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Value buys: Bharti Airtel, State Bank of India and Larsen & Toubro

This article was posted on May 25, 2009 and is filed under Stock Views

Last Monday proved to be a europhic day for Indian investors with the markets hitting the upper circuit as the news of a new Central government, insulated from the vagaries of coalition politics, unleashed a wave of positive sentiments.

The Sensex jumped 2,000 points touching 14,000, the third time since January 2007. The market gained a whopping 74% from the lows of March 2009. Liquidity, finally, seems to be back in the markets.

So what should the investors look on from here? Taking 14,000 as a standard peak, we swooped down on the stocks of top Indian companies, comparing their valuations and business performance on three occasions when the markets touched 14K (K stands for 1,000 points).

On January 12, 2007, the Sensex hit 14K for the first time in its history. Seventeen months later, as global slowdown fears coupled with the impact of the subprime crisis took down the markets from an all-time high of 21K, the benchmark index touched 14K once again, on June 24, 2008. And on last Wednesday markets again stood at 14K approx.

The comparison indicates a rich valuation that many frontline stocks command, indicating that a further upside in these stocks is limited and that these may not offer a great opportunity to investors at current prices.

The most prominent of all is Reliance Industries (RIL), trading at a price-to-earning multiple (P/E) of 22 times as of now, higher than the 17 it had on January 12, 2007. However, the growth in its net profit is tapering-off . While profit rose by 26% in the trailing twelve months as on January 12, 2007, it remained more or less flat in FY’ 09. It seems that at current price the stock has adequately factored in business fundamentals and further appreciation is expected to be limited in long run.

Hindustan Unilever, India’s largest fast moving consumer goods company, saw its scrip performing well in 2008 even when the market was on a downhill. The company performed well too by selling more of its products and improving its margins despite rising raw material cost. However, the price has risen to such an extent that the stock is now trading at a P/E of 24, while the net profit of trailing twelve months grew by just 11%. On January 12, ‘07, the stock was trading at similar valuations, but the net profit grew at 35%.

Another FMCG giant’s ITC shares a similar fate. The stock is trading at P/E of 22 times as of now, while bottom line growth stood at just 5%. This leaves little doubt in the mind of investors that ITC too is fairly valued and offers slim chances of high gains.

Many Indian banks and financial institutions too seem to be fairly valued. Take HDFC for instance: the largest mortgage player of country has commanded a premium in valuations over other top player of India Inc. The stock trades at a P/E of 28, while the net profit grew by only 15% in FY’ 09. In January 2007, it was a juicier bet, as the valuations were almost the same, while the profit grew by 23%. It seems that while the business has taken some hit due to slowdown, market has not yet discounted that in valuations.

Another financial services giant ICICI Bank has seen a sharp upsurge in its stock price off late. The stock has earned 34% return in last three weeks pushing up its P/E to 22. The bank has put a brake on its expansion plans for the last one year and is trying to arrest the rise in the nonperforming assets. As a result, the growth suffered and the net profit was almost flat in FY09. The case was just the reverse in January 2007, when ICICI Bank was the fastest growing Indian bank. Its profit grew by 40% in twelve months ending December’ 06 and the P/E stood at 30. By this comparison, it is clear that ICICI Bank is not an attractive bet for investment at current prices as the valuations are high and bottom line is stagnant.

There are many other companies like Mahindra & Mahindra, Maruti Suzuki, Reliance Communications and Tata Consultancy Services, where in the stock price has factored, or in some cases more than factored, in the fundamentals.

However, there are few frontline stocks, which seem to offer value to investors at current prices. Prominent among them is Bharti Airtel, the largest telecom company of India. Its stock is trading at a P/E of 21 and the profit grew by 23% in FY’ 09. Despite its large scale, the company’s subscriber base grew by more than 50% in FY’ 09. The company has managed to grow its profit by cost management.

While, other banks are struggling to grow in slowdown, State Bank of India (SBI) has grown at high rates. Its net profit grew at 22% in FY09. It is trading at a P/E of just 10, which appears to be less considering that the P/E stood at 12 on January 12, 2007 when the profits had actually fallen by 9% in the trailing twelve months.

The engineering giant Larsen & Toubro (L&T ) too seems to be a good bet at current levels. Its P/E stood at 23, while its earnings grew by 81% in twelve months ending Dec’ 08. Moreover, it is expected that the stable government would step up infrastructure spending, the much needed fuel to sustain a 7%+ growth rate for Indian economy. This would help companies like L&T .

To sum it all, at current levels, many frontline stocks seem to be adequately factoring in their business performance. However, there are a few opportunities like Bharti Airtel, SBI and L&T , which seem to be the front-runners of next upswing.

source: Economictimes

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