Value Stocks: The low-risk way to grow your wealth

The Indian stock market staged an outstanding performance since last Diwali, primarily on the hopes of faster recovery from the adverse impact of the pandemic. Of course, ample liquidity also helped matters.

The upshot: stocks are richly valued across the board. For conservative investors for whom capital protection is a priority, buying value stocks makes tremendous sense. Value investing is about buying stocks that are trading at prices lower than the company’s worth fundamentally.

Of course, what goes into that valuation could be divergent but largely the idea is not to pay excessively for growth expectations. This Diwali, we have picked up the following four value stocks for you.

ITC

In a market where valuations are elevated, it’s a rarity to find a bluechip stock available cheap. But tobacco major ITC fits into this bracket. The stock has been undervalued for sometime, testing the patience of investors waiting for the value to unlock. That has not happened so far because not only tobacco as a business is loathed by global investors for the health hazard that comes with it, markets also fear declining tobacco sales as a threat to growth.

The government’s move to continuously raise taxes will depress volume growth in the business that delivers around 85 percent of profits (earnings before interest and tax) for ITC. But then, cash flows are for real and stock market probably can’t ignore that for long, especially in a market where stocks offering stable growth are overpriced.

“ITC offers an attractive 5 percent FY23 dividend yield and we expect double-digit earnings CAGR over FY22-24,” wrote Kunal Vora of BNP Paribas Securities India Pvt Ltd in a report on October 28. CAGR refers to compound annual growth rate.

ITC cigarettes business is seeing a good recovery after the second COVID wave. ITC has said cigarette volumes saw smart recovery during the September quarter (Q2FY22) with volumes towards the end of the quarter at near pre-pandemic levels. This sets the stage for better recovery from Q3 unless a third wave hits the country. As the economy normalises, ITC’s other businesses too are expected to see a decent bounce back. At some point, a spin-off of the various businesses may unlock value embedded in the different businesses.

NTPC

If banks are a proxy for the economy, power is the proxy for the manufacturing sector. In fact, it is a proxy for the economy, too. NTPC Ltd in that sense is really a play on the economy, except that being a utility, its returns are capped. NTPC has been going cheap, again because the market is enamoured by renewables and unenthused by thermal energy, which is NTPC’s mainstay now. But NTPC actually offers the best of both worlds.

“While the high concentration of coal-thermal projects had raised ESG (environment, social and governance) concerns on the company, we see incremental efforts toward RE expansion,” said analysts from Emkay Global Financial Services Ltd in a report on October 31. The brokerage further added, “This, along with an improvement in the RoE (return on equity) profile, should lead to a re-rating in the stock.”

NTPC’s ambitious RE expansion is expected to assuage ESG concerns. NTPC plans to have around 15GW RE capacity by financial year 2024 (FY24) and another 45GW capacity by FY32. As such, NTPC’s low cost of funding is a distinct advantage for its RE expansion.

“Potential monetisation of its RE and power trading subsidiaries could further improve shareholders’ returns in the coming years,” said a recent report from Sharekhan Ltd.

NTPC’s shares have appreciated by around 38 percent so far this calendar year, reflecting the bright outlook to some extent. But it trades at a price-to-earnings ratio of around 8 times for FY23 estimates based on average estimates of a few brokerages and its price-to-book ratio stands at 0.9 times. That’s cheap.

NMDC

The NMDC Ltd shares have underperformed the broader markets in the past six months. To that extent, valuations of the iron ore producer are cheap. NMDC is a play on strong iron ore prices and volumes. It plans to raise its production meaningfully over the coming years. According to its FY21 annual report, the company plans to reach the capacity of 67 mtpa (million tonnes per annum) by 2025. In FY21, production stood at 34.1 mtpa.

NMDC is primarily an iron ore producer but it is also a rare earth elements play. In 2018, NMDC signed an MOU with Indian Rare Earths Ltd, which proposes to explore opportunities in rare earths in India and abroad. This could provide some option value in the stock. Indian billionaire investor Radhakishan Damani is amongst top 25 shareholders of NMDC.  In its Q4FY21 investors presentation, NMDC informed Damani owned 34 lakh shares of the company or 0.12 percent equity. According to NMDC’s Q1FY22 presentation, as on July 31, Damani owned around 54 lakh shares or 0.19 percent holding.

Further, investors should watch the progress on the commissioning of the 3 mtpa steel plant at Nagarnar, Chhattisgarh. Analysts believe the demerger of the steel plant would create value for shareholders.

For the September quarter (Q2FY22), NMDC is expected to report strong set of numbers year-on-year on the back of healthy realisations and higher sales volume. NMDC has said, “With a 56% increase in production and a 37% increase in sales over CPLY (corresponding period last year), the Navratna PSE surpassed its previous best Q2 performance.”

Container Corp of India

Container Corp of India Ltd (Concor), trading about 10 percent away from their 52-week highs of Rs 754.40, has a solid presence in the logistics sector. For now, Concor expects volumes to get a boost from the partial commissioning of the DFC (dedicated freight corridor).

Further, pleased with the growth momentum seen in the half year ending September, Concor’s management has revised its FY22 guidance for revenue to 15 percent (from 12 percent earlier). The company now expects its profit after tax to more than double year-on-year for FY22.

Going ahead, the full commissioning of the DFC is positive from volume perspective. “The DFC potential has started unlocking and the much-awaited divestment (potentially in FY23) could be the trigger that further re-rates the stock,” said analysts from Edelweiss Securities Ltd. “We expect significant earnings growth in FY23-25E and hence expect the upside to materialise.”

This state-owned company is a candidate for disinvestment. Thus, needless to say, investors would do well to monitor news flow on the divestment, going ahead. Further, investors should also keep a close eye on land policy by the government for long-term leasing.

“Land policy finalisation is awaited (Cabinet approval awaited) which will allow the company to pay upfront for 30 years LLF and lock in the present rates,” said ICICI Securities’ analysts. Based on the average FY23 estimates of a few brokerages, the Concor stock trades at a price-to-earnings ratio of around 30 times.