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Data available with Motilal Oswal showed that 30% of Nifty companies are trading at a discount when compared with 10-year P/E.
Benchmark equity indices are trading at a premium after a 100% rally since the lows of March 2020. However, there are at least 15 Nifty stocks that are looking attractive in terms of valuations when compared to the historical average.
Data available with Motilal Oswal Financial Services showed that 30% of Nifty companies are trading at a discount when compared with 10-year price-to-earnings. Some of the stocks in the list included Hero MotoCorp, Mahindra & Mahindra, Axis Bank, ICICI Bank, IndusInd Bank, State Bank of India, ITC and Hindalco, JSW Steel, Tata Steel, Indian Oil Corporation, BPCL, ONGC, Coal India and NTPC. On the other hand, Nifty is trading at a 7% premium against its 10-year average of 18.80.
A price-to-earnings ratio (PE) is a ratio of current market price to its earnings per share. It helps in measuring the value of the company and investors used this ratio to filter out stocks for investments. In general, investors should put their money in stocks that are trading at attractive levels compared to their intrinsic value.
Analysts believe that investors should use the P/E ratio as one of the filters to shortlist stocks. This ratio should not be used in insolation. One should combine this ratio with other financial and ratios before taking buying or selling decision. Novice investors can consult their financial advisors while taking buying or selling decisions on the basis of the P/E ratio.
While sharing his stock-picking strategy, Gaurav Dua, Head-Capital Market Strategy, Sharekhan by BNP Paribas, said: “We use 3R proprietary framework for shortlisting of a stock. 3R stands for right sector (macro environment should be favourable), right company (quality of promoters, business model and balance sheet) and right valuation (both on an absolute and relative basis). So essentially we primarily use a top-down approach to build an investment portfolio.”
Stocks to buy
For stock-specific investors, brokerage Motilal Oswal Financial Services suggested stocks like ICICI Bank, SBI, UltraTech Cement, Divi’s Labs, Hindalco, SBI Cards, Infosys, HCL Tech, M&M, Hindustan Unilever and Titan from the largecap space. On the other hand, it likes players like Max Financial, Varun Beverages, L&T Technology, Emami, Endurance Technologies, JK Cements, ICICI Securities, Indian Hotels, Aditya Birla Fashion and Orient Electric in the broader space.
On the other hand, Dua likes ICICI Bank, Cummins India, SBI, Ultratech, Tata Motors, Godrej Consumer, Infosys in the largecap space. In the midcap and smallcap segments, he prefers players like Gland Pharma, Polycab, Dalmia Bharat Cement, Sumitomo Chemicals, Max Financial Services, Laurus Labs and SAIL.
Factors that fuelled rally
Market watchers believe that the resilient performance of corporate India in FY21, robust FII inflows and liquidity measures taken by the RBI and government supported the rally. Motilal Oswal believes that earnings momentum to accelerate in FY22 as the pace of vaccinations picks up and the economy opens up further. “BFSI and commodities are expected to drive FY22E earnings. The market has been strong and largely looked through the second Covid wave on the back of strong liquidity and robust participation from non-institutional investors,” the brokerage said.