P/E values of 282 stocks sharply below 5-year averages; your value picks lie among them

Wild market corrections generally bring down all stocks, good or bad, in a fleet. That often throws up opportunities to grab quality stocks at cheaper prices to reap handsome gains in the long run. 

That is exactly what has happened in the domestic market in recent past: price-to-earnings (P/E) ratios of 57 per cent of BSE 500 index stocks have fallen below their five-year averages as of November 19 following the relentless hammering. 

P/E is a valuation measure that analysts use to know whether a stock is overvalued or undervalued with respect to its earnings growth. The ratio is calculated by dividing the current market price with earnings per share. It shows what the market or an investor is willing to pay for per rupee earnings that a stock delivers. 

Multibaggers graphite electrode majors HEG and Graphite India, too, figure in the list, despite having given up to 75 per cent returns so far this calendar. P/E values of IT players Tech Mahindra, Intellect Design Arena, Mindtree and pharma players such PfizerNSE 0.59 %, Ipca Laboratories have all slipped below their long-term average P/E ratios. 

India with 12-month price targets of Rs 5,750 and Rs 1,400, respectively. The brokerage projects Graphite India’s top line, Ebitda and PAT to expand at a CAGR of 57 per cent, 67 per cent and 63 per cent, respectively, during FY18-20E, while for HEG, the same components are projected to increase 53 per cent, 40 per cent and 46 per cent, respectively. 

Market veterans, however, caution not to jump the gun as often taking investment decisions on the basis of P/E alone makes little sense. 

“One shouldn’t invest just because a stock’s current P/E is below its five-year average. It may be an opportunity if profits have risen more than the proportionate increase in stock price and the market has missed the opportunity,” says G Chokkalingam, Founder, Equinomics Research and Advisory said. 

One has to ensure that there is no doubt on the company’s future growth potential. “In some cases, a fall in price may be more than proportionate that the fall in profits, and there may be greater uncertainty on maintaining current profits. In those cases, the market may be smart enough to value such stocks at PE valuations lower than their historical averages,” he said. 

Analysts say before picking such stocks one has to have the confidence on continued future profit growth. “If a stock is available at a significant discount to historical average valuation, it is also possible that the sector or theme as a whole may have lost the growth opportunity or positive perception of market participants. The gap can happen in such cases too,” says Chokkalingam. 

P/E ratios of stocks such as Reliance Communications, Dewan Housing Finance Corporation, PC Jeweller, Manpasand Beverages, 8K Miles and KwalityNSE 4.92 % were all trading far below their 5-year averages after these stocks plunged between 60 per cent and 93 per cent on a year-to-date basis. 

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