These Indian Stocks Look Cheap
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When hunting for bargain stocks, tangible book value is a handy metric. Unlike regular book value, which includes goodwill and other intangibles, tangible book value represents only assets you can see and touch. When a company trades well below its tangible book value (say 75% or less), you might have a bargain on your hands.
Tangible book bargains are great, but in the world of stocks they can be very rare. A diversified portfolio of them will certainly serve you well. But just because a stock has a high tangible book value doesn't necessarily make it overpriced. Looking at other metrics, including those specific to a company's industry, can identify bargains as well.
Trading for less than half of its tangible value
Sterlite Industries (NYSE: SSLT) is a diversified mining and metals company with a price/tangible book ratio of .47. Now that's cheap! In addition to its mining and metals operations, Sterlite controls 1.3% of India's electricity generation capacity.
Its mines produce aluminum, copper, and zinc. In its latest annual report, the company reported that it held a 17% market share in the Indian aluminum market. Excluding China, India is the fastest growing aluminum market in Asia, with consumption expected to increase at an 8.9% compound annual growth rate, or CAGR, through 2020.
Sterlite's copper business primarily consists of custom smelting. It had a 40% market share in the Indian custom copper smelting market in 2013. Wood Mackenzie projects demand for refined copper in India will grow at a CAGR of 7% through 2020.
The company is the only integrated producer of zinc in India. With an 82% market share in the Indian zinc market as of 2013, a market projected to grow at a CAGR of 6% through 2020, Sterlite holds a dominant position.
This is a company trading on the market for $4.2 billion. It has net working capital of $5.61 billion, or 33.6% greater than its market cap. Cash flow from operations, or OCF, is solid. OCF was a negative $439.7 million in 2008, but has been positive ever since. The 2008-2010 average was $471.6 million, the 2011-2013 figure was $1.85 billion.
Automaker with a P/E ratio below 10
Finding a company trading for less than half of its tangible book value is a rarity. Restricting yourself to such companies won't produce a wide selection very often. A less stringent, but still useful, requirement that can identify a cheap company is a P/E ratio of below 10.
When calculating P/E ratios, I prefer using the average earnings of the past three years as opposed to the traditional TTM. Using 3-year averages, Tata Motors' (NYSE: TTM) P/E ratio comes out to 8.14.
Here are a couple of reasons to be wary of this stock. The company's market share in the Indian automotive market declined to 8.9% in 2013 from 13.0% in 2012. Sales of the Tata Nano, touted as the world's least expensive car (Now about $2,600) declined by 38%. Debt is not a major problem, but it is not insignificant either. Tata's total debt to equity ratio of 1.54 is higher than the 0.96 ratio of General Motors, but still well below Ford's ratio of 5.62.
One bright spot in the company's latest 20-F was the performance of its light commercial vehicle segment. The segment, which includes sales of pickup trucks, increased sales by 21.5% in 2013. The company's market share in the Indian light and commercial vehicle segment has exceeded 60% in each of the past three years.
Revenue has grown at a 3-year CAGR of 15.4%. During the same period, OCF grew at a 16.3% CAGR. That's impressive growth. What's more, the company's TTM net profit margin of 7% is higher than the ratios of 3.6% and 4.3% for GM and Ford respectively. You can't give too much weight to one year's margins, but performance was impressive nonetheless.
Shares of this bank have gotten crushed
Shares of HDFC Bank (NYSE: HDB), India's second largest lender by assets, are down 22.64% from where they stood on May 8. Is now a good time to scoop up the $26.6 billion bank?
The bank's non-performing loans in the first quarter grew to 0.82% of total assets, an increase of 11 basis points year over year. Investors won't be pleased about that, but they ought to be happy about first quarter profits of $376.7 billion, a 25.3% year over year increase.
Two key metrics for evaluating banks are return on equity (ROE) and return on assets (ROA). In the TTM period HDFC Bank had an ROE of 20.53% and its ROA was 1.84%. The corresponding figures for Wells Fargo were 13.51% and 1.52% and for Bank of America 2.81% and .31%. In terms of these two key metrics HDFC outperformed two of America's biggest banks over the past 12 months.
According to Yahoo! Finance, one analyst has promulgated a price target on the stock. The analyst has labeled the stock a strong buy in each of the past three months, and has a target of $48, 43.5% above where shares currently trade.
Foolish final thoughts
The American stock market is heating up. Bargain opportunities may be shrinking here in the states, they still exist in abundance internationally. The DJIA is up 19.3% year to date. At the same time the S&P BSE Sensex, (which includes all three of these stocks as components) India's version of the DJIA, is down 0.6% year-to-date.
In my opinion the best pick of the three is Sterlite Industries. The company sells for less than half of its tangible value, and has been solidly profitable in each of the past four years. A diversified list of companies like that will almost always outperform the major averages. Still, I don't think any one of these companies makes for a bad long term investment at current prices.
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Fool blogger Ryan Palmer has no position in any of the companies mentioned in this article. The Motley Fool has no position in any of the stocks mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!