Value picks? RIL, ITC, TCS, HDFC Bank, L&T shares at or below 10 yr average PEs

ITC Ltd, Larsen & Toubro Ltd, Bharti Airtel Ltd, Reliance Industries (RIL), IT majors Infosys Ltd and Tata Consultancy Services and private lenders such as HDFC Bank Ltd, Axis Bank, Kotak Mahindra Bank Ltd and ICICI Bank traded below or at their 10-year valuation multiples at the end of March.  
DSP Mutual Fund in its monthly ‘Netra’ note this week said a large part of the $12.7 billion in selling by foreign investors in March would have been in these largest 10 stocks. Yet, the 10 stocks have shown remarkable resilience with normal impact costs and no jumps in trading activity, it said adding that it sees large caps in the buy zone. 

“Currently, the top 10 stocks are trading at valuations that are among the lowest seen in the past decade. On a percentile basis, the P/E of Nifty Top 10 Equal Weight Index stands at 17th percentile (data considered since March 2006), a level last observed in 2016 and 2020, periods marked by heightened pessimism and muted growth expectations for these businesses,” DSP Mutual Fund said.

For example, Infosys at 17.6 times trailing 12-month earnings per share (EPS) traded at a discount to 10-year average of 23.4 times and post global financial crisis (GFC) average of 22.1 times. ITC traded at 17.5 times at March end against 10-year average  of 26 times and post GFC average of 28.2. RIL traded around its 10-year average.    

These are the businesses which have seen business cycles time and again, emerging stronger over time, DSP said.

As far as earnings are concerned, Elara Securities said since its December quarter preview, Nifty 50 FY27 EPS estimate has been trimmed 2 per cent to Rs 1,255. 

“For FY26E in full, Nifty EPS of Rs 1,084 represents a 2 per cent growth over FY25, the index’s weakest annual earnings year since FY21. The soft base, however, is what makes 16 per cent recovery in FY27E an achievable target,” it said.

It noted that Nifty at 17.5 times one-year forward P/E trades 6 per cent below its 10-year rolling average of 18.6 times, a level that has historically marked (ex of Covid) a durable floor for valuations, though it has broken down those levels perhaps factoring in supply disruption, weakness in earnings, and FIIs outflow. 

Among the 10 stocks mentioned, MOFSL likes Bharti Airtel, ICICI Bank and Infosys. Axis Securities in its April note said it likes Kotak Mahindra Bank and Bharti Airtel among its top largecap picks.

“We believe, it is good time to increase allocation to Indian equities. It is important to remember that timing is very difficult and investing when risk-reward is favorable is likely to be more fruitful. More importantly, the risk-reward is highly favorable for high growth and good quality business, wherein valuation as well as earnings growth both are in favor for long term investing,” said Vinay Paharia, CIO, PGIM India Mutual Fund.