These stocks usually trade at low multiples of price to book value, have steady growth and return ratios, and offer attractive dividend yield.
The idea here is that while these stocks may be beaten down, eventually Mr Market will realise the true value of these companies, and eventually the stock price will rise.
Let’s take a look at Indian companies which offer comfort on valuations.
Anything with the word ‘green’ in it is taking off. Investors are betting big on stocks involved in the renewable and green energy space.
The enthusiasm shown by investors for green energy stocks is justified but here’s the thing. This has opened up a huge contrarian opportunity in the traditional energy space.
Opportunity for stocks like ONGC. And value investors are loving it.
In November 2020, ONGC was trading at levels of ₹65. Interesting thing is that ONGC has never traded this low in more than 15-years.
ONGC has a stellar profit history with equally attractive dividend payouts. At the current valuations, ONGC trades at a dividend yield of 2.5% (it was 7% back in November 2020).
The public sector undertaking (PSU) also has its debt level under control. The debt on its balance sheet is much lower than its equity.
Since this stock was trading at a massive discount to its latest book value, the risk-reward equation was strongly in favour of ONGC.
Since its December lows, ONGC stock price has more than doubled and touched a 52-week high of ₹173 last month.
Here’s what co-head of Research at Equitymaster, Rahul Shah wrote about it back in November 2020:
Right now, traditional energy companies like ONGC and Oil India are deeply out of favour.
And therefore, there’s a strong chance their true value is significantly higher than their current price.
This presents a good opportunity for alert value investors looking to exploit this gap.
Rahul was certainly proven right after the massive up-move in ONGC shares this year.
During the initial months of the pandemic, there were some hiccups for GAIL in gas supplies. But the company proved itself to be a critical player in India’s natural gas supply chain.
GAIL has kept its debt under control since the past 16 years. Its debt-to-equity ratio has never gone above 0.6x since 2005.
It has a stellar record of delivering double digit return on equity (ROE) over the years. GAIL’s 5 year average ROE stands at 11.4%!
The company also has a consistent track record of paying dividends. It has paid dividends consistently since the year 1995.
For the September 2021 quarter, GAIL’s revenue rose 57.7% year-on-year (YoY) and 23.7% sequentially to ₹215.2 bn. This was aided by strong growth across all segments.
The company is likely to do well in the short term, benefitting from a hike in gas prices.
Also, GAIL recently received its first LNG shipment from Russian firm Gazprom recently under its 20-year long-term contract at prices set to be cheaper than other foreign sources of gas.
Over the last one year, shares of the company have gained 32%.
As the largest producer of steel in the country, SAIL was the beneficiary of soaring steel prices, robust demand by various sectors, and the government’s focus on infrastructure.
As a result, the company recorded its best-ever performance in both production and sales during the financial year 2021.
It also deleveraged its balance sheet. In line with its focus on reducing borrowings, the SAIL reduced its net debt from ₹161.3 bn in 2020 to ₹153.5 bn in 2021.
This lowered its debt-to-equity ratio from 1.3 in fiscal 2020 to 0.8 in fiscal 2021. SAIL is also expecting further net debt reduction from here.
In the most recent quarter, the domestic steel giant delivered a solid performance. It reported an over 10-fold jump in its consolidated net profit at ₹43.4 bn.
SAIL’s management has guided that it will become net cash by the first quarter of fiscal 2023.
Coming to dividend, the company’s board has already approved an interim dividend of ₹4 per share for fiscal 2022. SAIL does not have a consistent track record of paying dividend.
SAIL currently trades at a price to book value of 1 and its PE ratio is 3.45 on a trailing twelve month basis.
A close look at NMDC’s financials would make you wonder about why this mining behemoth has underperformed over the years.
NMDC, over the years, has had zero or negligible debt on its balance sheet. For fiscal 2021, its debt to equity ratio stood at 0.07.
It has consistently reported good profits over the years, especially in fiscal 2021 when the net profit almost doubled. NMDC’s 3 year profit CAGR stands at 18% and its 5 year average ROE is 15.7%.
Currently, NMDC trades at a P/E of 3.9 and price to book (P/B) of 1.4.
The mining major reported good performance in the September 2021 quarter where revenues jumped 205% to ₹67.9 bn.
NMDC is a consistent dividend paying company. It has paid out dividends each year starting 1995. For fiscal 2021, NMDC paid dividend of ₹7.76 per share which results to a dividend yield of 5.6% at the current price.
Here’s an interesting data point…did you know that NMDC was a massive 1,000-bagger back at the start of this century?
Trading at less than a rupee in 2001-02, it rose exponentially and touched a high of ₹500 in a short span of 6 years.
#5 Oil India
Along the similar lines as we discussed about ONGC above, Oil India was trading near 15 year lows back in November 2020. Since then, it has rallied over 150%.
Oil India has a solid profit history. It has never reported losses for any financial year since 2003. Its profit CAGR for the past three financial years comes to a massive 23.2%.
The debt on its balance sheets is much lower than equity. The debt to equity for Oil India stands at 0.8x.
The average 5 year ROE is also in double digits at 10%.
Despite all this, the stock is currently trading at a discount to its latest book value.
For fiscal 2021, Oil India paid dividend of ₹5 per share. It has also paid an interim dividend of ₹3.50 per share this year. At the current price, the dividend yield comes to 2.5%.
Earlier this month on 11 November, the state-owned firm reported more than doubling of its September 2021 quarter net profit, on the back of a surge in oil and gas prices.
Since the start of 2021, shares of Oil India have gained more than 85%, outperforming benchmark indices.
A good portion of the outperformance has come in the past few months, due to rising crude oil prices. The benchmark brent crude oil is hovering around US$82 per barrel, having risen about 60%, so far, this year.
On top of this, another positive for Oil India is the government’s move to raise gas prices. APM gas prices have increased starting October because of the surge in global gas prices. This is a positive for gas producers like Oil India.
Currently, Oil India trades at a P/E of 5.5.
As of September 2021, promoters, i.e. the government held 56.7% stake in the company, while FIIs held 10%.
The list of value stocks does not end here. There are many more which pass the filtered criteria.
Ever wondered if there was a stock screener that lets you find the top value stocks quickly and easily? Equitymaster has got you covered.
We’ve recently designed our brand new Stock Screener which screens the top value stocks along with other themes.
Look nowhere else if you are a value investor looking for the top value stocks…
Value stocks offer the real value during volatility
The red hot Indian stock market has started to show its colors. Benchmark indices are down over 2.5% today on top of the fall witnessed this week.
Amid this volatility, value stocks are holding their foot. This is because value stocks usually exhibit strong performance after the stock market has peaked.
Value investing is about buying stocks that are trading at prices lower than the company’s worth fundamentally, i.e. investing in companies trading at a discount to their intrinsic value.
However, before you take a leap and invest in value stocks, research the company, and gain insight into why the market is discounting it.
This article is syndicated from Equitymaster.com
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