Even as global and local macro-economic challenges continue to haunt markets, brokerages look for value picks.
Indian equity markets have corrected by nearly 13 per cent since July this year and yet, there is no clarity on the quantum of negatives that have been priced in. So, is it time to do bargain hunting? While a segment of the market doesn’t think so, others are working on different financial models to identify multi-baggers.
Given that the biggest blue-chips are rather intensely covered, leaving little scope for price discovery, fund managers are finding it difficult to generate alpha returns (risk-adjusted active returns on investments). This makes the current period of uncertainty rather attractive for some fund managers. For instance, some are trying to apply investment rules by Benjamin Graham, a noted economist and Warren Buffett’s mentor. Graham worked out two formulas —one for traditional investors who could stick to safe, large companies and a more aggressive formula for enterprising investors.
Using Graham’s investment filter, Manishi Raychaudhuri and Gautam Mehta of BNP Paribas have come up with stocks trading below or close to their ‘net current asset value’ (NCAV). The value has been calculated by subtracting current assets from total liabilities (excluding shareholder liabilities). This analysis has thrown up companies in ugly duckling sectors such as real estate, metals, infrastructure and technology.
According to BNP Paribas, HDIL’s current valuations imply the company is available at less than half of its asset value. “That said, in each of these, there may be company-specific issues, possibly leading the market to disbelieve the value of their assets,” it says. If the NCAV filter is applied, companies such as Sobha Developers, IVRCL, Nagarjuna Construction and HDIL can be seen as trading at attractive valuations. While there may be instances of company-specific corporate governance issues for some and regulatory overhangs for the others, NCAV shows the companies’ underlying assets are not reflected in the stock prices.
While this model may work for aggressive investors, optimists believe the current valuations to be fairly attractive. Edelweiss Capital says India is below the five-year average on price/book and price/earnings (both relative and absolute). Other valuation indicators such as the composite indicator and the Shiller’s PE also point to a relative degree of comfort, it adds. Consequently, the brokerage has chosen to rerate BFSI, auto and capital goods to equal weight, while trimming overweight positions in consumer goods and pharma.
