Large-cap value buys in an overvalued market

The Indian stock market is currently trading at around an expensive zone, with the current price to earnings for Sensex 30 standing at 28x as compared to the average of the last five-year PE of around 21x. Although these rich valuations are not broad-based, companies in this expensive zone are attracting even more investors. Against this backdrop, investors seeking value have been stuck on the horns of a dilemma.

We have looked at the large-cap space to reduce this ambiguity of investors so that they can find value in this expensive market. We have filtered the companies that have had an average last three-year return on equity (ROE) of more than 15 per cent and recorded earnings per share (EPS) growth of more than 20 per cent during the same time period. Also, the stock prices of these companies have corrected by more than 30 per cent during the last one year. Our filters identified the following companies:

Filters:
1) Average last three-year return on equity> 15 per cent
2) Last three-year earnings per share> 20 per cent
3) Stock price has fallen by at least 30 per cent in the last one year

Zee: Part of the Essel Group led by Dr Subhash Chandra, this broadcasting company commenced its journey with the country's first satellite television channel, Zee TV, in 1992, followed by the country's first private news channel, Zee News. At present, the company operates around 41 channels in 10 languages, including Marathi, Kannada and Tamil. It enjoys the highest viewership in the country with around 20 per cent network share. It is also a leader in the Marathi, Bangla and Kannada entertainment markets. Zee has a content bank of over 250,000 hours of programmes and a strong international presence (10 per cent of its FY19 revenue), backed by its operations in more than 170 countries.

Primarily, it earns its revenues from advertisements (63.5 per cent of the total revenue in FY19) and subscription (29 per cent). In the recent quarter however, both the domestic advertisement revenue and subscription were affected because of some uncertainties about TRAI's order under which, consumers had to choose and select individual channels or bouquets.

In 2018, the company launched its over-the-top (OTT) platform, Zee5. This platform follows a subscription-based video-on-demand model instead of an ad-supported model. As of March 2019, it had 61.5mn monthly active users, along with an average time spent per user per day at 31 mins. As revealed by the Business Standard newspaper, it currently ranks sixth in terms of its user base in India, with Hotstar leading the race. Interestingly, both the OTT platforms, Zee5 and Hotstar, have similar yearly package rates. The company is also venturing into the movie production business, with plans to make 10-12 movies in a year. It also has a music business, wherein its YouTube channel is the third most subscribed in the country.

The media and entertainment industry is undergoing substantial changes on the back of rising internet penetration and speed, increasing disposable income and better and affordable mobile technologies. While TV broadcasting remains a cash cow for the company, the next growth chart is likely to come from the OTT platform, movie and music businesses. However, the management has indicated that it will maintain its operating margin around 30 per cent, going forward as well. An extensive collection of both Hindi and non-Hindi content remains a competitive advantage for the company. Nevertheless, its technological backwardness as compared to its peers like Netflix, Hotstar and others remains an area of concern.

The company is currently looking for strategic buyers driven by the need to repay its debt at the parent level and reduce the pledged shares. This has led to volatility in the stock price, which has corrected by more than 30 per cent in the last one year. However, it has grown its earnings per share by almost seven per cent in the last one year while maintaining a ROE of 18.9 per cent. Going forward, the EPS is expected to improve on the back of TRAI order settling down. The stock currently trades at a trailing twelve month (ttm) PE of 21.3x as compared to a five-year median PE of 35.3x.

Eicher Motors: Eicher's Royal Enfield bikes is India's answer to the iconic American-made Harley Davidson. It is the largest two-wheeler manufacturer in India in the 250 cc and above segment, with more than eight lakh motorcycles sold in 2019. It has a presence in more than 50 countries. The company also runs the commercial vehicle business through a JV with Sweden's AB Volvo.

The last financial year did not fare well for the company with the ongoing slowdown in the auto sector. More importantly, the massive floods in Kerala - which happens to be its biggest market - sent a serious blow to its sales. Adding to the woes were the new safety regulations and increased costs of the third-party insurance, which the company had to pass on to its customers. Making matters worse was the labour strike at its Chennai plant. All these events resulted in flat volumes for its motor division for the year and a lower-than-industry growth of 11 per cent for its commercial vehicle division.

As a silver lining, the launch of its new 650cc Twins after years of development, the establishment of a new manufacturing facility in Thailand and its foray into new markets, such as South Korea, are expected to provide a strong impetus to the company in the coming time. The stock is currently trading at 24 times, which is slightly higher than peers but is significantly lower than its five-year median of 46.6 times.

Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.