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Over 20 Nifty stocks trade below average 5-year P/E and P/B; time to buy?

If a stock is trading below its average 5-years PE and PB it means that stock is trading below its fair value, and it is just a matter of time before prices correct themselves and converge back towards its fair value.

April 22, 2020 / 11:34 AM IST
 
 
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The outbreak of COVID-19 has put immense strain on the economy not just in Indian but across the globe. With most economists across the globe looking at a near-zero growth for the India GDP in the forthcoming quarters, the capital market is factoring the worst.

After falling by nearly 40 percent from the highs, Nifty has recovered more than 20 percent but is still down in double digits from the record highs. But, the recent corrections has made valuation reasonable not just for Nifty but for most of the blue-chip names.

Valuations of Indian equities are well below their long-period averages. The Nifty trades at 12-month forward P/E of 12.7x, at a 30 percent discount to its long-period average of 18.1x.

“The Nifty’s P/B of 1.9x is also below its historical average of 2.6x (26% discount). At the current trailing P/E of 16.2x and forward P/E of 12.7x, we see limited triggers for further re-rating, unless accompanied by a material surprise in earnings,” Motilal Oswal highlighted in a report.

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The ‘Black Swan’ event in the form of COVID-19 fuelled lot of fear and lockdown scenarios observed across the globe is likely to put further strain on the economy, feel experts.

But, if you are value investors then this is the right time to pick jewels for your portfolio which are available at a steep discount compared to January prices.

There are as many as 23 Nifty50 stocks that are trading below their respective 5-Year Average P/E as well as P/B ratios, a Motilal Oswal report showed.

The list includes names like Wipro, M&M, Bajaj Auto, Grasim Industries, ITC, SBI, Vedanta, ZEE Entertainment, GAIL India, Hindalco, Coal India, and ONGC, etc. among others.

“Certainly some of the quality mid-caps, large-caps, and more importantly even companies from the Nifty 50 list are available at historic low valuations which are only possible at times of panic or crisis,” Paras Bothra, President of Equity Research, Ashika Stock Broking told Moneycontrol.

“While there will be speculations over the quality of assets in the financial space once the economy reopens and loan moratorium period is over. Nevertheless, strong names with quality management which have got over the crises before are expected to sail over this crisis as well,” he said.

Note: Companies given in the list are for reference only --

Price Earning MOSL


Relevance of P/E and P/B ratios:


Price-Earnings as well Price to Book Value are parameters that are often used in the valuation methodology. It is a readily available tool to look/compare the valuation of companies.


Price-earnings ratio is a ratio between the price and earnings of a company, whereas Price to Book (PB) value is a ratio between the price and the accounting value of the company.


But, experts advise to use these ratios with other parameters before making a buy or sell decision. “Both ratios, however, have limitations. For PE ratio, it is not prudent to compare through historical data if the earnings or EPS varies significantly through different cycles like for financial companies or heavily leveraged companies, thus making comparison difficult between peers or even historically,” says Bothra of Ashika Stock Broking said.


“It is prudent to look at PB ratio for financial companies and for asset-heavy businesses, although it does not work very well for asset-light companies such as those in the information technology sector, FMCG,” he said.


What should investors’ do?  

The next big question in front of investors is – are these stocks a good buy in the current turmoil? And, have enough firepower to create wealth in the long term say in the next 2-3 years.Experts feel that investors should stocks that are trading below their 5-Year average will look good on the paper but at the same time, investors should also analyse the reason behind the fall.

If a stock is trading below its average 5-years PE and PB it means that stock is trading below its fair value, and it is just a matter of time before prices correct themselves and converge back towards its fair value, say experts.

“At present, we can see the market also on a path of correction therefore with proper judgment, an informed decision can be made for value buying. Investors should try to accumulate stocks as they have the capability to generate good returns over mid to long term,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.

“We like NBFC giant HDFC Ltd, Larsen and Toubro, Indian Oil Corporation Limited and ITC are most preferred and placed at favourable price and on cheaper valuation,” he said.

Bothra of Ashika Stock Broking prefers HDFC, Cipla, M&M, Hero Motocorp, Bajaj Auto, ITC, State Bank of India, Gail & ONGC are some of the names which can be looked at on down days in the market.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.

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