Valuation worry? 40 Nifty stocks at discount to historic averages

Valuation worry? 40 Nifty stocks at discount to historic averages

NEW DELHI: A roaring bull market and record high Nifty levels might be making investors jittery over stock valuations, but dozens of index stocks are still ruling at a discount to their historic averages, offering comfort to those who are seeking value in this market.

Coal India is trading at a PE multiple, which is 58 per cent lower than its 10-year historic average. NTPC (down 53 per cent), ITC (down 37 per cent) and IOC (down 36 per cent), too, are trading at steep discounts to their historical valuations.

Select lenders such as SBI, ICICI Bank and Axis Bank are still up to 57 per cent down from historic price-to-book value ratios. Drug maker Sun Pharma, utilities firms NTPC and Power Grid and metal stocks Tata Steel and JSW Steel also make it to the list.


Analysts said Nifty50 has delivered 36 per cent return since December 2017. But there has been a divergence. The top 10 stocks by free-float market-capitalisation have delivered a stellar return of 56 per cent against a 13 per cent return by the remaining 40.

“This divergence has started narrowing in the recent months. Based on the top 10 stocks, the adjusted Nifty value works out to 15,543, while the remaining 40 would lead Nifty to just 11,355. This indicates Nifty is better valued today beyond the top 10 names. Long-term risk-rewards are better in the next 40 names against the top 10,” Axis Securities said in a note.

Post-Budget, Nomura India has raised weightage on ICICI Bank, Axis Bank, SBI and Larsen & Toubro in its model portfolio. Phillip Capital has increased weightage for ITC, SBI and L&T. Motilal Oswal said ICICI Bank, SBI, Axis Bank, L&T and Sun Pharma are among its top stock ideas from the largecap space.

SBI has been among the stocks seeing earnings upgrades in recent weeks.

While most banking stocks had bottomed out in March last year, SBI continued to fall for the next two months, despite being a ‘consensus buy’. Today, in hindsight, as most fears on the counter appear unwarranted, analysts believe the stock is up for a further rerating.

In JM Financial’s terms,
SBI is an elephant set to dance. But for Macquarie, the elephant is already dancing. Price targets for the stock have already risen by up to 83 per cent.

In the case of Larsen & Toubro, the infra push in the Union Budget is being seen as a big positive. L&T has bagged one of the largest single order of bullet trains specified in the NIP. Analysts said the competitive intensity in the industry has been easing due to consolidation among the peers or lack of support from them from the lenders.

Historically, L&T has won one out of four medium to large size orders it bids for. Some analysts see as much as 25 per cent potential upside for the stock over the next 12 months.

On Sun Pharma, Sandip Sabharwal of finds it a
clear turnaround bet.

“Many companies like Sun Pharma have been trading at valuations lower than that of cyclical companies. Now they are coming back strongly. Profits have outperformed expectations. Debt on the balance sheet is getting paid off, and the stock is relatively cheaper in the context of the overall market and the pharma basket as a whole. This is one stock which still seems to have value in the pharma basket. Today at 15,000, it is tough to make the index move up 20 per cent. But Sun Pharma has the potential of delivering that much,” he said.

Siddhartha Khemka of Motilal Oswal Securities said ITC has largely underperformed in the consumer space, but started seeing some interest post Budget.

“The expectation from ITC is not that great. Overall, cigarette volumes have improved sequentially but are still down 7 per cent on a year-on-year basis. However, there has been a positive commentary from the management recently on the hotel business and the non-cigarette FMCG business and these could drive ITC’s overall earnings,” Khemka said.

In the case of private banks, Nomura India said its FY22 EPS estimates saw 4.2 per cent upgrade in the last four weeks compared with 7.6 per cent over the past three months. “In our coverage, we prefer Axis, ICICI, IndusInd and SBI on the merits of a recovering economy.”

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