Valuation check: Try stocks with P/E of less than Rs10

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The markets are trading at an all-time high today. With so much talk of valuations and markets running ahead, CNBC-TV18's research analyst Nikhil Bhatnagar does a valution check.

Bhatnagar takes the bond yield at 7.25% and inflation at 4.25% and calculates that these two add up to 11.5%, which should be the return that an investor should ideally look to overcome, if he is planning to invest in equities. 

Further, Bhatnagar takes a few filters like stocks with PEs of less than Rs 10, a price to book of less than 2.5 times, shares outstanding greater than Rs 1 crore, so that there is reasonable amount of liquidity in the stock and three years of incremental profits, to discover these stocks. So, according to him, the last three financial years should have shown rising profits every year. All parameters have been taken at 12 months backwards basis, that is FY05, so that it appears more conservative in estimates, he says. Now lot of the stocks that came up were fairly predictable, he adds. 

A couple of PSU banks, some of the commodity plays like Tata Steel , Tata Sponge Iron and so on, but Bhatnagar picks the ones that have not been seen so far.

According to Bhatnagar,  DCW has a PE of 7.46 times, a price to book at a discount that is 0.74 times and a dividend yield of 2.56% and shares outstanding of Rs 17.2 crore. He analyses that this means that at a PE of 7.5 times one can take an earnings yield of around 13.5%.

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If one takes a dividend yield of 2.5%, that is close to 16% and 5% above what you could make on the risk free rates, that is 11.5%; reasonable amount of spread there, says Bhatnagar. The company makes PVC, Chlor-alkalies and soda ash. The price is about Rs 9-10 but it had a stock split. That is why it looks a lot lower than it actually is, he reasons.

Another stock that Bhatnagar picks is Garware Wall Ropes . It has a PE of 6.8 times, which is an earning yield of 14.7%.

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An amazing dividend yield of close to 5.25%, so that is 19% returns that the stock potentially has to offer considering a risk free return of 11.5% he says.  This again makes synthetic ropes, steel wire ropes.

The last stock that Bhatnagar talks about is GIC Housing Finance , which had a PE of five times, price to book of one time and a dividend yield of 2.6%, shares outstanding of Rs 2.6 crore. So fairly interesting plays, he says.