IDFC, Triveni Engg, Deepak Fertiliser join list of fair value stock picks in Nifty Small Cap index

The Indian stock market, which crossed its all-time high to close at a new peak yesterday, has seen bulls take charge even as Dalal Street is split down the middle on taking directional calls for the indices. While one side believes the market is poised to break out, others feel it is set for a correction.

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 their 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 Nifty Small Cap 100 index of companies, we get a set of 21 names that are trading at a discount to the fair value. Compared to last month, there are three new names and one that got replaced.

In particular, Triveni Engineering, Deepak Fertilisers and IDFC have joined the list with Redington getting pushed out of the pack.

While a few 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.

Meanwhile, a whole list of other companies retained their position as value picks: Polyplex Corporation, Gujarat Narmada Valley, Indiabulls Housing Finance, Exide, Rain Industries, EID Parry, Vardhman Textiles, Jindal Stainless, Mangalore Refinery, RBL Bank, NLC, Glenmark Pharma, Manappuram Finance, CESC, Chambal Fertilisers, Brightcom Group, Bank of Maharashtra and TV18 Broadcast.