In the bearings segment, Fag Bearings caught up with SKF and NRB Bearings; in electrodes, Ador Welding, aided by a good financial performance, marched up sharply; and in transmission towers, KEC International and Jyoti Structures are moving lock-in-step in terms of investment multiples.

However, a large number of stocks were caught in the middle, with average gains of 15-20 per cent.

Since the economy has been passing through a buoyant phase and expansion plans are being announced in different sectors practically everyday , identifying richly- and under-valued stocks has become quite difficult.

In this backdrop, you could pick up stocks based on the relatively low factor of their current earnings (price earnings multiples).

Or, pinpoint a stock whose market price is a low multiple of the actual (historical) cost of its assets, or unit cash-flows, and so on.

In short, for the present analysis, Business Line used the `relative valuation' yardstick to identify stocks.

Companies were compared by different parameters, such as market price as a multiple of earnings, book value, sales and cash-flows.

The criteria for stock selection

The S&P CNX-500 was considered as it mirrors the market closely and represents over 90 per cent of the total market capitalisation. From the list of CNX 500 stocks, richly-valued and under-valued stocks in different sectors were identified based on a combination of following criteria:

As a thumb rule, we evaluated whether stocks with a high PEM have the potential to deliver earnings growth higher than their PEM over a three-year period.

That is, a stock with a PEM of 25 will have to maintain an earnings growth rate of over 25 per cent over the next three years.

And in growth sectors such as software, telecom and pharma, we have relaxed this condition to a large extent. The reverse is applicable for under-valuation.

Generally, high P/BV indicates high valuation in mature industries.

For instance, a company with a P/BV of 5 is more expensive than one with 2.

But the caveat is that companies with high P/BV may also enjoy a high return on shareholder funds, which may justify the valuation. Else, it is indicative of overvaluation.

But before jumping to the conclusion that high P/S is bad, it is important to check the profit margin within the sector and the long-term debt-equity ratio.

If the former is high or the latter low, a high P/S may be sustainable.

Just like the others, it is not a standalone ratio. It has to be checked with other multiples.

Richly valued stocks in mature sectors

Comparing stocks across different sectors and multiples reveals that select stocks in construction, textiles and auto/auto ancillaries are richly valued relative to their fundamentals.

Select stocks outside these sectors also appear over- or richly-valued at current price levels.

Construction: This has been one of the most fancied sectors in the bull-run. Gammon India, IVRCL Infrastructure, Hindustan Construction and Nagarjuna Construction delivered handsome gains to investors.

However, some stocks, such as Unitech and Patel Engineering, are richly valued relative to their frontline peers.

Mahindra Gesco Developers has been in the vanguard of the latest bull run, with the stock gaining over 50 per cent in the past month.

The run-up in the stock has been marked by the company's decision to set up a Special Economic Zone in Jaipur for the IT/ITES sector.

It is thus difficult to justify the valuation based on conventional investment yardsticks such as PEM, P/BV, P/CF and return on shareholder funds.

Auto-ancillaries: Yet another front-runner in this bull-run riding on the demand for automobiles is the ancillaries sector. Select stocks may, however, be set to take a breather.

Stocks such as Goetze India and Munjal Showa are enjoying rich valuations vis-à-vis their peers. On a PEM, P/CF and P/Sales basis, the valuation of Maharashtra Scooters remains high.

Since it is a joint venture between Bajaj Auto and Western Maharashtra Development Corporation, instead of fundamentals, the possible sell-out of equity stake by the latter to the former is driving the stock price.

Textiles: While stocks in the textiles sector have had a spectacular run over the past couple of years, the valuation of some textile stocks, in synthetics, cotton and other products, appears stretched.

For instance, of stocks such as Nahar Spinning, Maral Overseas and Garden Silk Mills.

They fare poorly on both criteria: Return on shareholder fund and recent financial performance.

Most of these stocks have under-performed the broad market over the year and in the recent past, but may not have run the full course yet.

Other sectors: The other stocks across different sectors that appear overvalued on these yardsticks are Ador Welding (electrodes), Atul (dyes and pigments), Agro Tech Foods (foods), Infomedia India (printing), Dhampur Sugar (sugar), United Phosphorous (Agrochemicals), Apollo Hospitals (healthcare) and Mid-day Multimedia (media).

Relatively under-valued sectors

Steel: The recent price weakness in steel and the fear of rising imports from China have led to a sharp fall in steel sector stocks.

As the sector appears set to consolidate and the prices are expected to stabilise, frontline steel stocks such as Tata Steel and Steel Authority of India, with a PEM of under 5, appear quite attractive. Between the two, Tata Steel is our preferred candidate.

Investors with a high risk appetite may consider relatively under-valued second-rung stocks such as Bhushan Steel, Monnet Ispat, Uttam Galva and Mahindra Ugine.

Shipping: The anticipated decline in freight rates has been exaggerated in the shipping sector.

GE Shipping with a PEM of under 5 looks attractive from a medium-term perspective, even if the earnings remain flat in the near term.

The return on shareholder funds is quite attractive and the P/BV low.

Other sectors: In the engineering sector, while we are bullish on ABB, BHEL and Crompton Greaves, BHEL appears under-valued on a relative basis. BEML is another attractive candidate in this sector.

In the transportation sector, Container Corporation remains a good pick for the long term.

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