Best Financial Stocks in India

In India’s financial sector, certain stocks stand out due to their performance across various metrics. By examining parameters such as price to earnings (PE), price to book value (PBV), sales and profit growth, operational performance, and returns, we can identify some of the best financial stocks currently available for our watchlist

Undervalued Stocks: PE and Mean Reversion

Several stocks in the financial sector appear undervalued when comparing their current price to earnings ratio with their historical three-year average. Notably, CreditAccess Grameen, with a current PE of 14.78, is significantly below its historical average of 24.26. Similarly, Ugro Capital shows a PE of 21.73 compared to its historical PE of 40.66. Spandana Sphoorty also displays a substantial gap, with a PE ratio of 11.29 against a historical average of 32.35. This discrepancy suggests potential for mean reversion, where the stocks could revert to their historical averages, leading to price multiple expansion. Mean reversion is a financial theory suggesting that asset prices and historical returns eventually revert to their long-term mean or average level. As these stocks’ PE ratios move towards their historical averages, investors may see significant capital appreciation. The process of PE multiple expansion, driven by improving growth prospects and increased investor confidence, can substantially enhance shareholder value, presenting a compelling opportunity for long-term investors to capitalise on the current undervaluation.

Price to Book Value Analysis

Assessing the price to book value reveals further insights into undervaluation. Stocks like Bengal & Assam and Satin Creditcare have PBV ratios of 1.1 and 1.03, respectively, which are significantly lower than the industry PBV of 1.79. LIC Housing Finance stands out with a PBV of 1.41 against an industry average of 2.74, indicating it is attractively valued. VLS Finance shows a notably low PBV of 0.35 compared to the industry average of 1.79, suggesting a considerable undervaluation. Similarly, Repco Home Finance has a PBV of 1.2, which is lower than the industry average of 2.74.

Additionally, stocks like Power Finance Corporation and REC Ltd have PBV ratios of 1.71 and 2.1, respectively, which are lower than the industry PBV of 2.28. LIC Housing Finance stands out with a PBV of 1.41 against an industry average of 2.74, indicating it is attractively valued. Manappuram Finance also shows a favourable PBV of 1.51 compared to the industry average of 1.79.

Top Performers in Sales and Profit Growth

Sales growth and profit growth over three years are crucial indicators of a company’s financial health. CreditAccess Grameen leads with a remarkable sales growth of 36.58% and profit growth of 116.55%. Systematix Corp shows an impressive profit growth of 243.18%, coupled with a substantial sales growth of 35.67%. Shriram Finance, with a sales growth of 27.82% and profit growth of 43.38%, also stands out. Other notable performers include Choice International, with sales and profit growth of 62.31% and 97.49%, respectively, and Ugro Capital, demonstrating a sales growth of 89.77% and profit growth of 60.75%.

Operational and Net Profit Margins

Operational and net profit margins (OPM and NPM) reflect a company’s efficiency in generating profit from its operations. Systematix Corp excels with an OPM of 693.53% and an NPM of 462.43%. Spandana Sphoorty, with an OPM of 102.53% and a staggering NPM of 2087.10%, showcases exceptional operational efficiency. Satin Creditcare and Bengal & Assam also exhibit strong margins, with OPMs of 63.69% and 48.11%, and NPMs of 6406.67% and 96.97%, respectively.

Interest Coverage and Return on Equity

A high interest coverage ratio indicates a company’s ability to pay interest on its debt, enhancing financial stability. Bajaj Holdings, with an extraordinary interest coverage ratio of 3469.75, leads the pack. Nippon Life India and Tata Investment Corporation follow with ratios of 217.74 and 38.66, respectively. Systematix Corp and VLS Finance also demonstrate strong ratios of 22.92 and 1840.24, respectively.

Examining return on equity (ROE) alongside one-year returns provides a comprehensive view of performance. Systematix Corp shows the highest ROE at 42.44% and a one-year return of 413.43%. REC Ltd follows with an ROE of 22.19% and a one-year return of 227.48%. TVS Holdings, with an ROE of 26.37% and a one-year return of 262.73%, and Indian Renewable, with an ROE of 17.29% and a one-year return of 331.68%, also stand out.

Conclusion: Top Five Stocks

Based on an overall analysis, the top five stocks in the Indian financial sector watchlist are:

1. Systematix Corp: Exceptional performance with the highest OPM, NPM, and ROE, coupled with significant one-year returns.
2. REC Ltd: Strong financial metrics with notable ROE and one-year returns, and attractive valuation.
3. TVS Holdings: Impressive sales and profit growth, combined with robust ROE and market returns.
4. Credit Access Grameen: Leading sales and profit growth, indicating strong future potential.
5. Power Finance Corporation: Undervalued based on PE and PBV analysis, with solid sales and profit growth.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.