DSIJ Mindshare

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.[PAGE BREAK]

There are other surprises like Educomp Solutions, which historical-ly traded at a higher P/E multiple, but has been given a cold shoulder by the investor fraternity after the IT raids it witnessed. DB Realty is another company that witnessed double blows resulting from poor sectoral sentiment and alleged involvement in fraudulent activities. Apart from DB Realty, many other companies from the real estate sector are trading at a lower P/E, like HDIL and Ackruti City. Some more big names, like Videocon Industries, REC, Aurobindo Pharmaceuticals and Torrent Power, which have historically been trading at a higher P/E, are now trading at a single digit P/E.

While these 1040 companies are trading at a single digit P/E, the Sensex is still trading at 18.5x. Put differ-ently, there are many companies which are trading at a 52-week low while the Sensex is not. This only under-scores the mood of pessimism in the market, where investors have become risk-averse and market sentiments are fragile. However, we are not saying that all these counters are good buys. We feel that investors need to be cautious, as ‘low’ need not necessarily mean ‘good’ in this market. Many of these scrips may witness some more fall going ahead.

It is true that many of these companies would be reporting far from great numbers, perhaps even poor or negative numbers, for the next two-three quarters. It is also possible that some may witness another downturn. However, those who have an investment perspective of the next two years can start investing in the some good ‘A’ group counters with good management bandwidth, which are available at good valuations. This is an opportune time to do some bargain hunting for your long-term portfolio. Rather than spending your time fretting about the current situation, it would be better to take a step ahead and prepare a good long-term portfolio with a perspective of three years.

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