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D-Street shrugs off value stocks, chases growth even at high price

Looks like investors are in no mood to chase value at the moment.

Last Updated: Feb 21, 2019, 04.19 PM IST|Original: Feb 21, 2019, 04.13 PM IST
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Calendar 2019 has an even worse record: none of the 40 stocks that quoted single-digit PE as of December 31, 2018 are in the green.
NEW DELHI: The market is telling you what’s on the investor’s mind: While low PE stocks continue to bleed, so-called growth stocks have been among the top gainers in an otherwise depressed market.

Looks like investors are in no mood to chase value at the moment. And given the pre-election uncertainty, the trend is unlikely to change for now.

The disconnect between price and value in ’growth’ and ‘value’ stocks is such that many of the growth stocks are trading at expensive valuations, even on FY2021 earnings estimates, while many value stocks are ruling at inexpensive valuations, even on FY2019 basis, said Kotak Securities.

Out of the 49 BSE 200 stocks that have gained between 10 per cent and 60 per cent in last 12 months, half had PE multiples in excess of 40, data compiled from AceEquity suggests.

Shares of HUL and Nestle India have gained 30 per cent and 39 per cent, respectively. The two FMCG stocks have managed to sustain high price multiples in last 12 months, even as the benchmark BSE200 has declined 2 per cent in the same period.

Shares of United Breweries are up 28 per cent; Jubilant Foodworks has gained 34 per cent and Bajaj Finance 56 per cent while Pidilite Industries, Asian Paints and Dabur India have risen up to 25 per cent in last one year.

And look at the low PE stocks: oil firms ONGC, BPCL and HPCL, power firms NTPC, REC, Power Grid, Torrent Power, NBFC stocks Dewan Housing and Reliance Capital, metals & mining companies Vedanta, Coal India and NMDC are down up to 77 per cent during this period.

What disappointed
Calendar 2019 has an even worse record: none of the 40 stocks that quoted single-digit PE as of December 31, 2018 are in the green.

Analysts say poor returns by these stocks are either reflecting the poor growth prospects and, in many cases, concerns over corporate governance.

“Stocks quoting low PEs at this point mostly belong to heavily-indebted firms or companies with unstable earnings. As such, the pressure on stock prices are further dragging their valuations. Low PE in no way suggests a stock is cheap and that it is a better company to bet on for the future,” said Sameer Kalra of Equity Research Analyst and Founder, Target Investing.

Among the top 10 BSE200 losers so far are three ADAG group stocks Reliance Power (down 63 per cent), Reliance Infrastructure (down 62 per cent) and Reliance Capital (down 35 per cent). These stocks have been hammered after two lenders sold shares pledged with them by the promoters.

Shares of Dewan Housing Finance Corporation have dropped xx per cent. Company’s CEO Harshil Mehta resigned earlier this month. A news portal recently alleged that the NBFC was involved in a financial scam as big as Rs 31,000 crore. The company has denied any wrongdoing.

“Certain so-called value companies have found new ways to disappoint investors on corporate governance, thereby making the valuation argument largely redundant for such stocks,” Kotak Securities said.

Graphite electrode makers Graphite India, HEG are seeing tough days as electrode prices have softened due to weak global steel prices, increased Chinese imports into India and select trade restriction placed by the US.

Adani Power and IDBI Bank have been posting losses. Nalco has seen 58 per cent plunge in Q3 earnings, while Vedanta has been in news on concerns over corporate governance.

In contrast, among the top BSE200 stocks this year are from IT sector, where firms do offer earnings guidance at the end of each quarter. Two are private lenders, and one is consumer-oriented firm (Titan Company, which too offers guidance on its jewellery business).

Smart money chases growth
Smart money will always chase growth even at the higher premium, Kalra said. “For good retail and institutional investors, growth has always been a key criteria as cleaner growth is much more sustainable. Growth is what makes them give premium valuations to stocks. Consumer stocks are a case in point. They always trade at a higher premium as they are high cash flow businesses and there is high earnings visibility. It’s easy to estimate growth simply by looking at volumes,” he said.

Kotak Securities said: "The market seems to have taken a permanent view on the future of most companies, thereby effectively segregating companies into long-term winners; which are companies with superior business models, trustworthy managements and good corporate governance practices where no price or valuation may be too high to own the stocks, and long-term losers; which are companies with inferior business models and poor governance practices where no price or valuation may be too low to avoid the stocks."

Election & demand for quality
Election dates are likely to be announced over the next three weeks. In a study of past three general elections, Elara Capital found that volatility usually rises sharply ahead of Lok Sabha elections and cool off only after the election outcome. In a study of the 2004 -2018 period, the brokerage found that quality stocks tend to outperform in an uncertain market.

The brokerage says by high quality, it refers to companies with RoCE of greater than 15 in each of last five years, net debt-to-equity ratio of less than 1, positive free cash flow (FCF) yield for at least four out of last five years and net operating profit after tax (NOPAT) either stable or increasing. Within the BSE200 universe, there are 34 companies that fit the bill.

The brokerage has recommended 15 of them, which include Castrol India, Cyient, Eicher Motors, Gillette India, GSK Consumer, Infosys, ITC, Maruti Suzuki, Oracle, Sun TV Network and Tata Elxsi.

Here is the complete list

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