Investment guru Warren Buffet had once said: "Price is what you pay, value is what you get." As bears refuse to give up the grip on markets, investors are resorting to value investing. Value investing essentially means buying companies whose stock prices appear cheap when viewed against its fundamental intrinsic value.
Most investors have become wary of placing fresh bets after the benchmark Bombay Stock Exchange's Sensex lost more than 3924.19 points, or 19 per cent, this year.
The Sensex meltdown has also impacted the number of investments in the growth mode because earnings growth in several sectors has been affected indicating a cooling off effect on the economy.
However, as experts point out, there are value picks in every market. A value investor believes that markets are inefficient and looks to turn this to their advantage.
Value investors look for "bargains" or stocks that are trading at a discount to their unusual valuation. And as Buffett puts it, "it is as good as buying a dollar for 50 cents."
For example, if there is a company which is trading at Rs 100 per share, and one believes that intrinsic value of the company is worth Rs 300 because of its business prospects, then it would certainly qualify as a bargain buy.
A value investor generally buys the asset thinking its price to be more reflective of its intrinsic value and then he will benefit from the upsurge in prices in a near future.
Ajay Argal, co-head (equity investments) of Birla Sun Life Mutual Fund, which launched a pure value fund yesterday, says, "Opportunities exist in varied sectors such as fertilizers, oil and gas marketing companies, paper, shipping, cement, sugar and MNC pharma. This is because most of the stocks in these sectors are trading at a discount to their replacement cost."
Adds Rajiv Anand, CIO, Standard Chartered MF, "At the end of the day, India is mainly a growth market and 15-20 per cent correction does not make it a value market in true sense of the word. But we are seeing value emerging in certain sectors such as fertilizers, some public sector banks and cement companies. Valuations now are more compelling than they were a few months ago so it makes for a attractive buy in these times."
Reliance Energy serves as one of the best examples for value picks.
For most part of 2006 and 2007, the stock underperformed the market but it was a strong value stock as cash on the book was to the extent of 40-50 per cent of market capitalisation.
Huge cash helped the company bid for infrastructure and power projects leading to a significant re-rating. The scrip jumped from Rs 600 in January 2007 to Rs 2000 in December 2007.
Similarly Chennai Petroleum turned around from Rs 200 levels in August 2006 to more than Rs 450 by November 2007.
Value stocks are those that are available at a discount to intrinsic value and ones that have attractive price to book value.
These stocks have lower PE multiple but with a reasonable growth track record and have lower market cap than replacement cost.
Companies having high level of cash and liquid investments and those that reward investors with high and regular dividends also qualify as value picks.
The Birla Sun Life MF feels that shipping sector may unlock value because it will get re-rated along the line of global peers, which trades at a price close to their net asset values.
India and China have increased their dominance on the international trade as against developed countries.
