The recent fall in equity market has not only eroded investors' wealth but has also seen stocks of over 100 companies trade at their multi-year lows in terms of price-to-earnings (P/E) multiples.
Including Reliance Infrastructure, Bharat Heavy Electricals Limited (BHEL), NTPC, IVRCL and Amtek Auto, as many as 147 stocks are now available at their six-year low P/Es, according to market data provider Capitaline Plus.
These 147 stocks have underperformed the market by declining an average 19% in past two months, as compared to around 7% drop in the benchmark S&P BSE Sensex. The index has declined 6.8% or 1,368 points to 18,736 from its 52-week high of 20,104 touched on 25 January, 2013.
Of these, as many as 140 companies currently trade below a P/E ratio of less than 10 times (10x); 120 of them are trading at P/E ratio of less than 5x, as compared to over 10x at the beginning of the current financial year, data shows.
The P/E ratio is calculated as a stock's current share price divided by its earnings per share (EPS) for a twelve-month period (usually the last 12 months, or trailing twelve months (TTM)), while the earnings per share is calculated by dividing the net profit of the company by number of shares.
When the market is in a declining trend, the P/E ratio will also decline to historical lows indicating that the market is undervalued, analysts say.
Investors often turn for part of their decision-making to a close look at the stock's P/E. The P/E is a measure of how much investors are willing to pay for the company's earnings. A low P/E suggests that investors are not expecting higher earnings growth in the future compared to companies with a higher P/E.
Stocks of public sector undertakings (PSU), which are trading at multi-year lows, have been at the receiving end as compared to their private sector counterparts. Most of the stocks from the sector have fallen in the range of 12 – 36% from their January 25 level.
"The market fall is because of Indian political uncertainty and concerns regarding the slowdown in the reform process. Also, as the general elections draw closer, political uncertainty will increase. The stocks have fallen because of general negative sentiment in the economy and due to weakness in financial and operational health of the companies," says Jagannadham Thunuguntla, head of research, SMC Global Securities.
The 52-week low level does not mean the stocks have bottomed out. Individual stocks could still fall due to specific company or sector related issues or the general market sentiment. However, this fall gives an opportunity to long term investors to start accumulating in quality companies with good management, Thunuguntla added.
Among individual sectors, capital goods, power generation and distributions, fertilisers, metals and infrastructure stocks are trading at lowest valuations due negative news flow and slowdown worries.
"The Nifty is trading near the 6,000 mark, but valuation-wise we are below 4,500. The situation is worse than 2008. However, there is reason to believe that Nifty will follow the global trend and cross new high in the coming months. However, retail investors will not have any respite," said CNI Research head, Kishore Ostwal.
Aluminum major Hindalco Industries is trading at 5 times P/E against a low of 5.04 times P/E at the end of financial year 2007. Reliance Infrastructure is trading at 5.39 times P/E against a low of 8.78 times P/E, while Bilcare is trading at 1.41 times P/E against low of 6.43 times P/E in last six years.