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10 non-bank and non-finance stocks from the BSE500 Index universe that offer an optimal blend of low valuation, reasonably robust revenue and earnings growth in recent quarters, a strong balance sheet, and most importantly, positive cash flow from their operations.
India's equity valuation has seen a tempering in the past three months, mirroring a decline in the broader market.
The trailing 12-month price-to-earnings (P/E) multiple of the BSE Sensex has receded from an 18-month high of 24.8x at the end of July to 22.8x on October 30, 2023.
This downturn has been led by foreign portfolio investors (FPIs), who, after six months of net buying, have turned net sellers of Indian equities over the last two months.
The selloff by FPIs could be attributed to a marked escalation in bond yields in the United States, rendering investments in riskier assets like emerging market equity less financially appealing.
While the downward pressure on equity valuation is palpable across the market, growth stocks with rich valuations face the most significant downside risk.
Conversely, analysts perceive limited downside risk to value stocks with relatively low valuations, promising growth prospects, and robust balance sheets.
However, investors should tread cautiously when investing in stocks with low valuation parameters, such as price-to-earnings multiple and price-to-book value ratio.
Stocks with attractive prices can swiftly morph into value traps in the absence of revenue and earnings growth.
That's why it is crucial to invest only in those 'value stocks' whose businesses promise long-term growth potential.
Here are 10 non-bank and non-finance stocks from the BSE500 Index universe that offer an optimal blend of low valuation, reasonably robust revenue and earnings growth in recent quarters, a strong balance sheet, and most importantly, positive cash flow from their operations.
A majority of these companies also lead their respective industries, providing them with good earnings visibility over the long term.
Furthermore, these companies are either debt-free or carry minimal debt on their balance sheet, making their finances relatively resilient to rising borrowing costs.
Great Eastern Shipping
Great Eastern Shipping, India's top shipping company, is one of the best value stocks currently, given its low valuation, strong earnings growth, and a debt-free balance sheet
The stock is trading at a trailing price-to-earnings ratio (P/E) of 4.9x and price-to-book value (P/BV) of 1.5x -- among the lowest in the midcap space.
It offers a reasonably high dividend yield of 2.9 per cent at its current price
The company paid a record high equity dividend of Rs 411 crore in FY23, equivalent to 17.4 per cent of its net profit
In the trailing 12 months ended June 2023, the firm's net profit was up 151 per cent, and net sales by 37 per cent
It reported record high return on net worth (RoNW) of 28 per cent in FY23, up from 1.3 per cent in FY20, and has cash and equivalent worth Rs 5,000 crore, around 40 per cent of its mcap
On the flipside, however, the company faces a challenge from a decline in India's merchandise trade in FY24, which is likely to impact its tonnage volumes and revenue
Hindustan Aeronautics
Bengaluru-based and government-owned Hindustan Aeronautics Ltd (HAL) has been the top-performing defence stock in recent years, up 63 per cent in the past 12 months compared to a 13 per cent rally in the BSE Sensex
Its valuation is, however, still in a value zone with a P/E multiple and dividend yield that are still lower than that of the Sensex
Rally in the stock has been underpinned by strong earnings with the defence equipment marker's net profit up 31.3 per cent Y-o-Y in Q1FY24
Brokerages expect the earning momentum to sustain, with Prabhudas Lilladher estimating a 25.9 per cent compound annual growth rate (CAGR) in HAL's earnings in the next three years on higher order book from the Indian Air Force
On the downside, HAL has reported muted revenue growth in recent years -- a CAGR of 6.5 per cent in the past five years
Amara Raja Energy & Mobility
The battery maker reported its highest ever quarterly revenue in the June quarter on the back of stable demand across segments and a rise in two-wheeler battery volumes
While the growth outlook for FY24 is 6-7 per cent for four- wheeler replacement, it is 11-12 per cent for two-wheeler replacement; double-digit growth is expected in the telecom and uninterruptible power supply segments
To mitigate the risk of transition to lithium-ion batteries, Amara Raja is working on building capabilities and has recently started supplying Li-ion battery packs (with imported cells) for three-wheeler applications
Considering the positive demand outlook, B&K Research expects Amara Raja to maintain the growth momentum across auto, industrial and export segments
Additionally, softening lead prices (partially offset by rupee depreciation) is likely to support margins, believes B&K Research
Natco Pharma
The R&D-focused pharma major, which has a strong position in oncology and pharma specialty, gets two-thirds of its revenue from international markets
Natco has a strong pipeline of niche products, including generic version of cancer drug Revlimid
The company is increasingly focusing on non-US markets, including Brazil, Canada, and China, with several launches planned following a global portfolio strategy
