Value In­vest­ing’s Gain­ing Weight on a Pricey Street

Value stocks are gain­ing promi­nence over growth stocks in the port­fo­lio of in­sti­tu­tional in­vestors as earn­ings are yet to catch up All in­tel­li­gent in­vest­ing is value in­vest­ing — ac­quir­ing more that you are pay­ing for. You must value the busi­ness in or­der

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ET In­tel­li­gence Group: With bench­mark eq­uity in­dices hit­ting fresh highs, In­dian in­vestors ap­pear to be tilt­ing pro­nouncedly to­ward Ben­jamin Gra­ham’s ‘value’ in­vest­ing prin­ci­ples, tem­po­rar­ily giv­ing up Philip Fisher’s ‘growth’ stocks ap­proach to wealth-build­ing.

Value stocks are those trad­ing at lower price-earn­ings (P/E) mul­ti­ples with av­er­age earn­ings growth prospects. By con­trast, growth stocks trade at higher P/E and­typ­i­cal­ly­of­fer­bet­terearn­ings­growth vis­i­bil­ity. In a typ­i­cal bull mar­ket, the ini­tial rally is driven by growth stocks.

With the cur­rent rally in In­dian eq­ui­ties show­ing signs of fa­tigue, ‘value’ stocks such as Mahin­dra & Mahin­dra, Ba­jaj Auto, Bharti In­fratel, Lupin, Ci­pla, and HCL Tech posted pos­i­tive re­turns in the past one month. These scrips had de­liv­ered neg­a­tive re­turns be­tween Jan­uary and Septem­ber.

‘Value’ stocks are gain­ing promi­nence over ‘growth’ stocks in the port­fo­lio of in­sti­tu­tional in­vestors as cor­po­rate earn­ings are yet to catch up. About half of the BSE 200 stocks have wit­nessed a re­ver­sal in the rel­a­tive per­for­mance trend. The pos­i­tive change is seen in large-cap lag­gards, while neg­a­tive change is vis­i­ble in ex­pen­sive stocks.

In­vestors turned cau­tious on ‘growth’ stocks as they were trad­ing at 20-50% pre­mium to their five-year av­er­age. Ex­pen­sive val­u­a­tions left very lit­tle safety mar­gins, and in­vestors grad­u­ally in­creased ex­po­sure to ‘value’ stocks. For in­stance, M&M is one of the few auto stocks trad­ing at lower than its long-term av­er­age at a time the ru­ral mar­ket is sug­gest- ing a re­cov­ery. As In­dia’s largest trac­tor maker that has been con­sis­tently demon­strat­ing mar­ket share gains, M&M has emerged as an at­trac­tive value stock.

The shift to ‘value’ stock will likely gather pace af­ter the gov­ern­ment an­nounced mea­sures to re­vive growth. Bank re-cap­i­tal­iza­tion, low­er­ing of ex­cise duty on fuel, and higher min­i­mum sup­port prices for crops should spur con­sump­tion, and help end the over­hang of non-per­form­ing loans. Re-cap­i­tal­iza­tion has also turned state-owned banks into at­trac­tive in­vest­ment op­tions, and CLSA has added State Bank of In­dia to its model port­fo­lio.

Value stocks in sec­tors such as en­ergy, state-run banks, cap­i­tal goods, min­ing, and met­als trade at about 13.8 times their one-year for­ward earn­ings, which trans­lates into a 23% dis­count to the Nifty’s valu­a­tion. Growth stocks trade at 20-25% pre­mium to the Nifty’s valu­a­tion de­spite the re­cent drop in their prices. The Nifty trades at 18 times FY18 earn­ings, a 24% pre­mium to its long-term av­er­age.

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