RBL Bank, Polyplex, Glenmark among fair value stock picks in Nifty Small Cap index

The Indian stock market has been facing resistance while trying to test the all-time high touched last October. While the benchmark indices have bounced back sharply from the lows four 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 Nifty Small Cap 100 index of companies, we get a set of 19 names that are trading at a discount to the fair value.

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.

This includes names like Polyplex Corporation, Gujarat Narmada Valley, Indiabulls Housing Finance, Exide, Rain Industries, EID Parry, Vardhman Textiles, Jindal Stainless, Mangalore Refinery and RBL Bank.

Some others include NLC, Glenmark Pharma, Manappuram Finance, CESC, Chambal Fertilisers, Redington, Brightcom Group, Bank of Maharashtra and TV18 Broadcast.