From Asian Paints to Bajaj Finance: Ten largecaps ripe for picking

Apart from trading at a discount to their historic valuation, many companies are industry leaders with superior balance sheets and financial ratios

Indian equities continue their upward trajectory but largecaps, those stocks valued at Rs 20,000 crore or more, continue to underperform the broader market. The largecap-oriented BSE Sensex is up 31.9 per cent since the end of October last year lagging mid and smallcap indices by a big margin. For example, the BSE MidCap index has risen 58.4 per cent and the BSE SmallCap has rallied 55.6 per cent during the period.

This is not a short-term phenomenon. Smaller companies have been beating their larger peers on the bourses for a while now. The benchmark BSE Sensex is up 106.9 per cent since January 2020 compared to a 220 per cent rally in BSE MidCap and 291.7 per cent jump in the BSE SmallCap index during the period.

A relatively muted show by largecap stocks can be attributed to domestic retail and high net worth investors' preference for mid (valued between Rs 5,000-20,000 crore) and small cap (less than Rs 5,000 crore) stocks.

This has created a situation where many of India's top companies and industry leaders are now trading at a discounted valuation compared to both, their historical valuation and the broader market valuation. This is especially true in sectors such as banking and finance, fast-moving consumer goods (FMCG), cement, and pharmaceuticals. For example, the largest private sector lender, HDFC Bank, is currently trading at a price-to-book value (P/BV) of 2.9 times, down from its 5-year average P/BV ratio of 3.1x and Sensex's current P/BV ratio of 4.3x. P/BV ratio is calculated by dividing the company's current stock price per share by its book value per share and is used to determine whether a company is overvalued or undervalued.

Similarly, Hindustan Unilever is now trading at a P/BV ratio of 13.6x down from its 5-year average P/BV ratio of 20.9x.

In contrast, there has been a valuation rerating in the broader market. The Sensex's current P/BV ratio is 27 per cent higher than its 5-year average valuation ratio of 3.4x while the MidCap index is currently trading at a 68 per cent premium to its 5-year average valuation.

Even on a price-to-earnings (P/E) ratio basis, many of these largecap stocks are trading at a discount to their respective 5-year valuation. A low P/E ratio may indicate that a company's stock price is lower relative to its earnings and it is likely undervalued.

The discounted valuation of largecap stocks is an opportunity for investors as most of these companies are industry leaders. Besides, the balance sheet and financial ratios of some of them are the best when compared to peers. Their current valuation assumes a pessimistic growth and earnings scenario for the companies, even as the rest of corporate India is expected to do well. This dichotomy will not last for long, as markets have a tendency to revert to the mean.

Here are ten stocks from the BSE200 index that have seen the biggest derating in their valuation in recent quarters.  

Asian Paints

> Recent price hike of 1 per cent indicates that the largest decorative paint maker in the country continues to charge a premium and is unruffled by competition while aspiring for double-digit volume growth and improving operating profit margins, says Centrum Research

> In addition to the price hike, correction in crude oil prices is expected to support the company’s gross margins, as well as for other paint makers

> While the competitive intensity continues to remain high, the conservative operating profit margin guidance (Asian Paints’ at 18-20 per cent) provides sufficient room for brand/channel spends, says analysts at JP Morgan Research

> Improvement spends on discretionary spends like painting is also likely given some easing of inflation, potential interest rate cuts and pickup in rural incomes

> Worries of slow volume offtake and increase in competitive intensity has led to a derating of the sector. The market leader is trading at a 10 per cent discount to its five year average

Bajaj Finance

> Bajaj Finance shares has also lagged in recent months, up just 1.4 per cent, on concerns about elevated credit cost and rise in delinquencies in retail loans

> The retail lender’s consolidated net profit was up 13.8 per cent Y-o-Y, while gross interest income was up 28.3 per cent Y-o-Y in Q1FY25

> Interest cost was up 38.5 per cent Y-o-Y in Q1FY25 while provisions and write-off for bad loans were up 69.3 per cent Y-o-Y

> Analysts expect the pain to continue in the near-term due to stress in retail lending and higher credit cost that could put pressure on growth

> The company has outlined its latest rolling Long Range Strategy (LRS) to be implemented during FY24-28 with its entry into newer segments and more profitable cross-selling

> Analysts at Motilal Oswal Securities now expect Bajaj Finance to report healthy net profit CAGR of 24 per cent during FY24-FY26 and return on equity (RoE) of 22 per cent in FY26, which could signal a turnaround in the stock

Berger Paints

> With a value growth of 2.4 per cent and volume growth of 11.8 per cent in the June quarter, it has outperformed the industry, which saw an 0.8 per cent revenue decline and 8 per cent volume growth. 

> The volume-value gap is expected to narrow in the September quarter as the company is getting some traction in the premium part of its portfolio. 

> With crude oil prices at yearly lows, the raw material cost basket should improve for the company. > Nirmal Bang Research expects the benefit to come with a lag though some improvement is expected in gross margin in 2QFY25 and beyond. 

