10 Cheapest Stocks With Earnings Growth Potential

While the NSE’s Nifty 50 recovered from its recent slump after exit polls predicted a comeback to power for the Prime Minister Narendra Modi-led government, the surge has made stocks expensive.

The benchmark is trading at 20.4 times its 12-month forward earnings. That’s higher than the five-year average of 18.4 times. Analysts said despite higher valuations of India’s equity market, there are stocks with good earnings growth expectations that are still cheap.

This is the best time for investors to buy companies at “ridiculously low” valuations, as represented by their price-to-earnings growth or PEG ratio, according to Manish Sonthalia, the head of equities-portfolio management services at Motilal Oswal Asset Management Company. “Stocks that are trading at less than a PEG of one are sure-shot winners if you have a three-year time horizon,” he said. “Once the dust settles, you won’t see them trading at lower valuations when the benchmark is trading at higher valuations.”

PEG ratio is a stock’s price-to-earnings multiple divided by the earnings growth rate over a specified period. It’s considered a better valuation metric.

Still, Vikas Khemani, founder of Carnelian Capital Advisors, cautioned that investors should not solely reply on the PEG ratio and do further research. A PEG ratio below one could only be the starting point for one to consider investing in a stock, he said.

BloombergQuint compiled the list of the stocks with the lowest PEG ratio.

Methodology

• Stocks tracked by at least 10 analysts.
• Excludes companies from banking, financial services and insurance sector.
• Calculations based on Bloomberg’s 12-month forward PE multiple and EPS estimate for FY19-21.

Here’s the list and the reasons brokerages cited for their earnings growth expectations:

Orient Cement

Higher volume growth, prices and focus on cost cuts are expected to help the company boost its earnings. The proposed capacity expansion is also likely to drive performance.

A delay in deleveraging its balance sheet, because of continued capital expenditure, and presence in only select markets remain an overhang. Orient Cement largely supplies to Maharashtra, Andhra Pradesh and Telangana.

Apollo Tyres

The double-digit earnings growth is likely to be driven by replacement demand, ramp-up of a low-cost greenfield plant at Hungary, and the Chennai plant. The company’s margin is expected to expand on the back of higher volume growth and a possible decline in chemical prices after the anti-dumping duty was removed.

Aggressive capacity expansion amid slowing demand and rising debt have weighed on its valuations.

Lupin

A recovery in the U.S. driven by ramp-up in levothyroxine (thyroid hormone deficiency), cost cuts, monetisation of complex generics assets, and focus on its specialty portfolio are expected to aid the earnings growth.

A higher tax-rate over the next two years, uncertain timeline to resolve U.S. drug regulatory issues, muted growth expectations in Japan and a low probability of the specialty business have kept valuations in check.

Vedanta

Higher zinc, aluminium and oil production and the recent steel business acquisition would aid Vedanta’s earnings growth. Higher coal availability bodes well for its power segment.

But concerns around the U.S.-China trade war and related party transactions have overshadowed its earnings outlook.

Sunteck Realty

Strong pre-sales, the projects in Goregaon and Naigaon and steady sales at its Bandra-Kurla Complex property are expected to aid earnings growth. A strong balance sheet and healthy cash-flow outlook are other positives.

But the tight liquidity situation in the market, unsold top priced inventory, presence in just a few markets and no new projects lowered valuations.

Shoppers Stop

Renewed focus on private labels, growth in the beauty segment and scaling up of customer-centric programmes like personal shoppers, which contributes 15 percent to the revenue, are likely to drive earnings. Its e-commerce business is also likely to rebound after relisting on Amazon.

Lower same-store-sales growth, increased competition from both offline and online retailers, higher costs and adoption of private labels weighed on its PE multiple.

Granules India

Growth in the U.S. formulations business and a better opportunity in the active pharma ingredients business are expected to aid earnings. Own labels, better business mix and lower raw material prices are likely to help. The company guided for a 20 percent and 25 percent annualised growth, in revenue and profit respectively, in the next three years.

Valuations remain cheap because of shares pledged by promoters, possibility of regulatory issues and a global pharma slowdown.

Kalpataru Power

A pick-up in demand from green corridor and state electricity boards after the elections is expected to boost domestic transmission and distribution order inflows. While traction in the oil and gas infrastructure business is expected to continue, the company is also looking to monetise assets to pare debt.

The possibility of a slowdown in order inflow from the power transmission sector and delays in asset sales have kept the valuations subdued.

Oberoi Realty

The launch of three new projects, a strong brand presence and financial strength, even as smaller developers face a funds crunch, are expected to aid growth. Rising share of income from the rental business is also expected to boost earnings.

A slower recovery in overall demand, low mortgage rates and the tight liquidity conditions are among reasons that dragged valuations down.

KEC International

The company guided for a revenue growth of 15-20 percent in the ongoing financial year on the back of strong power transmission and distribution equipment order book. Operating income is expected to remain stable. The company also expects SAE Tower Holdings revenue to grow 30-40 percent as execution in Brazil picks up.

Valuation is cheap because of the possibility of a slowdown in orders and delays in ordering by railways. A higher working capital cycle could lead to weak cash flow, increasing interest costs.

(Expectations and risks compiled from reports by HDFC Securities, Antique Stock Broking, Spark Capital, Kotak Securities, Edelweiss, Axis Capital and IIFL, among others)