim earnings review report by Motilal Oswal states that the earnings growth of 163 of its coverage companies declined by 2% year-on-year. Sectors like metals, oil & gas, cement and speciality chemicals dragged the performance. In the Nifty 50 index, 39 companies that have declared results so far, reported an earnings growth of 5% yearon-year. The overall performance led to a downgrade in Nifty 50 earnings for 2024-25 and 2025-26 by 1.2% and 0.8%, respectively, adds the report.
Experts advise prudent investment in equity. Gaurav Goel, a Sebi-registered investment adviser says that India is very attractively placed for the next two decades and, hence, very attractive for long-term investors. However, the situation is not that rosy for short-term investors and stock market speculators. He advises methodical investment in equity markets through SIPs for long-term wealth creation.
As the global factors and high valuations are contributing to increased volatility, we have identified stocks that are trading at fair valuations relative to their respective long period (five-year) average. Though the price to earning, or PE ratio, is most widely used for valuation analysis, we have studied valuations in terms of price to book value or PBV ratio. PBV compares the stock price of a company to its book value per share. Book value is the net difference between the assets and liabilities and indicates the value of assets that shareholders will receive if the company is liquidated. However, the book value is an accounting metric and not based on the market value.
The ratio proves useful for evaluating companies that report negative net earnings (or net loss). It is also a preferred tool for analysing asset-heavy companies (capital intensive, like refineries, telecom, etc) and banks and financial sector companies.
However, the ratio is not free from limitations. It ignores intangible assets like patents, brand value, or intellectual property rights that have a significant impact on the company’s overall value. Therefore, it may not prove effective for service sector companies or IT companies.
Out of 2,506 stocks with market caps greater than Rs.100 crore, 60.8% or 1,523 companies are trading at a TTM PBV multiple higher than their respective five-year average; 1,042 companies’ (41.5% of total) current TTM PBV multiple is at over 25% premium to their respective five-year average multiple.
The stocks that are trading at a valuation discount in terms of their PBV multiple relative to their respective five-year average were identified. To look for fundamental soundness, only those that have surpassed analysts’ estimates in the June 2024 quarter were considered.
The following five companies are covered by a decent number of analysts and are currently offering a double-digit share price potential.
Five Star Business Finance
THE NBFC REPORTED a good performance in June 2024, with 37% year-on-year growth in net profit. The performance was led by strong business traction despite the election impact. The AUM jumped by 36% year-on-year, supported by steady disbursements that grew by16% year-on-year. The earnings surpassed Reuters-Refinitiv estimates by 2.1%.
The management is optimistic about more than 30% growth in AUM in 2024-25, and factors like branch network expansion, increase in business officers and higher ticket size are expected to support this guidance. It reported stable yields, asset quality and cost of borrowing on a sequential basis. Further, any reduction in interest rates is expected to moderate the cost of borrowing as the majority of its loans are on a floating rate. The management intends to reduce lending rates by 50-75 basis points in the near future to pass on the benefits of lower cost of borrowing to its customers.
The asset quality is stable and slippages during the quarter were lower than its peers. Superior underwriting practices and investment in the collection workforce over the past few quarters are strengthening asset quality.
A recent Ambit report is bullish on the company and states that it is well-placed to cater to under-served borrowers given its distribution and collection strength.
City Union Bank
THE PRIVATE SECTOR BANK reported a net profit growth of 16% year-on-year in the June quarter supported by stable credit costs. It surpassed Reuters-Refinitiv estimates by 4.8%. The loan growth of 10% year-on-year was supported by a lower base and traction in gold loans. The management expects double-digit loan growth in the coming quarters that will be supported by its focus on expanding secured retail, micro-LAP and housing loans.
