5 reasonably valued stocks with up to 41% upside potential: Can be good buys in volatile share market
One of the key reasons for the ongoing volatility in the Indian equity market is the high valuations, especially in the mid- and small-cap segments. The valuations, in terms of TTM PE, in these segments remain high compared to the historical averages. As per the data compiled from Trendlyne, Nifty Midcap 100 ’s current TTM PE is at a premium of 13% and 38%, relative to the past one-year and two-year averages, respectively. The Nifty Smallcap 100’s TTM PE is at a premium of 15% and 37%, respectively.#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;}
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The global equity markets in 2025 will be influenced by heightened trade friction, geopolitical issues, stronger USD, higher-for-longer US interest rates, likelihood of an increase in the prices of industrial raw materials, and uncertainties associated with the growth of the Chinese economy. Though the Indian markets may remain insulated from tariff-related uncertainties, weakness in the rupee could prove unfavourable. The USD is expected to strengthen as markets anticipate fewer rate cuts from the US Federal Reserve, which will keep the rupee under pressure. A weaker rupee will be detrimental to the Indian economy due to its net importer status. A stronger USD will influence FPI inflows, which can aggravate volatility.
The domestic markets will be influenced by consumption. While rural consumption will remain strong, urban consumption will be dependent on moderation in inflation and an increase in employment opportunities.
A likely moderation in the inflation rate in early 2025 will provide support to the equity markets as it will help the RBI initiate a rate cut cycle. A recent CareEdge Foresights December 2024 report expects a rate cut of 50-75 basis points in 2025, starting with a 25 basis point cut in the February policy meeting. The report estimates CPI inflation to moderate below 5% in the first quarter of 2025. Though analysts remain optimistic about India’s long-term growth prospects, led by favourable demographics, strong economic growth outlook (driven by revival in capex cycle) and stable governance, they list revival in domestic demand and external geopolitical tensions, commodity price shocks and weather events as factors that will influence earnings growth.
As uncertainties create risks, it is advisable to consider stocks that are trading close to their intrinsic values. Generally, investing at a price that is lower than the intrinsic value creates prospects of wealth creation.
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What is intrinsic value?
The intrinsic or fair value is defined as the price that is based on the future earnings of a company. It is considered the true value of a company from an investment perspective and is calculated by taking the present value of the earnings a company is expected to generate in the future. The intrinsic value is usually calculated by analysts using discounted cash-flow analysis.
Though the intrinsic value is not directly available, it can be obtained from Reuters-Refinitiv’s proprietary intrinsic value model, which compares the intrinsic value of a stock with the current price of the stock. The model uses the dividend discount method, incorporating earnings forecasts and long-term growth rates, prioritising recent top-rated analyst projections. Future dividends are discounted to determine the stock’s intrinsic value.
After obtaining the intrinsic value, the model uses the ratio of the price and intrinsic value to arrive at a score that determines the relative valuation of a stock in its respective industry. The score varies between 1 and 100. The closer it is to 100, the better the stock in terms of valuations and growth prospects.
We extracted the model scores for 1,567 mid- and small-cap stocks and identified high-ranked stocks within their respective industries. High-scoring stocks are defined as those with a score between 51 and 100. Only stocks with a market cap of more than Rs.100 crore were considered. In addition to high model scores (in respective industries), the five stocks shortlisted also ensure decent analysts’ coverage and a double-digit upside potential over the next year.
As the calculation of the intrinsic value is based on a proprietary algorithm, it is not freely available. The objective of this article is not to understand the functioning or basics of the algorithm, but to use the model output to identify reasonably valued stocks. The following are the five shortlisted stocks.
Hero MotoCorp
The two-wheeler manufacturer reported a decent performance in the September 2024 quarter, with a standalone revenue growth of 10.8% year-on-year. The performance was supported by improved volumes and net realisations, led by healthy spares revenue. Cost control initiatives and operating leverage benefits supported EBITDA margins that jumped by 40 basis points y-o-y.
The company saw strong festive season demand in urban and rural markets. The momentum is expected to continue, led by new model launches, marketing campaigns and a ramp-up of the 125 cc segment. The government capex, marriage season and improving rural demand will also support performance in the second half of the current financial year. The export business is also seeing a healthy demand from the Columbia and Mexico markets.
Its EV business ‘Vida’ is gradually gaining market share, and the management aims to launch affordable EV variants by the end of the current financial year to scale up volumes in the segment. PLI benefits will also support EV business in the future.
A PhillipCapital report released after the September quarter results states that the management’s focus on premiumisation, scaling up of Premia stores, investment in building sub-brands, emphasis on refreshing its ICE scooter portfolio, expansion of EV portfolio and continuing demand momentum are key strongholds.
