Sucheta Dalal :Moneylife study identifies five cheapest sectors
Sucheta Dalal

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Moneylife study identifies five cheapest sectors  

January 12, 2010

A new Moneylife study of 49 sectors covering 1,252 stocks has identified consumer durables, cement, paper & paper products, plastics and packaging as the top five sectors that are attractively valued, based on four key valuation parameters.


Investors are perennially looking for low-value stocks and often go by such conventional uni-dimensional formulae such as Price to Earnings ratio. The Moneylife study combines four key parameters: Price/sales; price/operating profit; earnings yield and Return on Equity (RoE). While the valuation of the first two (price/sales; price/operating profit) parameters is based on the sales and profits of the past three quarters; RoE and earnings yield have been calculated on a yearly basis. Earnings yield is the reverse of P/E and measures the earning capability of a company (in this context, a sector) per rupee of investment.


Among the top five sectors, the consumer durables sector scored with the highest RoE (37%). Its valuation is also considerably low with price to sales being 0.64 and price to operating profit being 5.27 times. Another high RoE yielding sector is cement (23%) with its market cap at 1.44 and 4.48 times its sales and operating profit respectively. Out of the five sectors selected, paper & paper products is currently trading at the lowest valuation. Its market cap is 0.58 times and 3 times its sales and operating profit respectively. Paper stocks also enjoy the highest earnings yield of 11%. However, its RoE is at the lowest level (11%), a reason why the sector is going cheap.


Which was the most expensive sector going? It is the electronic media, a sector that earned just 4% of RoE and is valued at an astronomical level of 5 times revenues and 25 times operating profit.

— Moneylife Research Desk


-- Sucheta Dalal