Sheetal Agarwal of Business Standard has written an article stating that the Return on Equity ratio is a key valuation parameter. It is calculated by dividing net profit by shareholders’ equity. It indicates how much money or return a company is earning on the shareholders’ funds.
She points out that Business Standard has identified some companies having potential for strong RoE expansion of over 300 basis points in each FY15 and FY16 and robust earnings per share (EPS) growth, based on consensus Bloomberg estimates. Most of these companies belong to beaten down cyclical sectors and hence are likely to witness significant RoE expansion on the back of revival in macroeconomic growth which in turn will boost their prospects.
| Improving prospects of 30 companies with ROE growth | ||||
| Return on Equity (%) | EPS CAGR (%) | FY16E P/E (x) | ||
| Company | FY15E | FY16E | ||
| Bajaj Electricals | 16.5 | 22.6 | LTP |
14.1 |
| Birla Corp | 10.9 | 14.5 |
66.7 |
9.7 |
| Blue Dart Express | 22.7 | 26.4 |
26.0 |
62.9 |
| Capital First | 8.3 | 13.1 |
68.7 |
13.9 |
| Carborundum Universal | 12.3 | 15.9 |
50.7 |
17.0 |
| Crompton Greaves | 12.0 | 16.0 |
67.1 |
17.4 |
| Gujarat Fluorochemicals | 12.3 | 20.1 |
118.6 |
9.1 |
| Hathway Cable | -3.7 | 3.2 | LTP |
116.0 |
| HSIL | 7.3 | 11.4 |
94.6 |
20.1 |
| India Cements | 3.1 | 6.6 | LTP |
12.9 |
| Indiabulls Power | 2.5 | 7.0 | LTP |
7.2 |
| Jain Irrigation | 8.3 | 12.6 |
32.5 |
12.5 |
| Jindal Saw | 7.6 | 10.8 | LTP |
4.4 |
| JK Cement | 8.4 | 12.5 |
81.2 |
15.2 |
| JK Lakshmi Cement | 11.2 | 15.2 |
58.3 |
17.2 |
| Jubliant Life Sciences | 10.7 | 15.8 |
105.9 |
5.2 |
| Mahindra CIE Automotive | 8.0 | 12.5 | LTP |
16.2 |
| Motherson Sumi | 36.4 | 40.4 |
53.6 |
19.0 |
| Motilal Oswal Financial | 12.5 | 18.6 |
145.6 |
12.7 |
| Oberoi Realty | 10.9 | 14.8 |
54.8 |
9.7 |
| Phoenix Mills | 11.1 | 15.4 |
60.4 |
16.2 |
| Prism Cement | 4.4 | 18.3 | LTP |
17.2 |
| PVR | 18.0 | 22.2 |
45.9 |
23.3 |
| Ramco Cements | 12.5 | 18.3 |
311.9 |
3.7 |
| Shoppers Stop | 4.8 | 12.0 | LTP |
67.5 |
| Tata Communications | 21.2 | 32.3 |
85.8 |
30.4 |
| Trent | 5.9 | 10.2 | LTP |
32.8 |
| Tribhovandas Bhimji Zaveri | 16.1 | 20.0 |
43.1 |
12.8 |
| TVS Motor | 28.0 | 36.1 |
49.4 |
27.7 |
| United Spirits | 9.0 | 15.0 | LTP |
50.3 |
| E: Estimates; LTP is Loss to Profit; EPS CAGR is over FY14-16 | ||||
| Source: Bloomberg, brokerages | ||||
She adds that of the BSE 500 companies, about 30 are likely to witness RoE expansion of over 300 basis points each in FY15 and FY16. Of these, 12 are likely to turn profitable over the period of FY14-16 versus a loss in FY14, while four are likely to report high earnings per share (EPS) CAGR over FY14-16 – namely, JaiPrakash Power Ventures (up 334.1%), Ramco Cements (up 311.9%), Motilal Oswal Securities or MOSL (145.6%) and Gujarat Fluorochemicals (118.6%).
She further adds that most of the companies are expected to post earnings CAGR of 26% to 94.6% over FY14-16. After talking to top experts, she says the valuations as of now do offer opportunities to make reasonable returns over a three to five year period
