stocks to invest in: Sensex @ 58,000: 10 value stocks that are worth investing in now – The Economic Times

Clipped from: https://economictimes.indiatimes.com/wealth/invest/sensex-58000-10-value-stocks-that-are-worth-investing-in-now/articleshow/85921217.cms

SynopsisAfter the growth-led rally, the value segment seems to be catching up now. Experts say these style shifts usually last a few years, so there is still steam left in value stocks. This also because of the structural shift happening in our economy.

The global economy has been badly hit by covid, but stock markets across the globe have gained due to very low interest rates maintained by central banks around the world. Indian equity markets have been no exception. The benchmark Sensex is now above 58,000, nearly 40% higher than its pre-covid peak of 41,953 in January 2020.

The market rally, especially when the economy is under stress, has taken the valuations almost into bubble territory. “Broader market is now trading at around 21 times its forward earnings and 27 times its historical earnings and therefore, can be considered as expensive,” says Amit Premchandani, Fund Manager at UTI Mutual Fund.

Is it possible to find value in an expensive market? Yes, say experts. “While the broader market multiple is at a high level, several value stocks are still available at reasonable prices,” says Meenakshi Dawar, Fund Manager, Nippon India Mutual Fund. The performances of growth and value styles tend to rotate. Value stocks usually do well after the market has peaked. “Globally also, growth style has outperformed values for the last 2-3 years and once economic growth picks up, value style will do better than growth,” says Anoop Bhaskar, Head – Equity, IDFC Mutual Fund.

Why investors chase growth
There are only a few pockets of growth during economic turmoil and all investors obviously want to be in that space. They are willing to pay high premiums for growth during the low interest rate regime. However, investors should note that the earnings growths of companies may not match the rise in share prices.

“Valuation is a clear concern because there is too much euphoria in some sectors and stocks. Several mid-cap stocks have gone up by 10 times in recent months. While the earnings will improve, it can’t shoot up like that,” says Rajeev Thakkar, CIO and Director, PPFAS Mutual Fund.

Also read:Value mutual funds have given stellar 1-year returns: How to pick the right scheme to invest in

Also, the fear of economic turmoil is making investors stick with companies that have stable profits. They are avoiding cyclicals with fluctuating net profits. “The market has rewarded companies with stable net profit growth disproportionately. However, earnings growth in cyclical sectors will be higher when the economy bounces back,” says Bhaskar.

Value still has steam left
After the growth-led rally, the value segment seems to be catching up now. Experts say these style shifts usually last a few years, so there is still steam left in value stocks. This also because of the structural shift happening in our economy. Traditionally, consumption and services stocks were considered growth stocks and manufacturing and utilities were value picks. The recent revival in the manufacturing segment, due to government initiatives like the production linked incentive, is changing this. “All manufacturing companies with global relevance are doing well now and these structural themes are expected to continue for a few more years,” says Dawar.

Avoid value traps
This week’s cover story has identified 10 value stocks that are worth investing now. We have screened the BSE 500 universe on several parameters (see graphic) to identify companies that are trading at reasonable valuations and could offer decent returns to investors. Our list has taken care not to include stocks that may have low valuations but are not value stocks.

Finding value above 58,000
How we applied filters to identify stocks that offer value

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The low PE ratio may be due to a sudden jump in net profits this year due to extraordinary events. In fact, experts call such scrips value traps. Similarly, the low PB ratio of financial services companies may appear enticing, but their book value itself can disappear if the non-performing assets shoot up. Value investors should also be careful of highly leveraged companies.

Experts say that besides the quantitative factors, value investors should also look at qualitative factors. “Avoid companies with poor promoter quality even if they are quoting at a discount,” says Dawar. “If promoters are not investor-friendly, they may do some merger or demerger and keep the value you spotted for themselves,” says Thakkar. “Avoid small players in any industry if the company doesn’t have its own niche – like low production cost, exclusive access to raw material, technological advantage in its key segment, etc.,” says Bhaskar.

