In the story how the stock can be asserted to fall in the cheap or expensive category and how for this criteria, price to earnings ratio comes into picture is discussed. So, before moving on to some of the least expensive stocks in the Indian markets, let's first understand about the valuation metric price to earnings in brief:
What is Price to Earnings?
Price to earnings ratio is the metric that provides for a relationship between the company's stock price as well as earnings per share (EPS). It is indeed a price a shareholder would pay for every unit of the company's current or future earnings, as the case may be. It thus helps in offering a better sense about the company's value.
In order to value a firm , current or future earnings are highly important as the ratio helps to understand the current or future potential of the company to generate earnings over a period of time.P/E Ratio is used and interpreted against the industry benchmark as well as those of the competing peer
If trying to conclude or make some understanding of a P/E of a company on a standalone basis, you will be reaching nowhere. By the interpretation of a P/E there is attained a standardization of a stock with different prices as well as earnings levels. This is also referred as earnings multiple.
Two P/E estimates are made one is the trailing i.e. reached basis the prior period of EPS while the latter or the forward P/E is when EPS calculations are based on future estimates.
How price earnings ratio is computed?
P/E = Stock Price Per Share / Earnings Per Share; here EPS is nothing but the earnings or the net profit of the company divided by its outstanding shares in the market
P/E = Market Capitalization / Total Net Earnings
Justified P/E = Dividend Payout Ratio / R - G
R = Required Rate of Return
G = Sustainable Growth Rate
Now how a P/E helps in ascertaining whether a stock is expensive or cheap?
Note here while P/E is a measure of determining whether the stock is undervalued or overvalued, Say if a stock A is having a P/E ratio of 15x then comparing it with another company 'B' of another industry and commanding a P/E of 7x shall be not fair. What is furthermore important is that even 2 companies of the same industry need to be compared considering other factors as well.
Coming to the core point of discussion i.e. stocks commanding the lowest P/E and hence the least expensive, it is to be noted that though these stocks are attractive on valuation, being undervalued and can offer higher growth prospects, what should be known is that weak or low P/E can also be on account of bad or poor fundamental and hence blindly making a call on them for a 'Buy' shall never be advised.
1. Coal India:
This is a state run entity that has been in existence since November 1975. The company as of today is the world's leading producer of coal globally and even the largest corporate entity with the good employee strength. The Maharatna company functions via its subsidiaries in as many as 84 mining places.
Trailing twelve month P/E i.e. derived by dividing the company's share price with the last 4 quarterly EPS. Sector P/E is 9.92.
M-cap of the stock is Rs. 83,720 crore
India's largest utility company is aiming to become a 130 GW company by 2032. Established in 1975, NTPC aims to be the world's largest and best power major. The company continues to work on its vision and mission of generating reliable power at competitive prices in a sustainable way by optimizing the use of multiple energy sources with innovative eco-friendly technologies.
M-Cap of the company- Rs.. 1,10,396 crore
TTM P/E- 7.26
Industry or sector P/E- 17.21
Vedanta Limited is a globally diversified natural resources company with areas of functioning such as zinc-lead-silver, Iron ore, Steel, Copper, Aluminium, Power, Oil and Gas.
The other peer group companies or competitors of Vedanta include Hindalco, JSW, Tata Steel, Arcelor Mittal, Reliance Infrastructure. The company commands a TTE P/E of 7.1, while its sector P/E is 9.92. M-Capitalisation of the company as on August 24, 2021 is Rs. 105,215 crore.
Founded in the year 1958, the company is the largest iron ore producer by volume in the country. The company carries out exploration of a range of minerals that include iron ore copper rock phosphate lime stone dolomite gypsum bentonite magnesite diamond tin tungsten graphite and beach sands.
M-cap of the company-Rs. 45,219 crore
TTM P/E- 5.06
Industry P/E- 9.92
It is again a oil sector and PSU sector company that was founded in 1956 by the government of India. The company is engaged in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India. The company's international subsidiary ONGC Videsh currently has projects in 17 countries.
m-cap: Rs. 1,42,157 crore
Industry P/E- 12.5
While we have listed some of the least expensive stocks in the Indian stock markets, it is not being said they are undervalued and hence you can go on a 'Buy' in them. This story is purely for informational purpose and investors should not construe it to be an investment advice.