Costly stocks still a bargain: analysts

Costly stocks still a bargain: analysts
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First Published: Mon, Jul 23 2007. 06 44 PM IST

Updated: Tue, Jul 24 2007. 05 09 PM IST
Indiabulls Financial Services Ltd, Videsh Sanchar Nigam Ltd (VSNL), Reliance Natural Resources Ltd, GMR Infrastructure Ltd, Aban Offshore Ltd, Tech Mahindra Ltd, and Financial Technologies Ltd belong to an exclusive group on the Bombay Stock Exchange (BSE).
These are the most expensive stocks in BSE 100 in terms of their price-earnings (P-E) multiple, the number of times a company’s stock price is a multiple of its earnings per share (EPS). However, analysts say the prices of some of these scrips could rise even further as they grow their earnings.
All the companies mentioned here have a trailing P-E multiple over 100 at their current prices.
The BSE 100 is the Bombay Stock Exchange’s index of the top 100 stocks in terms of free-float (shares available for trading) market capitalization. The trailing P-E multiple measures a firm’s stock price against its earnings for the previous 12 months.
When the estimated earnings growth is taken into account, most of the stocks that look very expensive, seem reasonably priced. A Mint analysis of the P-E to growth (PEG) ratio—the P-E multiple divided by the estimated growth in earnings—of the stocks in the BSE 100, shows that more than 30 stocks have a PEG multiple of well below one, which means that they are still not overvalued.
A PEG multiple of less than 1 means that a company is growing its earnings faster than its P-E multiple. The Mint analysis of P-E and PEG multiples left out listed commercial banks because these are evaluated on the basis of their price (of shares) to book value.
Analysts say that it doesn’t make sense to look at trailing P-E multiples in isolation. In PEG terms, there is still value in Indian stocks, they add. PEG is the relation between today’s market reality and tomorrow’s growth expectations from the company.
Sameer Narayanan, head of portfolio management services at ABN Amro Asset Management (India) Ltd, said: “With the market at new highs, 1 needs to be extremely cautious of price, while adding new stocks to the portfolio. From here on, value could migrate to companies that offer better growth and are reasonably priced. Its always safer to buy a stock when it is quoted below a PEG of 1.”
Sensex, BSE’s benchmark index, and the broader Nifty index of the National Stock Exchange closed at new highs on Monday. The Sensex rose 166.65 points or 1.07% to close at 15,732.20, while the broad-based S&P Nifty rose 53.30 to end the day at 4,619.35.
Stand-alone P-E multiples alone do not indicate the true valuation of a company, said Ketan Karani, vice-president of research at Kotak Securities Ltd. “In a country like India, which is on a huge growth curve, one has to look at both P-E as well as the PEG levels. Interestingly, both P-E and PEG levels of most large-cap companies are nowhere near their historic highs. This provides enough justification for these stocks to go up from their current levels,” he added.
VSNL with a PEG of 0.01 and India Cements Ltd with PEG of 0.02 are at the bottom of the table.
Other companies trading at phenomenally low PEGs, according to the data culled from Bloomberg, are Aban Offshore Ltd, Steel Authority of India Ltd, Bharat Electronics Ltd, JSW Steel Ltd, Divi’s Laboratories Ltd, Cipla Ltd, HCL Technologies Ltd, Nestlé India Ltd and Tata Consultancy Services Ltd.
A senior analyst at a domestic brokerage, who did not wish to be identified said: “VSNL and India Cement’s low PEG is because of the unnatural difference between their current EPS and the expected future earnings.
However, many other stocks are currently at a low PEG, which leaves some upside growth in their stock prices in the future.”
The analyst added that VSNL’s EPS is expected to increase from Re0.54 in 2006-07 to Rs18.09 in 2007-08 and India Cements’ from Rs2.63 to Rs20.32. “These are exceptional cases,” he said.
The most expensive stocks in terms of PEG are two companies from the Tata group—Tata Motors Ltd and Tata Steel Ltd. While Tata Motors is trading at a PEG multiple of 28.2, Tata Steel is at 12.2. Stocks such as Glenmark Pharmaceuticals Ltd, Crompton Greaves Ltd and Hindustan Unilever Ltd come just after the the two Tata companies, making them among the most expensive stocks in terms of PEG.
An analyst from a foreign brokerage said investors who want to play it really safe should buy those stocks with PEG below 1, but also with a moderate EPS growth estimate.
“There is a larger risk at hand when the estimated EPS growth is big. Even if the company performs one notch below the estimate, the stock price will get beaten up as the market has factored this growth long ago,” he adds.
Companies such as Ultratech Cement Ltd fall in this category. It is currently trading at a PEG of 0.87 and has a projected EPS growth of 15.6%. Maruti Udyog Ltd, Satyam Computer Services Ltd, ITC Ltd, NTPC Ltd, Tata Chemicals Ltd, Mahanagar Telephone Nigam Ltd and Hero Honda Motors Ltd also belong to this category. All these companies have a PEG below 1 and an estimated EPS growth of below 30%.
Ashwin Ramarathinam contributed to this story.
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First Published: Mon, Jul 23 2007. 06 44 PM IST