Value stocks on the rise but bargains hard to find: ICICI Securities

Financials and commodities dominate pool of investable value stocks, says brokerage

A recent market correction has increased the number of "investable value" stocks but deep bargains are hard to find, according to a report by ICICI Securities.

 

The percentage of "investable value" stocks — those offering favorable returns relative to bond yields — has risen moderately to 16 per cent among the top 1,000 companies. This is up from recent lows but still below the long-term average of 24 per cent. ICICI Securities designates a stock as "investable" if its earnings yield exceeds the bond yield and it offers a return on equity (RoE) of at least 14 per cent.

 

 

The report highlighted an improving landscape for equity investing compared to bonds. The risk premium, measured as the spread between earnings yield and average bond yields, has narrowed from a 130 basis points (bps) discount in July 2024 to just 25 bps. With the Nifty 50 index's forward earnings yield at 5.24 per cent against an average India bond yield of 5.48 per cent, stocks are gradually approaching value territory.

 

However, ICICI Securities analysts Vinod Karki and Niraj Karnani cautioned that a true risk premium over bonds — where equities would clearly outshine bonds — has yet to materialise. Historically, the post-pandemic era provided two brief periods of value: in 2022, during the Russia-Ukraine conflict and aggressive rate hikes, and in 2023, amid the developed markets' banking crisis.

 

Looking ahead, falling bond yields or stronger corporate earnings could further tip the scales in favour of stocks. With improving growth-inflation dynamics and debt-equity ratios in the corporate sector, the report said that "deep value" opportunities may remain limited.

 

Among sectors, financials and commodities continue to dominate the pool of investable value stocks, consistent with prior trends. Smallcap stocks, despite their strong performance over the past two years, now trade at a risk discount to large caps: A reversal from their traditional premium. The report argued that their low financial risk (healthy balance sheets) justifies a modest premium, not a discount.

 

Some of the value stocks identified in the report are Coal India, State Bank of India, Hindalco Industries, Shriram Finance, and NTPC in the largecap space.

                                  

Value buys	Some value stocks screened by the brokerage
	FY26 estimates (in %)
	RoE FY26E	Earnings yield(%)
Large cap
Coal India	32.5	15
SBI	15.7	11
Hindalco Inds	11.6	10
Shriram Finance	16.4	9
NTPC	13.4	7
Mid cap
Oil India	15.2	14
Federal Bank	13.4	11
Aditya Birla Capital	13.3	9
Aurobindo Pharma	12.8	7
Small cap
South Indian Bank	12.3	22
Karur Vysya Bank	16.3	14
PNB Housing	12	10
Mahanagar Gas	17.5	9

 

Source: ICICI Securities 

  Screening criteria: Market-implied long-term growth value> 40%; Earnings yield > bond yield; BUY rating from our sector analysts