It’s bargain sale on D Street

It’s bargain sale on D Street
Published: 13 October 2008

There was never a better time to accumulate India’s blue-chip stocks. Some of the soram Industries, ITC, Ambuja Cement and Indian Hotels, among others, are trading at one of their lowest levels in over a decade on various valuation parameters such as P/E ratio, price-to-book value and dividend yield.

Take, Tata Steel for instance, India’s oldest integrated steel maker, which celebrated its centenary only last year. The company is currently at a little over two times its annualised net profit during the June ’08 quarter, the cheapest ever in the last 15 years.

This has broken the FY03 record when the stock was trading at 4.2 times its net profit for that year. Even more dramatic has been the fall in its price-to-book (P/B) value ratio. At the end of Friday, Tata Steel is trading at around 43 per cent discount to its book value (net worth). During last economic down turn, its P/B fell to the lowest of 0.92 in 1998-99.

At its current price, the company’s dividend yield has shot-up to 5.6%, the highest in the last six years but lower than over seven per cent in FY03 and FY02. However, high-dividend yield in those two years were achieved by exceptional rise in dividend payments. In contrast, the company has reduced its pay-out ratio in FY08. For the year end June ’08, Tata Steel reported a consolidated net profit of around INR9900 crore, in comparison to its current market capitalisation, which is a little over INR21,000 crore.

The situation is similar in case of Hindalco Industries. The AV Birla group company and the country’s leading aluminium and copper producer is currently trading at historically low P/E ratio of 3.5. In contrast, its 15-year average P/E ratio is over 10. At Friday’s closing price, Hindalco is trading at 44 per cent discount to its book value, its lowest-ever in the last 15 years. In comparison, its 15-year average P/B ratio is around 1.2. At its current price, the dividend yield has shot up to 2.3 per cent. Only once in the last 15 years (FY03) was the dividend yield better.

Cement major ACC is right now trading at a P/E ratio of 7.5, the lowest-ever figure in recent memory. At its current stock price of around 540, the stock gives a dividend yield of nearly four per cent, the highest ever. In fact, on all parameters, ACC right now is even cheaper than it was during the last economic slowdown between 1999 and 2003. Its close cousin, Ambuja Cement, is even cheaper. The stock is currently available at just 10 times its trailing annual earning per share, while dividend yield has shot-up to an all-time high of 5.3 per cent and price-to-book value has fallen to two.

The above examples illustrate that in many ways stock markets are like super-markets. Just like super-markets do a clearance sale once in a while to attract value buyers, the stock market gives you similar opportunity in times like this time. But surprisingly, while consumers rush to take advantage of a sale in a supermarket, investors do the opposite. It’s so much easier to buy in a rising market and vice versa. Only if equity investors could act as shoppers, things would have been so different.