> The stock is trading at a 19 per cent discount to its five year average price to earnings and can be looked at on dips

Biocon 

> Biocon’s April–June (Q1FY25) quarter performance was hit by a sluggish show across segments and the divestment of its India portfolio to Eris Lifesciences

> Biocon’s efforts to cut research and development costs and improve margins in Q1 was hit by employee costs from the Viatris acquisition, leading to margins touching a new low of 18 per cent

> India’s largest biopharmaceutical firm is looking at reducing debt and scaling down capital expenditure which should help it to strengthen its balance sheet 

> JM Financial Research is positive on Biocon’s outlook and underlying potential of biosimilars business given its enviable pipeline, integrated business, large total addressable market 

> The stock is trading at a 45 per cent discount to its five-year average and the same is the highest in this list

HDFC Bank

> HDFC Bank’s stock has been a laggard post its merger with HDFC in July last year, grossly underperforming the benchmark and peers like ICICI Bank and Axis Bank

> This can be attributed to HDFC Bank’s sub-par earnings growth post-merger due to high credit-to-deposit (C/D) ratio and contraction in net interest margins (NIMs)

> The largest private sector lender’s gross interest income was up 11.9 per cent Y-o-Y and net profit was down 1.2 per cent in Q1FY25, when adjusted for merger with HDFC

> On the brighter side, sequentially, NIMs were up by 4 basis points and C/D ratio declined by 6 per cent to 104 per cent in Q1FY25

> According to brokerages, HDFC Bank is going through a period of adjustments as it is replacing erstwhile HDFC’s borrowings as they mature, hurting its earnings in near term

> Analysts expect HDFC Bank’s earnings trajectory to normalise once integration is complete and most of them have a ‘buy’ or ‘accumulate’ rating on the stock

Hindustan Unilever

> While Hindustan Unilever’s (HUL’s) performance in the September quarter is estimated to be broadly similar to that of Q1, brokerages expect an improvement over the next couple of quarters

> On the margin front, the FMCG major is witnessing a mixed pricing environment. The declining crude oil and soda ash prices provide some relief, but inflationary trends in maize, tea, coffee, Malaysian palm oil, and palm fatty acids are likely to challenge margin stability, says Motilal Oswal Research

> JP Morgan expects good monsoon trends with more than 75 per cent of districts receiving normal/above normal rainfall, increase in minimum support price and stabilising consumer inflation to aid rural demand pickup

> In addition to the recovery in rural demand, transformation of the portfolio to high growth spaces will help the volume growth to recover further in the coming quarters. This coupled with margin expansion is key to further rerating of the stock

Indraprastha Gas

> Indraprastha Gas’s (IGL) stock has lagged both broader market as well as its peers such as Mahanagar Gas, Gujarat Gas and Adani Total Gas in recent quarters

> This can be attributed to IGL’s muted revenue and earnings growth due to lower-than-expected gas volumes

> IGL’s net sales were up just 3.3 per cent Y-o-Y, while net profit was down 8.4 per cent in Q1FY25

> On the brighter side, IGL remains debt-free, consistently generates free cash flows and its RoE at 20.2 per cent is among best in the industry 

> The IGL management has now guided for 10-12 per cent Y-o-Y growth in gas volumes on a long-term basis compared to 5 per cent growth in Q1FY25

> Brokerages, however, remain cautious on the stock and anticipate lower than anticipated volumes and earnings growth for the company in the near term

Nestle

> Most brokerages had cut their earnings estimates after Nestle India missed estimates in Q1.

> There could be a growth moderation in the near term after three years of outperformance over peers, believe analysts

> Antique Stock Broking, however, believes that over the long term, Nestle would be able to drive strong innovation and distribution led growth

> Input cost inflation could weigh on the profitability. However, any price action to counter the sharp uptick in Nestle’s commodity basket due to increase in wheat, sugar, cocoa beans, coffee, and milk prices could offer relief 

> Historically, the company has shown an ability to bounce back from every debacle and after every mega capacity expansion programme, says HDFC Securities. A sharp correction, thus, would be a buying opportunity

SBI Cards and Payment Services

> SBI Cards has been an underperformer on the bourses with its share price down 2.2 per cent in the past one year as compared to a 30 per cent rally in the BSE Sensex

> This can be attributed to the company's muted earnings growth in recent quarters besides a rise in bad loans in its credit card loan portfolio

> Y-o-Y growth of 0.2 per cent in net profit and 11.4 per cent in total revenues in Q1FY25 has been the slowest in the last three years

> A slowdown in credit card spends and higher provision for bad loans have weighed on earnings

> SBI Cards’ interest cost was up 34.3 per cent Y-o-Y, while provisions for bad loans were up 53.2 per cent Y-o-Y in Q1FY25

> Analysts expect the stress to peak out as interest rates moderate and a gradual improvement in asset quality

> Motilal Oswal Securities expects SBI Cards’ earnings to grow at a 34 per cent CAGR during FY26-27 in an optimistic scenario

Shree Cement

> Kolkata-based Shree Cement has also struggled on the bourses with the stock up just 3 per cent in the last 12 months as against a nearly 30 per cent rally in Sensex and 45 per cent rise in cement industry leader Ultratech Cement

> This can be attributed to a sharp fall in Shree Cement’s EBITDA or operating profit due to lower-than-expected realisation and a higher-than-expected operating and depreciation cost

> In Q1FY25, the cement maker’s net sales were up 1.8 per cent, EBITDA was 4.3 per cent and net profit was down by 51.3 per cent, on a Y-o-Y basis

> Depreciation cost was up 107.5 per cent Y-o-Y in Q1FY25 as it commissioned new capacity

> Shree Cement however remains debt-free and continues to generate free cash flow despite steady investment in capacity expansion

> Analysts at Elara Securities expect faster earnings growth thanks to post-monsoon recovery in demand and access to recently added capacity