Finding value in equity markets is tough and it is even tougher to put money when the market trades at record highs. Yes, valuations of Indian markets do look stretched but there are plenty of stocks which are ‘value for money’ even at current levels.
The action was more pronounced in small and midcap stocks which gave double-digit returns in a relatively small period of time. A prudent strategy for investors would be to focus on quality because most stocks are already trading at lofty valuations.
Even though D-Street celebrates record highs on Nifty, there are one lingering concerns – fundamentals do not support the rally. A lot of it is hope based. Valuations remain rich and earnings recovery will still take some time.
Even though foreign investors continue to dump equities, domestic institutional investors (DIIs) poured in close to Rs 20,000 crore in the month of August alone – which is an all-time high.
"Continued inflow in domestic funds, benign interest rate environment, stable currency coupled with favorable global cues is driving markets higher. Anxiety in global markets over North Korea has tapered off," Gautam Duggad, Head- Research, Motilal Oswal Institutional Equities said.
He believes while valuations are not euphoric, they are rich versus long period averages and therefore support from earnings pickup is critical to sustaining these valuations, going forward.
“We prefer largecaps to midcaps owing to valuation gaps. Earnings visibility and valuation comfort are key determinants for preferred ideas," Duggad said.
Many stocks have more than doubled investors’ money in the last one year and so far in the year 2017 especially in the small and midcap space. But, not every stock in the broader market is a buy.
Investors should look at stocks which are low risk and are trading at levels which may look expensive but justifies future growth potential of the stock.
“We follow bottoms-up approach for all our schemes. We have clearly articulated investment framework for each scheme. We follow our investment discipline while investing inflows and we keep a close focus on risk management,” Sachin Relekar, fund manager – equity at LIC MF told Moneycontrol.
“In the near-term, we are cautious. However, we are positive on domestic-oriented businesses from a medium to the long-term point of view,” he said.
We have collated a list of stocks which are value for money and investors can look at current level:
Analyst: Pankaj Pandey, Head of Research, ICICI Securities
Pick-up in domestic execution trends along with continued focus on reasonable margin orders disciplined working capital, and monetisation of non-core assets will all work in conjecture to improve RoEs.
We expect RoEs to improve 300 bps in FY17-19E to 14.4 percent. This is expected to be achieved on the back of 16.2 percent PAT CAGR over the same period. L&T is the best way to play the recovery of the Indian capex cycle. Hence, we have a BUY rating on the stock with a target of Rs1,430.
Cochin Shipyard (CSL)
CSL is consciously improving its business mix by increasing the share of ship-repairs orders (2x profitable than shipbuilding business) in its order book. Currently, CSL has a healthy order book of Rs2856 crore and is also likely to receive a large order for phase III of IAC.
With a healthy order book and order pipeline, we believe CSL will clock revenue, EBITDA and PAT CAGR of 14.2 percent, 13.3 percent, and 10.5 percent, respectively, in FY17-19E. Accordingly, we value the company at 25x FY19E EPS of Rs29 to arrive at a target price of Rs725 per share.
Axis Bank is has a strong liability franchise with CASA ratio at 49.2 percent of deposits as on June 2017. The bank has been under pressure due to its asset quality stress with GNPA ratio at 5.03 percent (| 22030 crore).
However, its watch list declined 16 percent in the last quarter to Rs7941 crore (69% is power sector). With existing stress already in the price and limited exposure to IBC referred accounts, we factor improvement in return ratios to 14 percent RoE by FY19E.
Trading at 2x P/ABV, we believe the stock offers favourable risk-reward ratio among private banks. We have a target price of Rs585.
Analyst: D.K. Aggarwal, Chairman and Managing Director, SMC Investments, and Advisors
ICICI Prudential Life
According to the management, through a focus on improving protection business, persistency, and costs, the company would give good growth in coming years.
The key strategy of the company has been to grow the Value of New Business through growing the protection business, while the company achieved its strategic goals for FY2017.
The company is well capitalized for growth opportunities. The solvency ratio was at healthy level of 288.6% end June 2017, which is much above the regulatory requirement of 150%
Government’s greater emphasis on ‘Make in India’ initiative in Defence sector provides a great opportunity for the Company to enhance its indigenisation efforts and to address the opportunities in Indian Defence sector.
Healthy order book and orders in the pipeline, capacity enhancements and creation of new test facilities help the company in achieving the targeted growth and also would continue to drive the growth in the coming 4 to 5 years.
The company continues to gain market-share in the industry. Improvement of productivity and quality, relentless focus on manufacturing cost and energy efficiency, sharing of intelligent practices and benchmarking them against global standards and total compliance with environment, health and safety standards and norms helped the factories to maintain an almost faultless supply to the Businesses.
The company grew faster than the industry in terms of both revenue and profit. The company regained revenue growth in Print business with a heightened focus on yield-led growth and tight control of costs to improve profitability.
Also, the company continues to drive revenue from its newly launched Radio stations. Along with all these factors, with improved Digital footprint by executing on digital strategy, the company is expected to see good growth going forward.
Techno Electric & Engineering
The management of the company is confident of the company’s potential to expand the EPC segment on the back of capex revival, led by PGCIL and SEBs, with strong visibility of traction in the order book and healthy revenue due to healthy trade receivables.
In FY18, the management has said that it would focus on the closure of projects, which it believes will prune retention money and improve working capital cycle.
Analyst: Deepak Jasani, Head - retail research, HDFC Securities
The imposition of highway liquor sales ban by Supreme Court, demonetization, and implementation of GST disrupted the volume growth over the last few quarters but are now events of the past.
Relaxation given by Supreme Court and Kerala government are positives for volume growth. RKL is also expecting price increases to be effected soon as input costs had risen significantly in the past due to low sugar production in SS2016-17.
We feel investors could buy the stock at the CMP and add on dips to the Rs.152-158 band (~18x FY19E EPS) for sequential targets of Rs 207 (24x FY19E EPS) and Rs 224 (26x FY19E EPS) over the next 3-4 quarters.
Karur Vysya Bank (KVB)
KVB has consistently maintained comfortable capital adequacy, backed by regular capital infusion through rights issues and moderate internal accruals.
The proposed rights issue (1:6 @Rs 76) would ensure capital available for growth in the coming years. With a major portion of troubled assets either restructured or recognized as NPA, slippages should decline the going forward.
We feel investors could buy the stock at the CMP and add-on declines to Rs. 139-142 band (1.75x FY19E ABV) for sequential targets of Rs. 181 (2.25x FY19E ABV) and Rs. 201 (2.5x FY19E ABV) in 3-4 quarters.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.