Value investing, a concept popularized by Benjamin Graham, continues to be a pivotal strategy in the investment world. This approach emphasizes acquiring stocks that are undervalued, appealing to those seeking growth at a sensible price while ensuring a margin of safety. However, it’s crucial to identify the catalysts—such as earnings growth, management shifts, or fundamental changes—that can help these undervalued stocks close the valuation gap with their peers. Remember, low valuations aren’t always a signal for investment; sometimes, they reflect underlying financial issues or sector challenges.
Spotlight on Two Undervalued Stocks
In this article, we highlight two notable stocks currently trading below their industry valuation, specifically based on the price-to-earnings (P/E) ratio.
1. PNB Housing Finance
PNB Housing Finance stands as the third-largest housing finance institution by assets, boasting an impressive ₹712 billion in assets under management (AUM) as of FY24. The company’s portfolio includes:
- Home Loans: 70%
- Loans Against Property: 23%
- Non-Residential Loans: 4%
- Wholesale Loans: 3%
The company’s well-diversified loan assets span across various regions, with the North, West, and South contributing 33%, 35%, and 32%, respectively. Interestingly, despite experiencing robust loan growth, PNB Housing’s AUM has declined from ₹833 billion in FY20 to ₹712 billion in FY24.
Despite this decrease, FY24 marked a 7% growth in AUM, primarily driven by a surge in retail disbursements. The company holds a deposit license, with stable deposits recorded at ₹178 billion for FY24. Over the past four years, net interest income (NII) has risen by 9%, reaching ₹25 billion, propelled by increasing net interest margins (NIM), which improved from 2.8% in FY22 to 3.7% in FY24.
PNB Housing faced challenges during the pandemic, with its gross non-performing assets (NPAs) climbing from 2.9% in FY20 to 8.1% in FY22. However, significant reductions in NPAs have been achieved through the sale of bad loans and write-offs. By FY24, the gross and net NPAs had decreased to 1.5% and 0.9%, respectively.
As a result of improved asset quality and a rise in NIM, PNB Housing’s profits surged by 44% year-on-year, totaling ₹15 billion in FY24, while return on assets (RoA) also improved to 2.2% from 1.6% the previous year. In the first nine months of FY25, NIM increased by 7%, and net profit grew by 30% to ₹13.8 billion.
Looking ahead, PNB Housing has introduced a new vertical focusing on Emerging Markets to cater to tier 2 and 3 cities, which currently includes 50 branches across 12 states. This segment is expected to contribute around 40-42% of incremental business. Additionally, the affordable housing initiative, branded as Roshni, has seen rapid growth, achieving a loan book of ₹17.9 billion within just 15 months of launch.
Currently, PNB Housing trades at a P/E ratio of 13, significantly lower than the housing finance sector average of 32 and its own 10-year median of 14.5.
2. Motilal Oswal Financial Services
Motilal Oswal Financial Services Limited (MOFSL) has established itself as a key player in the diversified financial services sector since its inception in 1986. The company operates across multiple segments, including:
- Broking: 47% of revenue
- Asset and Wealth Management: 27%
- Housing Finance: 8%
- Treasury Investments: 19%
As of FY24, MOFSL reported an AUM of ₹3.8 trillion. Notably, its market share in futures and options (F&O) expanded from 2.8% in FY20 to 8.7% in FY24.
The firm has also made strides in its financial product distribution, showcasing a robust 38% CAGR growth in distribution AUM, reaching ₹270 billion in FY24. The wealth management segment flourished, with AUM increasing by 72% to ₹1.24 trillion.
MOFSL’s financial performance has been commendable, with FY24 revenue and operating net profit growing at a 32% CAGR, resulting in figures of ₹71 billion and ₹15 billion, respectively. The company continued its strong performance into the first nine months of FY25, with revenues increasing 41% year-on-year to ₹38.5 billion.
Currently, MOFSL is trading at a P/E of 11.2, significantly lower than its 10-year average of 21 and the capital markets sector average of 20. This valuation has seen a recent correction from 22x as broader market trends impact earnings expectations.
Conclusion
Both PNB Housing Finance and Motilal Oswal Financial Services are currently available at attractive valuations compared to both their historical figures and industry averages. PNB Housing’s lower valuation reflects past challenges but also indicates a strategic pivot towards retail and affordable housing, which could enhance its growth trajectory. Conversely, MOFSL benefits from strong industry dynamics, despite recent market corrections affecting its valuation.
Investors should conduct thorough research and consider seeking professional advice before making investment decisions, as these insights serve purely for educational purposes.
