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Unabated buying in the domestic equity market has taken the valuation of the Indian equity market sharply up, making them one of the most expensive among emerging countries. As a result, over 70% of stocks in the BSE 500 index traded above their long-term valuations.

Data available with Ace Equity showed that the price-to-earnings ratio of 150 companies in the broader index is  still lower than their 5-year average. The majority of these stocks have also delivered positive returns to investors in the past one year.

In general, if a stock is trading below its average 5-years PE then it means that counter is trading below its fair value. With a rally of 340% in the past one year, Jindal Stainless (Hisar) is the top gainer in the top. Shares of the company traded at Rs 176.25 on June 2, 2021 against Rs 40 on the same day last year. The P/E ratio of the company is hovering at around 8.70 times against its long-term average of 13.26 times.

The BSE Sensex on June 3 settled 382 points higher at 52,232, while the NSE Nifty index hit a record closing high of 15,690. At present, the 30-share index Sensex is hovering at a P/E of 31.15 times against the five-year average of 29.97 times. Commenting on the further movement of the Indian equity market, Axis Securities said, “The street has not yet fully factored in the demand loss of Q1FY22. A clearer picture of FY22 earnings will emerge only as the Q1FY22 concludes. Moving ahead, the market is looking for the timely unlocking of the economy and any delay in its reopening will pose a near-term risk to FY22 EPS. Notwithstanding near-term challenges, the overall market structure continues to remain positive. Sector rotation and the stock-specific approach will be keys for outperformance, moving forward.”

Attractively-valued stocks

The data further highlighted that IIFL Finance, PNB Housing Finance, Prims Johnson, Tata Steel, Solara Active Pharma Science, Lux Industries and Sequent Scientific are among stocks which are trading at attractive valuations despite an over 200% rise since June last year.

Some of the other attractively-priced shares included banking majors State Bank of India and metal players Jindal Steel & Power and Jindal Stainless. Indian Bank, Linde India, JK Tyre, Orient Cement, Tata Power, Emami, Uflex, Hudco, Aegis Logistics and Suprajit Engineering. Shares of the companies have also more than doubled investors wealth during the past one year.

Stocks to buy
Money9.com collated a list of stocks that are looking attractive to various brokerages at present valuations.

State Bank of India: Narnolia is bullish on State Bank of India with a price target of Rs 459. “The bank reported a strong pre-provisioning profit during the quarter. Barring the impact of interest reversal net interest income also did well. Net profit has been strong. GNPA/NNPA were lesser than that of proforma numbers in Q3FY21. On the asset quality front, agri and SME segment are likely to face challenges in the near term,” the brokerage said in a report.

Indian Bank: P/E ratio of the company is hovering at around 5.38 times as against its long-term average of 12.76. Brokerage Phillip Capital is positive on Indian Bank with a target price of Rs 180. “Having completed the merger, the next challenge for the bank is Covid related asset quality headwinds, akin to other banks. The guidance suggests credit cost of less than 2% and slippage of less than 3% in FY22. We expect a rebound in earnings growth for FY22/23, translating into return on assets of 0.6%/0.85%,” the brokerage said.

Jindal Steel and Power: Investec is bullish on JSPL with a price target of Rs 575. “Growth capex at a competitive capex intensity is a welcome move. While JSPL is well placed for the next phase of growth, we highlight it would need to do more vs peers on carbon abatement,” the brokerage said.

Tata Steel: Anand Rathi Shares and Stock Brokers has ‘Buy’ on Tata Steel with a price target of Rs 1,437. The brokerage said that the company delivered a strong financial performance in Q4 with strong revenue growth and margin expansion along with solid free cash flow. Strong recovery in Indian business, efficient working capital management coupled with a sharp capital allocation should improve prospects further.