Top Undervalued Stocks with Lower Price-to-Earnings Ratio
10 months ago
Looking at low PE (Price-to-Earnings) stocks when the market is at an all-time high can be a prudent strategy because they might offer relative value compared to high PE stocks. Low PE stocks typically have lower valuations and may be undervalued compared to their earnings potential. This may present an opportunity to invest in fundamentally strong companies at a reasonable price, reducing the risk of overpaying for a stock during a market peak. However, it's essential to conduct thorough research and consider other factors before making investment decisions.
Key Highlights
I. Strong Q4FY23 Performance: PFC reported a healthy Q4FY23 PAT of ₹ 34.9 billion, representing a significant 16% QoQ and 34% YoY growth. The increase was largely driven by a credit cost reversal of ₹ 4.9 billion. The company's robust financial performance indicates its resilience and ability to navigate challenging market conditions.
II. Improving Asset Quality: PFC showcased an improvement in asset quality, with the Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) at a six-year low of 3.91% and 1.07%, respectively. The coverage ratio on stage-3 assets also increased to a healthy 72.7%, indicating a proactive approach to manage stressed assets.
III. Steady Loan Book Growth and Sanction Pipeline: The loan book witnessed a pick-up in growth, showing a 7.4% QoQ and 13.2% YoY increase, reaching ₹ 4.22 trillion. Additionally, the healthy sanction pipeline of Rs2.31 trillion, which is more than 50% of the current loan book, indicates the potential for sustained loan asset growth in the future.
Key Risks
I. Higher Credit Cost with Delayed Resolution: One of the key risks for PFC is the possibility of higher credit costs if the resolution of stressed assets gets delayed. Delays in resolving stressed projects under the NCLT or other channels may lead to increased provisioning and impact the company's profitability.
II. Slower Demand Pick-Up in Project Financing: The company faces the risk of slower-than-anticipated demand for project financing and liquidity schemes. If there is a delay in demand recovery or a slowdown in project financing activities, it may impact PFC's loan growth and overall financial performance.
III. Currency Depreciation Impact: PFC has managed a significant portion of its foreign currency borrowings with hedging strategies to minimize the impact of depreciation. However, any adverse movement in the exchange rate beyond their hedged positions could lead to forex translation losses.
Financial Performance
I. PAT Growth: PFC's Q4FY23 PAT showed a strong growth of 16% QoQ and 34% YoY, primarily driven by a credit cost reversal of ₹ 4.9 billion. This indicates the company's ability to capitalize on improving market conditions and optimize its operations.
II. Loan book Growth: The loan book witnessed a notable growth of 7.4% QoQ and 13.2% YoY, reaching ₹ 4.22 trillion. The increased disbursements, especially in distribution-related projects, contributed to the growth and augurs well for future loan asset expansion.
III. Margins and NII: PFC's margins have been moderate for FY23 due to declining yields and rising cost of funds. Margins for Q4FY23 moderated by 6bps QoQ to 3.39%. While the Net Interest Income (NII) was lower by 3% QoQ, it saw a 3% YoY increase, indicating overall stability in earnings despite margin pressures.
Outlook
I. Positive Growth Trajectory: With a steady loan book growth and healthy sanction pipeline, PFC is well-positioned to capitalize on infrastructure and logistics projects. The company's proactive approach towards resolving stressed assets and maintaining healthy asset quality should help sustain its positive growth trajectory.
II. Margin Stabilization: Although margins were impacted in FY23, the recent increase in yields and potential uptick in margins going forward should support PFC's profitability. The company's hedging strategies to minimize currency depreciation impact also bode well for stability in financials.
III. Dividend Policy and Capital Buffer: PFC's consistent dividend pay-out policy of ~30% of earnings or 5% of net worth, whichever is higher, provides income stability for investors. Additionally, its focus on maintaining a healthy Capital to Risk-Weighted Assets Ratio (CRAR) above 24% ensures adequate capital buffer to meet regulatory requirements and fuel future growth.
Company
PFC
CMP (Rs)
258.9
P/E (x)
3.2
P/BV (x)
0.8
Price / Sales (x)
0.9
MCap (Rs m)
6,83,385
RoE (Latest, %)
19.6%
D/E (Curr FY, x)
9.2
Key Highlights
I. Strong Q1FY24 Performance: BPCL reported robust financial performance in Q1FY24, with EBITDA at ₹ 158 billion and APAT (Adjusted Profit After Tax) at INR 106 billion, surpassing estimates. The marketing segment was a key contributor to this strong performance.
II. Favourable Refining Margins: BPCL's reported Gross Refining Margins (GRMs) for Q1FY24 were USD 12.6/bbl, showing a significant improvement compared to the same period last year (USD -14.9/bbl YoY) and the previous quarter (USD -7.7/bbl QoQ). This favourable trend was supported by the Mumbai, Kochi, and Bina refinery GRMs.
III. Recovery in Auto-Fuel Gross Marketing Margins: The domestic marketing sales volume for BPCL witnessed a YoY growth of 8% in Q1FY24, and blended gross marketing margins reached ₹ 9.6/lit. The recovery in auto-fuel gross marketing margins was driven by moderation in crude oil prices.
Key Risks
I. Volatility in Crude Oil Prices: BPCL's profitability is exposed to fluctuations in crude oil prices. Any adverse movement in global crude oil prices can impact refining margins and marketing segment performance, leading to lower earnings.
II. Energy Transition Challenges: As the company plans to allocate a significant portion of the Rights Issue proceeds towards energy transition, there might be challenges in adapting to changing energy demands and achieving net-zero targets. Uncertainties in the transition process could affect the company's financial performance.
