9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

Synopsis

In simple terms, it makes sense to pay more for a stock whose earnings grow at a faster rate. Now, how much more should be paid
would be and what would determine whether the stocks which are being bought are cheap or they just appear to be cheap due to
one ratio, i.e PE ratio. PE ratio is one of the most overused and misused ratios, it is used by all and sundry to justify their valuations
and create a mirage of value. From investor presentations to research reports, one finds its mention everywhere. Is there an
alternative to it?

Given the huge difference in what is value and what looks

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cheap due to one financial ratio, more often than not, relying 11 MINS READ, Last Updated:
on PE may lead to wrong investment decisions. PEG ratio is Sep 10, 2023, 12:55 PM IST

much better compared to the commonly used P/E ratio. It

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helps in avoiding stocks which might appear cheap but
actually are not value buys. Especially in sectors like
banking and financial services which have large numbers of
stocks which on face of it appear cheap but are actually not.
Also in sectors which are cyclical in nature, looking at the FONT SIZE SAVE PRINT COMMENT

price earning matrix may lead to wrong decisions. Given the

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huge difference in what is value and what looks cheap due
to one financial ratio, more often than not, relying on PE
may lead to wrong investment decisions. It is better to use
PEG ratio when looking for long-term investment, though
finding the right ratio is itself a challenge.

In simple terms, it makes sense to pay more for a stock

whose earnings grow at a faster rate. Now, how much more
should be paid would be determined by dividing a
company’s PE multiple with its growth ratio. So, Forward PE
multiple is divided by the 5-year forecasted growth rate to

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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

arrive at the PEG ratio. Therefore, while a PEG ratio greater

than 1 suggests a stock is overvalued; a PEG ratio of less than
or equal to 1 would suggest that the stock is fairly priced. It is
an effective financial metric that throws light on a
company’s price with respect to its future earnings growth
potential over a specified period.

However, it is worth mentioning that calculating the PEG

ratio is a complex process and comes with its own set of
challenges. The challenge with PEG ratio is the quality of the
earning forecast and given that in an ever changing macro
environment , even the best of the forecast for any business
can go wrong which may impact other elements which lead
to some unexpected changes. However, even with these
challenges, it is worth looking at PEG ratio before taking a
long term investment decision.

Another problem with PE ratio is that it not only creates a

problem in terms of buying based on PE ratio , but even
selling stocks just because P/E is high is also something
which leads to selling wealth creators early and then
regretting or buying them at a point when they are
expensive in real terms.
It is extremely important to keep this in mind that there are
stocks which might start looking attractive due to the low
PE ratio as relative valuation would be even higher when
one compares on PE basis.

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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

The data used in screening the following 4 stocks has been

gathered from the latest Refinitiv’s Stock Reports Plus
report dated Sep 10, 2023.
Stocks with PEG & Long Term Growth Rates
Upside Potential - Sep 10, 2023

* Upside LTG
Company Avg Analyst Potential PEG Ratio
Name Score Reco Count % Ratio %

City Union
6 Buy 22 41.8 0.6 17.1
Bank

Manappuram
8 Buy 18 38.3 0.3 20.4
Finance

Kalpataru
Projects 8 Buy 14 26.3 0.7 25.0
International

Venus Pipes Strong

9 3 15.7 0.6 50.0
and Tubes Buy

* Calculated from highest price target given by analysts

S SR Pl

About the Companies

City Union Bank Limited (the Bank) is a banking company.

Thecompany's segments include Treasury, Corporate and
Wholesale Banking, Retail Banking and Other Banking
Operations. The Company has contemporary technology and
infrastructure including automated teller machines (ATMs),
net banking, mobile banking, e-wallet, social media banking
for personal, as well as business banking customers. It serves
industries, including textile, metal, paper and paper
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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

products, food processing, chemicals, rubber and plastics,

engineering, beverage and tobacco, and automobiles. The
Company has a network of approximately 702 branches
with over 630 branches located in South India and
approximately 72 branches in other states.

Manappuram Finance Limited is a non-banking financial

company (NBFC). The Company serves the credit
requirements of people belonging to the lower socio-
economic classes, particularly in rural and semi-urban areas
of India. The Company offers a range of retail credit products
and financial services. The Company has a diversified
portfolio across retail, microfinance, small and medium
enterprises (SMEs), and commercial customers. The
Company offers gold loans against the security of gold
jewelry. The Company's short-term gold loan product is used
primarily by customers who require immediate funds and
may not have access to other forms of formal credit readily
available. It offers online gold loan, gold loan, SME finance,
forex and money transfer, vehicle loan, doorstep gold loan,
personal loan, micro home finance, hospitality industrial
loan, teachers loan division, healthcare industry loan, other
loans, other services, and two-wheeler finance.

