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Large Cap Nifty Stocks – Returns since our call in December 2011

Important: Don’t miss the last paragraph.


When we wrote Large Cap Nifty Stocks available at deep discounts in December 2011, we were very excited to find a number of great companies available at very cheap prices. And since the world as well as Indian economy hadn’t fully recovered, it was really common sense that one stuck with businesses which could weather the economic turmoil. We advised and bought a few of these large caps for our personal portfolios.

So after an year, when index has given 25% returns, we checked the performance of individual stocks. And we must say that we are more than happy to see around 15 stocks giving 40% + returns. But there are a fair number of duds too. There are 10 stocks which trade at discounts compared to December 2011 prices.

Large Cap Nifty Stocks Returns One Year
Nifty Stocks: One Year Returns (Dec 2011 – Dec 2012)
As of now, markets are trading at a PE of close to 19 and since markets have run up around 800 points in last 4 sessions, we are not sure if it’s a good time to pick stocks. We would rather wait and watch for the time being.

Caution: Our post might make you believe that we have good predictive capabilities. The fact is that we don’t. Why? Markets have risen 25% in last one year. So have all stocks representing the market. And as Warren Buffett said: A rising tide lifts each and every boat. You only find out who is swimming naked when the tide goes out.

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Nifty Stocks and PEG Ratios

In our previous post, we saw that Indian markets are presently trading at PEG ratio of 0.97. We arrived at this figure by dividing current P/E of 16.7 by average growth rate (in last 18 years)of 17.1%.

For details, please check the post on Historical EPS Growth Rates & PEG Ratio of Indian markets.
In continuation of our analysis of PEG ratios, we calculated PEG ratios of a few Indian large cap stocks –
Click to enlarge
Some details/observations of our analysis are as follows –
  • We have chosen EPS growth rates to represent growth rates of a company. One can also use any other growth rates.
  • For each company, we have calculated 3 PEG Ratios –
    • Using latest EPS Growth Rates (2010-2011)
    • Using Average of all EPS growth rates in last 5 years
    • Using least positive EPS growth rates in last 5 years
  • Afterwards, we calculated another PEG for each company – Average PEG – which is an arithmetic average of previous three PEGs.
 
  • Normally, a PEG greater than 1 indicates an overvalued company, and less than 1 indicates an undervalued company. But we must understand that PEG is just a ratio and it should always be looked in conjunction with other ratios and numbers.
  • For instance, a company like Bharti has an average PEG of 0.33, which is quite an attractive number when looked at on a standalone basis. But if we consider that Bharti operates in a highly competitive industry; has loads of debt due to 3G fee payments and African expansion; has decreasing average revenues per user (ARPU) and has a negative PEG(!) for current fiscal, the number 0.33 may not look so attractive.
  • But there are also few companies like BHEL (0.59), PowerGrid (0.83), Tata Steel (0.40) and Tata Motors (0.42) which have considerable moat (competitive advantage & operations in industries having high entry barriers) and can be said to be available at good valuations. But once again, one should understand that stock like Tata Motors are rate sensitive and cyclical. And under current global circumstances, may slip further.
  • A company like Sterlite Industries (pegged by few as future RIL) is available at a ridiculous PEG of 0.19 (or 0.25, 0.08, 0.26). But that does not mean that it is going to become a future multibagger. Similarly, Maruti is available at PEG of 0.10(!)
  • Then there behemoths like SBI which may be available at outrageous mathematically calculated PEG of 6.6, but are worth investing as there current PEG stands at 0.54. But one should also consider rise in NPAs of SBI and other factors before investing.
So a Stable Investor understands that one should never rely on just one mathematical tool to arrive at any investment decision. Any number should always be looked in conjunction with other ratios and numbers.

Large cap Nifty Stocks available at deep discounts

On 25thNovember 2011, Nifty closed at 4710 – A level 26% lower than highs of 2007-2008 and 2011. So does it mean that all 50 stocks that make the index are following a similar trend?
Before answering this question, I would like you all to know that Nifty is made up of stocks of 50 companies representing 24 important sectors of Indian economy. All these stocks have different weights. And for all practical purposes, the index can be considered to be a good enough representative of stock markets.
NSE itself provides a lot of information about Nifty like Full list of constituents, calculation methodologies, etc. for retail investors.
I did some quick calculations to see how individual Nifty stocks were placed with respect to their 2007-2008 & 2011 highs –
Nifty Stocks 2008 2009 Lows
Nifty Stocks – Discounts to their 2008 & 2011 highs
As evident, shares of companies like RCom (Reliance Communications) are down 92% & 66% from their highs of 2008 & 2011. RCom, because of various negative reasons may not be the best stock to evaluate. But this small analysis also throws up some interesting insights about other large caps –
  • Sterlite Industries – According to a few, another Reliance in making, is down 68% & 58% 
  • Tata Steel is down 64% and 50% 
  • BHEL is down 54% & 50% 
  • Reliance Industries – Bellwether of Indian stock markets, sitting on a cash pile of more than 16 Billion Dollars, generating cash of around a Billion Dollar every quarter is down a staggering 54% from its 2008 highs and 35% from its 2011 highs! 
So what should an average investor do after witnessing shares of mighty and blue chip companies fall like nine pins?
  • Long term investors should understand that though index is down around 25%, good individual stocks like Reliance Industries, Tata Steel, SAIL & State Bank of India are down more than 60%. And these are not small or mid caps; these are full-fledged large caps!
  • This analysis does not suggest that there won’t be any further fall in these scrips. 
  • It makes sense for long term investors to continue with their SIPs in good mutual funds or index funds. Also investor should start selectively buying these large cap stocks, which score high on sustainability parameter and have visibility in revenues/profits.