National Aluminium Company
THE PSU COMPANY with diversified operations in mining, metal and power reported a healthy operating performance in the September 2024 quarter, with revenue growth of 31% y-o-y. The performance was supported by higher alumina prices and volumes. Moreover, lower power and fuel costs due to higher captive coal usage and operating leverage benefit boosted EBITDA, which registered 291% y-o-y growth.
The price of aluminium is expected to remain elevated due to rising consumption in China and bauxite supply disruptions in Guinea. In addition, Alcoa’s closure of its Kwinana refinery in Australia, and Rio Tinto’s declaration of force majeure at its Queensland refineries due to gas shortages, have exacerbated the demand-supply mismatch. On the other hand, coal costs are expected to remain lower with the commissioning of the Utkal D coal block. These factors are expected to boost profitability in the second half of the current financial year.
A Systematix report released after the September quarter results expects notable profitability growth from the commissioning of multiple projects, including a ramp-up of the Utkal D coal block, fifth stream alumina refinery expansion at Damanjodi (commissioning expected in September 2025), and development of the Pottangi bauxite mine. The report expects an extended surge in the alumina prices till supply concerns are resolved, either through the restoration of supplies or fresh bauxite supplies from mines under expansion. However, these expansions are expected to take time to materialise.
Sonata Software
THE IT SERVICES COMPANY reported a decent performance in the September quarter despite the macroeconomic challenges and ongoing geopolitical issues. While the consolidated revenue declined 14.1% sequentially in rupee terms amid seasonal weakness in the domestic business, the international IT services revenue registered 2.3% sequential growth in USD terms. The margins improved sequentially, led by operational efficiency despite headwinds from wage hikes.
It has a healthy deal pipeline in AI and cloud services, with a TCV of $100 million. Its focus on large deal wins and investments in Gen AI are yielding results. In terms of verticals, the growth will be driven by healthcare, life sciences and BFSI. The management expects its performance in the second half of 2024-25 to be better than that in the first half. An HDFC Securities report released in the first week of December expects the company’s growth to accelerate, supported by recent deal wins, focus on new verticals and strategic partnerships.
The report also expects the international IT services segment to bounce back in 2025-26 and achieve a 15% CAGR over 2024-25 and 2026-27. The EBITDA margins in the segment are likely to recover in 2025-26, aided by operational efficiency, SG&A (selling, general and administrative costs) leverage, and the ramp-up of large deals.
Ashok Leyland
THE COMMERCIAL VEHICLE manufacturer’s volumes and revenue registered 8.5% and 9% y-o-y decline, respectively, in the September quarter. Muted demand and high base effect impacted the performance. However, cost efficiencies and price control supported EBITDA margins that jumped 40 basis points y-o-y. Also, higher other income supported adjusted PAT, which registered a growth of 11.8%.
The CV industry is expected to pick up in the second half of 2024-25, aided by an anticipated growth in government spending and replacement demand. Also, the demand for buses is expected to rise, led by pent-up demand in school and office segments. A healthy order book of e-buses from various states will help it to gain market share in the bus segment.
The company will also benefit from the improved outlook of its non-vehicle business (power solutions, defence and aftermarket). On the other hand, exports are likely to register a strong growth amid recovery in the Asian and African markets.
A Motilal Oswal report released after the September quarter results sees the company as the top investment choice in the CV growth cycle, given its positioning to expand revenue and profit pools. Its focus on profitable growth, driven by lower discounts, better mix and cost-control measures is expected to support the EBITDA margin expansion over 2023-24 and 2025-26.
Oil India
THE UPSTREAM OIL AND GAS COMPANY reported a muted performance in the September 2024 quarter, with a 12.5% and 12.3% decline in EBITDA and adjusted PAT on a y-o-y basis. Lower production and higher operating expenditures dragged down the performance during the quarter. While the production was hit by a power outage and a lower offtake by its subsidiary, Numaligarh Refinery, the dry well-related write-off led to a surge in the operating expenditure.
The management aims to boost oil and gas production by focusing on high-impact areas and OLAP field development. Moreover, capacity expansion for NRL from 3 MMT to 9 MMT (expected to be completed by December 2025), and completion of Indradhanush Gas Grid phase I will further enhance growth.
A recent report from JM Financial expresses optimism about the company, citing several key factors. These include the support of OPEC+ for crude prices at nearly $75 per barrel (net realisation), strong production growth outlook over the next 1–3 years, and management’s guidance on the continued excise duty benefits for its expanded capacity.
A report from ICICI Securities states that the new nomination field price formula (sets premium prices from new wells) could lead to a gas price that is well above the company’s long-term historical average and will support its EPS growth.
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This story originally appeared on: India Times - Author:Faqs of Insurances