III. Regulatory and Policy Changes: BPCL operates in a highly regulated sector, and any adverse regulatory changes or policy shifts in the oil and gas industry could affect the company's operations and financials.
Financial Performance
I. Strong EBITDA and APAT: BPCL's Q1FY24 EBITDA stood at ₹ 158 billion, and APAT was at INR 106 billion, exceeding expectations. This was mainly driven by a robust performance in the marketing segment.
II. Refining Segment: The reported crude throughput for Q1FY24 was 10.36 million metric tons (mmt), showing a YoY growth of 7% and a QoQ decrease of 2.5%. The overall GRM stood at USD 12.6/bbl, supported by the performance of the Mumbai, Kochi, and Bina refineries.
III. Marketing Segment: Domestic marketing sales volume witnessed a YoY growth of 8% in Q1FY24, with the blended gross marketing margin at ₹ 9.6/lit. This growth was driven by higher gross marketing margins for petrol and diesel due to moderated crude oil prices.
Outlook
I. Positive Growth Trajectory: BPCL's strong refining margins and recovery in auto-fuel gross marketing margins provide a positive outlook for the company. The ongoing efforts towards energy transition and net-zero targets indicate the company's commitment to adapting to changing industry dynamics.
II. Capex Plans and Debt Reduction: BPCL's sharp decline in gross debt in Q1FY24 and its planned capex of ₹ 150-170 billion for FY24-25 indicate the company's focus on strengthening its financial position and investing in future growth opportunities.
III. Risk Management and Regulatory Compliance: As the oil and gas industry faces various challenges, BPCL's proactive risk management and compliance with regulatory changes will play a critical role in ensuring sustained financial performance.
Company
BPCL
CMP (Rs)
378.4
P/E (x)
4.9
P/BV (x)
1.3
Price / Sales (x)
0.3
MCap (Rs m)
8,20,737
RoE (Latest, %)
22.5%
D/E (Curr FY, x)
1.1
Key Highlights:
I. Robust Refining and Marketing Margins: IOCL reported a strong performance in Q1, with EBITDA at ₹ 222 billion, representing a significant YoY growth of 13 times and a QoQ increase of 44%. The beat was largely driven by better-than-expected performance from the marketing segment. Refining and marketing margins remained robust, supporting earnings.
II. Favorable Refining Margins: Despite a decline in crude throughput by 1% YoY and 2% QoQ, IOCL's reported Gross Refining Margin (GRM) for Q1 was USD 8.34/bbl. The derived refining EBITDA declined YoY and QoQ due to moderation in product cracks from abnormally higher levels seen last year. However, the company is expected to maintain strong refining margins.
III. Improved Marketing Margins: Domestic marketing sales volume showed marginal growth of 0.2% YoY and 1% QoQ, while exports declined. The blended gross marketing margin for the quarter stood at ₹ 9.2/lit, supported by higher margins for petrol and diesel due to moderated crude oil prices.
Key Risks
I. Volatility in Commodity Prices: IOCL's financial performance is sensitive to fluctuations in crude oil and petrochemical product prices. Adverse movements in commodity prices can impact refining margins, marketing segment earnings, and overall profitability.
II. Petchem Segment Weakness: The petrochemical segment's weaker performance in Q1 and its vulnerability to market dynamics pose a risk to IOCL's overall financial performance. Any adverse changes in demand or pricing may further impact the segment's earnings.
III. Elevated Debt Levels: While IOCL's gross debt declined to ₹ 1.1 trillion as of Jun-23 end, it remains at elevated levels. High debt can lead to increased interest costs and limit the company's financial flexibility.
Financial Performance
I. Strong EBITDA and APAT: IOCL's Q1FY24 EBITDA of ₹ 222 billion and APAT of ₹ 138 billion exceeded expectations, driven by robust refining and marketing margins. This indicates the company's ability to capitalize on favourable market conditions.
II. Refining Segment: Despite a slight decline in crude throughput, IOCL's refining segment reported a GRM of USD 8.34/bbl for Q1. However, the derived refining EBITDA witnessed a decline YoY and QoQ due to changes in product cracks compared to the abnormally higher levels seen last year.
III. Marketing Segment: The marketing segment's favourable performance was supported by higher margins for petrol and diesel due to moderated crude oil prices. Domestic marketing sales volume showed marginal growth.
Outlook
I. Positive Growth Trajectory: IOCL's robust refining and marketing margins provide a positive outlook for the company's earnings. The company's ability to capitalize on favourable market conditions indicates its resilience and potential for sustained growth.
II. Debt Reduction and Financial Flexibility: While IOCL has managed to reduce its gross debt, the company's elevated debt levels remain a concern. Focus on further debt reduction and improving financial flexibility will be crucial for the company's long-term sustainability.
III. Petchem Segment Improvement: The petrochemical segment's weak performance requires attention, and efforts to improve EBIT margins and enhance market positioning will be essential for bolstering the company's overall financial performance.
Company
IOC
CMP (Rs)
94.5
P/E (x)
5.4
P/BV (x)
0.9
Price / Sales (x)
0.3
MCap (Rs m)
13,34,457
RoE (Latest, %)
19.3%
D/E (Curr FY, x)
0.9
These companies have shown resilience in navigating challenging market conditions and have implemented strategic measures to enhance their financial positions. The outlook for each of these undervalued stocks looks promising, with potential for sustained growth in their respective sectors. However, it is essential for investors to conduct thorough research and consider associated risks before making investment decisions. Overall, the outlook for these undervalued stocks is very positive, and they may present lucrative opportunities for investors seeking relative value in an all-time high market.
