These large-cap stocks are trading at a discount to fair value

The Indian stock market has been consolidating around 10% below the all-time high after coming under a bear grip only to see the bulls claim part of the territory. But the risk elements remain.

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 grows investors start looking at alternative investment themes such as value investing.

On the flip side, when the markets are flush with liquidity, it is not a no brainer 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 businesses, we set aside those conditions and try and identify stocks that could be considered as they are trading below their fair value.

If we look at the BSE 100 set of companies, we get a set of 16 names that are trading at a discount to the fair value.

At the top of the chart is Tata Steel. It is followed by Bajaj Holdings, Grasim Industries, HPCL, Hindalco, ONGC, Shriram Transport Finance, Bharat Petroleum, Vedanta, IOC, GAIL, Aurobindo Pharma, NTPC, Power Grid Corp, Federal Bank and State Bank of India.

Some other stocks that are not at a discount but close to their fair value and thereby could be buy candidates at dips includes names like Coal India, IndusInd Bank and Piramal Enterprises.