Five leading companies whose premium valuation suffered due to regulatory issues

More and more investors expect lower future revenues from companies that are grappling with product-related regulatory hurdles. Such stocks — like Nestle India caught up in the Maggie controversy — face a valuation challenge that may result in their de-rating and waning interest from investors. Going by past experience of regulatory compliance issues, chances are analysts may de-rate the Nestle India stock.
According to a Kotak report “this event should make investors question the ‘quality premium’ attached to the company.” “A misplaced India strategy,” says the broker, “in recent years and sub-par EPS growth delivery have failed to impact this premium...However, a slip-up on safety aspects (if true) and poor PR management of the event raise valid questions on the premium.”

ET Intelligence Group takes a look at some of the leading companies whose valuation suffered and P/E multiple shrank due to regulatory issues. Such stocks hover around a lower new normal.


ITC: PE Multiple Since 2008


The government is considering a ban on loose cigarettes, which account for more than 70% of total cigarettes sales of ITC. Also, there is a proposal to raise the age limit on tobacco consumption to 25 years. Adding to the company’s woes is higher penalty for smoking in public.

VALUATION: From a peak PE multiple of 38 based on trailing 12 months earnings, the multiple has come down to nearly 23. It is trading at lower than its average multiple in the past 8 years.


ONGC & Oil India: Price to Book Value

Earnings of ONGC and Oil India depend on the petroleum subsidy burden they have to bear. Since 2009 there has been no formula to decide subsidy. As a result, many institutional investors have stayed away from these two stocks given the uncertainty in their earnings growth despite a comparatively lower valuation.
VALUATION: Based on the ratio of enterprise value (EV) to barrels of oil equivalent (BOE), both stocks are among the cheapest available globally. Their price-book ratios have halved in the past 5 years. (BOE is a way to convert hydrocarbon reserves into equivalent energy content in barrels of oil)

IPCA Labs: One-year Forward PE



The pharma company’s factories in Indore and Ratlam came under the glare of the US Food and Drug Administrator. The US accounts for 10% of Ipca’s sales.

VALUATION: After a sharp correction and earning revision, analysts are assigning a lower P/E multiple of 14 times to the company as against 16 times earlier. This P/E is 30% lower than its midcap peers.

Indraprastha Gas

Gas regulator PNGRB directed the company to cut its network tariff by 63% in 2012 and refund the difference to customers retrospectively from April 1, 2008 till the date of the order. While the Supreme Court fi nally ruled in favour of the company, the stock did not return to the earlier levels.

VALUATION: The stock, which traded at an average P/E multiple of 20 times, touched a multiple of 9.74 after the order. It’s currently trading at 12.65 times as against the average of 14.26 of past eight years.