The domestic formulations segment should also see better trends, with improvement in oncology and growth in cardiology and diabetology segments, aided by new products (10-15 launches planned annually) and inorganic opportunities, says Julius Baer Equity Research
In addition to the strong generics pipeline, key triggers for the stock are foray into crop protection and strong return ratios
Lakshmi Machine Works
Coimbatore-based Lakshmi Machine Works (LMW) is one of the world's leading manufacturers of yarn spinning machinery
It is one of India's most valuable capital goods manufacturers with a trailing P/E of 36.8x and P/BV of 6.5x
Premium valuation is, however, justified given strong Y-o-Y growth in its revenue and profit of 33.3 per cent and 54 per cent, respectively, in the past 12 months
LMW also demands high valuation, thanks to its debt-free balance sheet with cash & equivalent worth Rs 1,100 crore at the end of FY23
There has also been a sharp rise in LMW's RoNW from a low of 2.3 per cent in FY20 to 20 per cent in FY23
Analysts expect its earnings momentum to continue given LMW's strong order book from its domestic and export market
Avanti Feeds
The company makes shrimp feeds and exports processed shrimp. Thailand-based Union Group, which is one of the largest seafood makers in the world, has a 24 per cent stake in Avanti Feeds
With raw material costs pressure easing and demand from the developed markets of US and Europe normalising, SMIFS Research expects Avanti to be aptly placed to take advantage of this demand revival and increase its capacity utilisation levels
Its entry into the fish feed business could also open up new growth avenues
Given the government's focus and incentives for the sector, the company's expansion programme, nil gross debt, and strong growth opportunities, revenues and profits are expected to grow by 15 and 30 per cent, respectively, in the next few years
NCC
Hyderabad-based NCC has been one of the top-performing construction & infrastructure stocks in recent quarters
The stock is up 215 per cent in the past 12 months, beating the Sensex by a big margin, driven by strong double-digit growth in its revenue and profit
Its valuation, however, remains in value zone with trailing P/E of 15x and P/BV of 1.6x, among the lowest in Tier-I construction firms
In the trailing 12 months ended June 2023, NCC's net sales were up 34 per cent Y-o-Y, net profit was up 20 per cent
Analysts expect NCC to maintain its growth momentum given its large order book worth Rs 50,244 crore at the end of FY23, up 28 per cent Y-o-Y and nearly 4x its net sales last financial year
NCC managed to deleverage its balance sheet and its gross debt declined to Rs 974 crore in FY23 from a high Rs 2,700 crore in FY19
Petronet LNG
India's largest liquified natural gas seller, Petronet LNG, is one of the top value stocks currently with low valuation and a high dividend yield
The stock is trading at a trailing P/E of 10.1x and P/BV of 2.3x, both at a discount to the Sensex's valuation
Petronet LNG is also among top dividend yielding stocks, with a yield of 5 per cent currently, much higher than the Sensex's yield of 1.24 per cent
Analysts expect it to maintain the dividend payout in FY24, thanks to a rise in its earnings and gains from recent softening of global LNG prices from record highs in FY23
Prabhudas Lilladher says that there is limited downside in the stock given its highly liquid balance sheet with cash & equivalents worth Rs 6,500 crore at the end of FY23, equivalent to a fifth of its current market cap
Dr. Reddy's Laboratories
The pharma major posted a strong performance in the June quarter led by growth across markets, especially, North America and Europe, which led to higher operating leverage and favourable product mix
The US market is expected to continue to grow strongly, driven by key products, such as the generic version of cancer drug Revlimid
Volume growth in base business and product launches should also help, though the same could partially be offset by price erosion, says Sharekhan Research
In the Indian market, price increases for drugs under price control and softening of raw material costs could improve the margin profile going ahead
The stock is trading at a 29 per cent discount to its peers on FY25 earnings estimates
Coromandel International
Coromandel International reported a marginal decline in revenue in the June quarter.
The corporation, however, is confident of achieving a 6-10 per cent year-on-year (Y-o-Y) growth in manufactured volumes going ahead
Prabhudas Lilladher expects the crop protection firm to report stable margins over the long term led by efficient sourcing of raw materials and benefits of backward integration
Rising share of unique grades to overall manufactured volumes, product innovation & capacity expansion, and enhanced focus on product branding, both in nutrition and crop protection segments, should aid profitability
Quick ramp-up of revenue from contract development and manufacturing operations (CDMO) and the Dhaksha (drone business) offers an upside to IIFL Research's estimates
Valuation at 14 times its FY25 earnings is attractive given the company's strong fundamentals
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Feature Presentation: Aslam Hunani/Rediff.com