“Since intrinsic value is calculated as discounted value of cash flows for 10-20 years and its terminal value, investors should be careful with companies where its terminal value is low or depleting,” says Premchandani. Coal India is a good example of this depleting terminal value due to the decline in coal consumption following pollution concerns. Similarly, the terminal values of companies like Castrol and Gulf Oil Lubricants are also under a cloud because of the threat from electric vehicles.

  • Power Finance Corp

With a very low PB ratio and high dividend yield, Power Finance Corp is a typical value stock. Most of its loans are to government entities and, therefore, are practically risk free. However, PFC does have some stressed private sector assets. The stock has underperformed the market and NBFC sector in the past one year because of the slower than expected resolution of these stressed assets.

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The management’s effort on this front continues and PFC has brought down its net NPA to 2% as on 30 June from 2.1% as on 31 March 31. Any resolution of these private assets will result in a re-rating. Increasing provision coverage ratio, which was around 65% as on 30 June, is another comforting factor.

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“Its attractive valuation (0.6 times its book value expected in 31 March 2022) indicates a high margin of safety. Its 7% plus dividend yield is also sustainable due to risk-free public asset financing,” says a recent Edelweiss report.

  • Kalpataru Power

Execution misses due to the second covid wave and increase in freight costs resulted in subdued numbers for the first quarter of 2021-22. Though this led to a correction in the past one month, experts continue to like Kalpataru.

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Only 60% of its order book of Rs 13,400 crore is from the transmission and distribution business and the remaining 40% is from emerging segments like railways and oil & gas pipelines. As of now, these are the focus areas of the government and therefore, are expected to report healthy growth in the coming years. Kalpataru also holds 68% stake in JMC Projects, a construction company. Management is acting on the market’s concerns about its debt and promoter pledging.

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“We are positive on Kalpataru due to its healthy order book, deleveraging backed by asset monetisation, sharp improvement in performance of subsidiaries and clarity on reducing pledge by Rs 300-350 crore in one year,” says a Prabhudas Lilladher report.

  • NMDC

NMDC is another company from the metals and mining space that benefitted from the surge in metal prices. The first quarter net profit shot up by five times year-on-year. Global iron ore prices have cooled off in the past two months but this will not dampen the prospects of NMDC.

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With steel prices remaining high, iron ore prices should also stabilise in the coming quarters. More importantly, NMDC is India’s largest merchant iron ore miner and is one of the lowest cost iron ore producer in the world. Therefore, it will be able to manage the price fluctuations smoothly.

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“We like NMDC due to its attractive valuations and demerger of its steel plant can be the value unlocking trigger in this counter,” says Pankaj Pandey, Head of Research, ICICI Direct. NMDC’s Nagarnar steel plant is expected to get commissioned during the second half of 2021-22. The company is also targeting its demerger and divestment after commissioning.

  • GAIL India

The gas distribution business in India is not just a pocket of undervaluation, but also a fast growing opportunity. “Since the upstream and downstream oil businesses are volatile, we prefer to remain in the gas transmission business. Clear growth is also visible because consumption of gas as an energy source will double during this decade,” says Pankaj Pandey, Head of Research, ICICI Direct.

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Gas pipelines account for around 8% of the recently announced National Monetisation Pipeline worth Rs 6 lakh crore. This shows the government’s focus for this sector. Gail operates a gas pipeline network of more than 12,000 km and is also participating in city gas distribution business.

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The gas transmission volume is already above pre-covid levels and the same is expected to pick up further once the economy recovers. Gas trading margin is also expected to improve in the coming quarters due to the prevailing high spot LNG prices.

  • NTPC

We dropped Coal India from this list because coal consumption is declining. So why have we included NTPC, one of the biggest coal consumers in India? Though coal-based thermal power generation remains its bread and butter, NTPC is transforming itself into a renewable energy company.

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Around 3GW of renewable capacities are under construction and may get commissioned over the next two years. NTPC has set an ambitious renewable energy capacity target of 60GW by 2032, compared to its commercial capacity of around 65GW. It is also experimenting with new technologies such as green hydrogen and manufacturing methanol. The cash flows from thermal projects should help NTPC achieve its renewable energy ambition.