Kalpataru Projects International Limited is an

engineering, procurement and construction (EPC) company.
The Company is primarily engaged in the business of EPC
relating to infrastructure comprising buildings and

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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

factories, power transmission and distribution, roads and

bridges, water pipelines, railway track laying and
electrification, oil and gas pipelines laying, and other. It
delivers complete solutions, which covers designing, testing,
fabrication, erection and construction of transmission lines,
oil and gas infrastructure and railways projects on a turnkey
basis. It operates in 63 countries spread across five
continents. Its Oil & Gas business includes providing EPC
contracting services for cross-country pipelines, terminals
and gas gathering stations across diverse territories. The
Company is providing railways EPC services for executing
civil infrastructure, track laying, signaling and
telecommunication, and over-head electrification projects
for railways in India.

Venus Pipes & Tubes Limited is a company. The Company is

engaged in manufacturing and exporting of stainless-steel
pipes and tubes. The Company manufactures stainless steel
tubular products in two broad categories: seamless
tubes/pipes; and welded tubes/pipes, under which it is
manufacturing five product lines, namely, stainless steel
high precision & heat exchanger tubes; stainless steel
hydraulic & instrumentation tubes; stainless steel seamless
pipes; stainless steel welded pipes; and stainless-steel box
pipes. Under it brand name Venus it supplies products for
applications in diverse sectors including chemicals,
engineering; fertilizers; pharmaceuticals, power, food
processing; paper; and oil and gas. It has one manufacturing

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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

plant which is located at Bhuj-Bhachau highway, Dhaneti.

Source for About Companies: SR plus report

Methodology used in filtering the list of stocks:

1) Market cap of over Rs 3,000 crore

Only companies having market capitalization of more than
Rs 3,000 crore form part of this selected series of stocks.

2) Stocks with either “Strong Buy” or “Buy” or “Hold”

recommendation rating
The recommendation rating for each stock has been used
from Institutional Brokers Estimate System (I/B/E/S) by
Refinitiv. The recommendations are presented on a five-
point standardized scale - Strong buy, buy, hold, reduce and
sell.
The I/B/E/S mean is the average recommendation of all
analysts covering the stock. The list provided below
incorporates recommendation ratings having the
recommendation rating of either “Strong Buy” or “Buy” or
“Hold”.

3) Stocks with minimum upside potential of 15%

The highest price targets for all the stocks are selected where
analyst target prices are available over the next 12 months.
This highest price target is then compared with current
market prices to arrive at the highest upside potential in
percentage terms. The upside potential should be of

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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

minimum 15% to fit into this list. In other words, these

companies should have a growth potential of at least 15%
over the next 12 months.

4) A minimum long-term growth rate of 16%

A long-term growth rate of at least 16% is applied to arrive at
the list. Long-term growth rate is a compounded annual
growth rate which takes into the consideration the current &
projected EPS values.

5) Price-to-earnings to growth ratio of less than or equal

to 1
The annual EPS growth of a company is equated with its
price-to-earnings ratio. So, companies with this PEG ratio of
less than or equal to 1 form part of this selected list of stocks.
Generally, lower this PEG ratio, the better it will be. Forward
PE multiple is divided by the 5-year forecasted growth rate
to arrive at the PEG ratio.

6) Average score with neutral to positive outlook

The scrips which enjoy a high growth potential and having a
broad market outlook of neutral to positive and one with the
overall average score of 6 and above are considered for
selection. The average score of Stock Report Plus is based
upon five key pillars i.e. earnings, fundamentals, relative
valuation, risk and price momentum.

7) Institutional ownership of at least 10%

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9/10/23, 5:27 PM 4 stocks with a right PEG ratio for long-term wealth creation

Companies which enjoy higher institutional interest &

having institutional ownership of at least 10% are
considered in this list.

Stock Reports Plus, powered by Refinitiv, is a comprehensive

research report that undertakes an in-depth quantitative
analysis of all stocks. The report also contains trend
analysis, peer analysis and mean analysts’
recommendations to help an investor make better &
informed investment decisions.

ET is providing these research reports as a complimentary

offering to all ETPrime users. Click here to know more.

(Disclaimer: The views, scores, research and investment tips

expressed herein are not that of Economic Times (“ET”) or its
management and has been gathered from various third-
party sources. ET does not guarantee the accuracy, adequacy
or completeness of any information and is not responsible
for any errors or omissions or for the results obtained from
the use of such information. The content provided herein
including any output of tools/analysis is for informational
purposes only and should not be relied upon or construed as
an investment advice. ET advises users to check with
certified experts before taking any investment decision.)
(Originally published on Sep 10, 2023, 12:52 PM IST)

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