Repco, Uflex, Polyplex among fair value stocks in the small cap index

The Indian stock market has been facing a resistance while trying to test the all-time high touched last October. While the benchmark indices have bounced back sharply from the lows three months back, they have seen selling pressure as they near the psychologically critical 60,000 mark for the Sensex and the 18,000 mark for the Nifty.

In a bull market, it’s easy to be swayed by herd mentality to look for growth stocks. But as concerns of valuations in the market grow, investors start looking at alternative investment themes such as value investing.

On the flip side, when the markets are flush with liquidity, it is important to identify value stocks, which refers to shares of firms that appear to trade at a price below what is suggested by its fundamentals, such as earnings, revenues and dividends.

One way to gauge a set of such companies is to scan them through the lens of the ‘Graham’s number’, which represents the fair valuation of a stock. It sets the upper price limit that a defensive investor can or should pay for a stock.

It is calculated from the Earnings Per Share (EPS) and Book Value Per Share (BVPS).

The measure was created by Benjamin Graham, a British-born American economist, professor and investor, widely considered as the father of value investing. Although there are limitations for the use of this number in asset-light technology enabled business, we set aside those conditions and try and identity stocks that could be considered as they are trading below their fair value.

If we look at the BSE Small Cap index of companies, we get a set of around 82 names that are trading at a discount to the fair value.

While many actually command a market cap in excess of Rs 5,000 crore that is seen as a threshold for small-cap group of stocks, we stuck to the index for now to filter companies that could be value buys.

This includes names like Hinduja Global, Kirloskar Industries, Jindal Poly Films, Zuari Industries, Polyplex, Uflex, Shriram City Union, TTK Healthcare, Panacea Biotec, HEG, Repco Home Finance, Great Eastern Shipping, PNB Housing Finance, Gujarat Alkalies and Ramco Industries.

Some others include Vardhman Textiles, JSW Holdings, Chennai Petroleum, RSWM, RPSG Ventures, Century Enka, INEOS Styrolution, Shreyas Shipping, Technocraft, Cholamandalam Finance, Excel Industries, Cochin Shipyard, EID Parry and GHCL.