Value stocks poised to outperform growth stocks, benchmarks

MUMBAI: Foreign investors may soon prefer stocks that are currently undervalued and have a steady dividend paying record over those companies with a reputation of consistent earnings growth. Analysts say premium valuations of shares of companies with a good revenue track record may deter these investors from making fresh investments as earnings are yet to show a sign of recovery.

The MSCI India Value Index is currently trading at around 10.5 times one-year forward price to earnings (P/E) ratio, which is cheaper compared to the 10-year average of around 12 times. The MSCI India Growth Index is trading at about 18 times, which is a tad higher compared to the 10-year average of around 17.5 times. MSCI has included stocks such as RIL, SBI, HDFC, M&M and Wipro in its Value Index category; while TCS, Sun Pharma, ITC, Hindustan Unilever and L&T form part of the Growth Index.

Analysts say the discount in valuations of the value index to the growth index suggests there is a possibility of a rally in the so-called value stocks. “Value stocks have immense re-rating potential, and can outperform both growth stocks and benchmarks by significant margins,” said Naveen Kulkarni, co-head of research at Phillip Capital. “We find value stocks in the financial sector best to capture macro themes in the medium-term. We are also positive on value stocks in the consumer discretionary and cyclicals.”

The MSCI India Value Index has gained 5% over the past one year and has underperformed MSCI India Growth Index, which surged 23% over the same period. However, both the indices have corrected 9% from their March-highs. “The valuation gap between the value and growth stocks will narrow going forward,” said Nirakar Pradhan, chief investment officer at Future Generali. “As soon as there is a turn-around in the economy, which we expect after the September quarter, value stocks will come in demand. Investors till recently were buying value stocks on hope and expectations, but that has not happened.”

Stocks on the MSCI India Value Index is evaluated on the basis of variables like book value to price, 12-month forward earnings to price and dividend yield.

The MSCI India Growth Index uses variables like long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate, long-term historical EPS growth trend, and long-term historical sales per share growth trend.

“Our allocation to value stocks is significant at 36% in the model portfolio,” said Phillip Capital’s Kulkarni. “Our top value picks are ICICI Bank, SBI, ONGC, Canara Bank, Bank of Baroda, JSW Steel, Coal India, and M&M.”

“Value stocks gives a lot more stability to the portfolio, while growth stocks can create volatility,” said Future Generali’s Pradhan. “As corporate earnings have disappointed, we have seen growth stocks correcting from their recent highs.”