Value picks hard to come by on a Street full of stretched valuations

Mumbai: Value pickers are increasingly struggling to spot winners in India as valuations of companies are tilting heavily toward the higher end. According to a DSP Mutual Fund study, at least 43% of the BSE Allcap Index are trading above the Price to Earnings (PE) ratio of 40 times, leaving fewer stocks in traditional value territory. The Nifty is trading at a PE ratio of around 22-23 times.

PE ratios vary across different industries, with growth stocks typically trading at higher levels, while cyclicals tend to trade at lower levels. However, the study suggests that India's valuation stretch extends beyond sector mix.

In this index, 43% - or 644 stocks, including 135 loss-making companies for which the PE ratio is not meaningful - trade at more than 40 times, while only 334 stocks, or 22%, trade below 20 times. In effect, high-multiple stocks outnumber low-multiple ones in the BSE Allcap universe by roughly two to one.

"Several companies trading at or above 60 times valuations also exhibit subpar ROEs, a concerning combination of high valuations and low profitability," says Sahil Kapoor, head of Products and Market Strategist, DSP Mutual Fund. Data from the study shows that 274 companies trade at a PE above 60 and have an average return on equity (ROE) of 12%. "The markets have eventually corrected such imbalances, and while the timing of the correction is uncertain, we remain cautious of this segment of the market," adds Kapoor.

Of the 1,492 constituents, 274 stocks trade at over 60 times PE, another 124 fall in the 40-50 band, and 41 sit between 50 and 60.