Corrected Valuations: Bargain hunting opportunity

The one thing that usually makes a buyer happy is a discount. This is why most buyers wait eagerly for end-of-season sales to shop for their favorite brands at a discount. Usually, whenever discounts are offered, people enjoy shopping and it is a joyous period. However, the stock market is one place where exactly the opposite occurs. When stocks are available at a discount, the mood is hardly joyous. Rather, a sale on D-street means that things are not going well.

Something similar is happening of late. Factors like the US sovereign downgrade, European debt worries, slower growth for corporates in the June 2011 quarter and slowing GDP growth has resulted in the Sensex witnessing a sharp fall. Despite the recovery witnessed in the last few sessions, it is still down by 10 per cent since the beginning of August. The Sensex is down 19 per cent Year-to-Date (YTD), making India the worst-performing market in the Asia Pacific region on a YTD basis. All this gives one the feeling that an end-of-season sale is on for several valuable stocks.

The downward movement has resulted in many good scrips trading at low valuations of single digit P/Es on a trailing four quarter basis. To quantify this, there are a total of 1040 companies which are still trading at a single digit P/E. The best part is, around 42 of these are from the ‘A’ group. In the ‘B’ group too, there are 23 companies with a market cap of more than Rs 2000 crore, and 58 companies with a market cap of more than Rs 1000 crore, which clearly indicates that there are larger companies in the ‘B’ Group too.

If we concentrate on the ‘A’ group companies, which account for 55 per cent of the total turnover and more than 80 per cent of overall market capitalisation, there are a few surprises. For instance, if we adjust for the 16 PSU banks, some of the leading stocks from high-growth sectors like infrastructure, capital goods and mining, which are available at single digit price to earnings multiples. The scenario is no different for the services sector, with companies from the IT and education sectors making it to the list. Here, the presence of Tata Steel, SAIL, JSW Steel, Bhushan Steel and Jindal SAW point to the state of the steel sector, which is facing problems on the volumes and the realisation front. The impact of a slower demand in the metals industry and the ban on mining in certain areas has impacted the valuations of the sector as a whole, hurting companies like Sesa Goa and MOIL.

Infrastructure was one space which provided a high amount of growth, but in the past few quarters, the sce-nario has changed completely. While two leading players, Jaypee Infratech and Reliance Infrastructure, are part of the list from the ‘A’ group, there are 51 infra companies from the ‘B’ group too. Even leading players like IVRCL, Gammon Infra, J Kumar Infraprojects and Unity Infraprojects are in the list. This is a sign of the fragile sentiments towards the infrastructure sector.

The IT sector too has taken a hammering. Although only one company from the ‘A’ group, Patni Computers, is on the list, there are around 49 smaller IT companies from the ‘B’ group, including names like 3i Infotech, Allied Digital Services, Geometric, Persistent Systems and Zylog Systems.