Even though the benchmarks Nifty 50 and Sensex scaled all-time highs, the broader market left Dalal Street investors’ eyeballs rolling, as the S&P BSE Smallcap index rallied 38% since April.
In fact, in the last three sessions of market correction, the Sensex shed more than the S&P BSE Smallcap index.
After such a stupendous run, the obvious question arising in the minds of investors is whether valuations have run ahead of fundamentals.
ETMarkets did an analysis on the valuation of stocks with a minimum market capitalization of Rs 1,000 crore.
Through this analysis, 10 such stocks were shortlisted that have given high double-digit to triple digit returns in the last six months, but are still trading well below the average industry price-to-earnings ratio.
Price-to-earnings or P/E is one of the most common and widely tracked parameters to gauge the valuation of a stock. However, one must look at all other important parameters such as cash flows, balance sheet, etc before buying or selling a stock. Wind turbine maker Suzlon Energy topped the list of 10 stocks, as this has given a staggering 227% returns in the last six months, but is still trading way below the industry average P/E.
The stock is trading at 62 times its 12-month trailing earnings, compared to the industry P/E of 80.3 times, Trendlyne data showed.
The second in the list was Kalyan Jewellers India, as its shares have given around 81% returns in the last six months. The stock is trading at 48 times its 12-month trailing earnings, compared to the industry average P/E of 84 times.
Air conditioner maker Amber Enterprises India is another stock which has given handsome returns to investors in the last six months, and despite this rally, it trades below the industry P/E.
The stock has given 58% returns to investors in the last six months, and trades at a trailing P/E of 62 times, way lower than the industry average P/E 117 times.
Joining Amber Enterprises is another cooling products maker Whirlpool of India. This stock has given 24% returns in the last six months. It trades at a multiple of 99 times its trailing earnings.
Of the 10 stocks, three belong to the real estate sector, and these are DLF, Brigade Enterprises, and Godrej Properties.
DLF stock has rallied 41% in six months, and on a trailing basis, it trades 62 times, compared to the industry average of 104 times.
Similarly, Godrej Properties, which gave 42% returns in the last six months, trades at a P/E of around 68 times, which is quite lower than the industry average.
Besides real estate and consumer durable goods makers, some of the stocks in the hospitality space are also a part of the list, and Chalet Hotels is one of them.
Shares of this company have rallied 49% in six months, and trades at a P/E of 45.8 times, compared to the industry average P/E of 55.2 times.
What should investors do?
There are several pockets within the midcap and smallcap segments which have turned expensive after the rally, according to money managers. Therefore, one needs to be a bit cautious while investing in this segment.
Many cyclical, leveraged and somewhat weaker governance microcap and smallcap companies are trading much ahead of their fair valuation at this point in time, says Manuj Jain of WhiteOak Capital AMC, adding that one needs to moderate return expectations and expect higher
volatility over the next 12 months.
Meanwhile, Kaushik Dani of Abans Investment Managers is not too worried about the valuations of smallcap stocks at this point.
“…Smallcap valuations have not reached those euphoric levels that we have witnessed in the past,” he said.
However, Dani recommends investors to have a fairly balanced portfolio with a diversified mix of large-, mid- and smallcap stocks.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)