The asset quality continues to improve, with negative net slippages (owing to strong recoveries), which has also led to a moderation in credit costs. However, the cost-toincome ratio is expected to remain elevated over the next 6-7 quarters as it continues to invest in digital capabilities. Thereafter, the benefits of digital lending and operating leverage from employee productivity will contribute to the earnings. A recent Elara Capital report is bullish on the bank and believes that the operational parameters are turning favourable as changes made by the bank are starting to take shape. The report states that while a definitive turnaround may be some time away, the bank is making the right strategic choices, which will define future capabilities. It estimates an RoA of 1.4-1.5% with RoE improving to 13-14% over the next two years.
Ujjivan Small Finance Bank
THE SMALL FINANCE BANK reported a 7% yearon-year decline in net earnings in the June quarter, impacted by a contraction in margins and elevated provisions. However, the reported earnings surpassed Reuters-Refinitiv estimates by 4.1%. The disbursement growth was flat on a year-on-year basis due to asset quality issues in the MFI space.
The bank has been witnessing stress in the microfinance portfolio in some districts (Punjab, Haryana, Gujarat, Kerala and Uttar Pradesh), which has resulted in asset quality deterioration. However, strong provisions are expected to avert any meaningful disruption. Moreover, the mature microfinance markets (Maharashtra, West Bengal, Tamil Nadu, Karnataka) continue to exhibit healthy asset quality trends.
The management expects growth momentum to improve in the second half of 2024-25 as the impact of lower disbursements in MFI will be offset to a certain extent by the growth in individual loans and the affordable housing segment. Gold and vehicle loans will further boost the share of secured assets and support margins and profitability.
The bank is set to approach the RBI in 2024-25 for a universal banking licence and acknowledge that it meets the guidelines for that. The acquisition will provide benefits in terms of lower capital requirements, increased product diversification and lower PSL requirements. Analysts are bullish on the stock due to its potential for generating decent return ratios.
Macrotech Developers
THE REAL ESTATE DEVELOPER reported a healthy performance in the June quarter with a 20% pre-sales growth. The EBITDA margin jumped by 620 basis points, whereas PAT surged by166% on a year-on-year basis. It launched new projects with GDV (gross development value) of Rs.3,000 crore during the quarter and plans to launch several projects with GDV of Rs.12,000 crore in the next three quarters of 2024-25.
The company’s established position in MMR (Mumbai Metropolitan Region), progress in new markets (Pune and Bengaluru), and rising demand for residential properties, coupled with the company’s large land bank, is expected to sustain growth momentum in the future. Moreover, plans to launch premium inventory in Palava township will be value-accretive.
The management has guided a 20% pre-sales increase in 2024-25, and factors like price increase, volume growth in existing geographies and improved contribution from new markets are likely to support this guidance. Further, the collections and cash flows are expected to improve in the future, aided by a faster construction pace in the remaining part of the current financial year.
A recent Nuvama report is bullish on the company and states strong execution skills, industry consolidation, asset-light business development, ready inventory liquidation and interest cost reduction are likely to culminate in robust cash flows and debt reduction in the future.
Sagar Cements
THE CEMENT PLAYER reported a net loss of Rs.32.2 crore in the June quarter amid weak realisations and operating deleverage. Compared to the corresponding quarter of the previous year, the net loss was narrowed as it reported a loss of Rs.42 crore in the June 2023 quarter. Muted demand due to elections and adverse weather affected the performance during the quarter. Analysts expect pricing and demand to improve in the third quarter of 2024-25.
The company reported volume growth of 9% year-on-year due to ramping up of capacities in Andhra Cement. Further, the volumes are expected to improve with the capacity expansion at the Gudipadu and Jeerabad plants by 2025-26. The management has maintained volume guidance for 2024-25 at 6.5 MT (million tonne). Moreover, focus on operational efficiencies is expected to support margins in the future. It is building railway sidings, captive power plants and waste heat recovery systems to improve its operational infrastructure. This, coupled with adequate limestone reserves, is helping the company procure inputs at reasonable prices, contributing to margin stability.
A recent Systematix report is bullish on the company and believes that it is well-positioned to leverage the stable input prices once the revival in demand plays out in the second half of 2024-25.
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This story originally appeared on: India Times - Author:Faqs of Insurances