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“Even as NTPC scales up its renewable journey, we expect continued capitalisation for its thermal projects to drive 12% growth in regulated equity between 2020-21 and 2022-23,” says a Motilal Oswal report.

  • Tata Steel

Tata Steel is a global steel company, with operations across the world. The recent uptick in global steel prices has boosted its fortunes. Tata Steel generated a consolidated free cash flow of Rs 3,500 crore during the first quarter of 2021-22.

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It reduced debt by around Rs 25,000 crore during 2020-21 and may reduce the same amount in 2021-22. Since the Tata Steel share has already reacted to the rise in steel prices, should investors go for it now? Yes, experts say. The covid induced disturbances have slowed down capacity additions and therefore, metal prices across the globe will remain firm once the economy revives.

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“Tata Steel is doing well in the domestic market. Its European operation is also expected to improve from the second quarter,” says Pandey of ICICI Direct. Tata Steel has renegotiated several contracts in July and the positive impact of the same (its realisations are expected to go up by €200/tonne) will be visible from the second quarter.

  • ITC

ITC is quoting at reasonable valuations despite several profit-making entities under its belt. With diverse products under its foods and personal care divisions, its FMCG business is doing well and gaining market share across many categories.

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However, its valuation is not the same as other FMCG companies because most foreign portfolio investors (FPIs) follow the ESG principles and therefore, keep away from ITC due to its cigarettes business. Though its hotels division is under strain due to covid-induced restrictions, the paper and agri divisions are doing well now. Since ITC is a conglomerate, all divisions are not getting their correct valuations.

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“ITC offers a combination of decent growth, dividend yield and inexpensive valuation. Any move to demerge some businesses could result in value unlocking attracting investors who are interested in the respective businesses,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

  • Petronet LNG

Petronet LNG offers value (it is trading at attractive valuations and offers high dividend yield) and also prospects of future growth. Petronet, a natural gas importer, is in a sweet spot now because the domestic gas production will not be able to match the demand jump in Indian natural gas, which is expected to double by 2030.

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The Kochi terminal utilisation improved a bit to 25% in the first quarter of 2021-22, compared to 15% (y-o-y) and 23% (q-o-q). Its further ramp up is expected to take it beyond 30% in 2021-22 and reach around 50%-60% in the next five years. This is critical for its profitability.

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“We see the increase in volume from Kochi adding to its pre-tax profit. Kochi is positive at the operating profit level at utilisation of 17-18% and will turn PAT positive at 30% utilisation,” says a Nirmal Bang report. Its strong parentage (it is promoted by PSU oil majors like ONGC, IOC, Gail and BPCL with a 12.5% stake each) is another comforting factor for Petronet.

  • Hero MotoCorp

Hero Motocorp, a traditional growth company came into the value segment because of its recent price fall. While most stocks gained in the past one year, Hero declined due to the dull demand from the rural sector.

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“While rural demand was sluggish in first quarter, the same has improved in July and August and is expected to grow faster than urban demand in the coming months,” says Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services.

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Hero has efficient cost management systems and was able to manage the raw material cost inflation smoothly. To protect its margin, it increased prices in July. With the covid situation improving across the globe, Hero is also seeing traction in exports. Though not a big player now, Hero is in the process of launching several electric vehicles in 2021-22 and is expected to maintain its market share even in the electric vehicles space in the coming years.

  • CESC

CESC’s efforts to increase its power distribution footprint in newer areas is yielding results. It is the highest bidder for the 100% stake sale in a Chandigarh distribution company. The same may come under CESC in the coming quarters.

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Management is taking efforts to clean the accounts of newly acquired distribution companies and slowly turn them around. The reduction of losses from the distribution franchisee (losses reduced from Rs 64 crore to Rs 9 crore in a year) has helped CESC generate a 34% y-o-y consolidated net profit growth during the first quarter of 2021-22.

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The problem of delayed tariff order by West Bengal ERC is also expected to get resolved soon. “With the new tariff order, the standalone business is expected to get normalised in 2021-22. Further, we expect the overall distribution franchise business to turn profitable soon and achieve a net profit in 2022-23,” says Jasani of HDFC Securities.

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