Value picks are hard to come by on a street full of tense valuations

Mumbai: Value picks are increasingly struggling to spot winners in India as company valuations tilt sharply towards the higher end. According to a study by DSP Mutual Fund, at least 43% of the BSE Allcap Index is trading above its price-to-earnings (PE) ratio of 40 times, leaving fewer stocks in the traditional value space. The Nifty trades at a price-to-earnings ratio of around 22-23 times. Price-to-earnings ratios vary by sector, with growth stocks typically trading at a higher level while cyclical stocks tend to trade at a lower level. However, the survey shows that India’s valuation extends beyond its sector mix.

In this index, 43% (or 644 shares, including 135 loss-making companies for which the price-earnings ratio is not meaningful) trade more than 40 times, while only 334 shares, or 22%, trade below twenty times. In fact, in the BSE Allcap universe, stocks with a high multiple outnumber those with a low multiple by about two to one.

“Several companies trading at or above 60 times valuation are also exhibiting sub-par ROEs, a worrying combination of high valuations and low profitability,” said Sahil Kapoor, Head of Products and Market Strategist, DSP Mutual Fund. Data from the survey shows that 274 companies trade at a price-to-earnings ratio of more than 60 and have an average return on equity (ROE) of 12%. “Markets have eventually corrected such imbalances, and while the timing of the correction is uncertain, we remain cautious on this market segment,” Kapoor added.

Of the 1,492 stocks, 274 shares trade at more than 60 times price-to-earnings ratio, another 124 fall in the 40-50 band and 41 are between 50 and 60.