Summary of 5 Large Cap Stocks Facing Valuation Correction
Hi friends, in this article I’m going to speak about five large cap companies and the clear pattern in these five companies is that they are undergoing valuations correction at the minute. We are trying to understand the fundamental aspects of these businesses, their valuation correction reasons, and a lot more.
1. ICICI Bank Fundamental Analysis
Let’s start with stock number one, ICICI Bank. What you see on my screen is the price-to-book ratio of ICICI Bank, and if you look at the last five years’ median PB of this company, it is at around 3.1. The current PB is at around three, which is below the median. Previously, the price-to-book value of ICICI Bank was at around four. So from four, it has dropped to almost three, which is a 25% correction in the valuations. What’s driving this correction and what are the long-term fundamentals of ICICI Bank? Allow me a couple of minutes of your time so that you understand it completely.
For this, what you need to look at first of all is the total deposits growth for ICICI Bank. It has grown at around 14.63% on a CAGR basis, which is very, very healthy if you compare it with many other banking companies. If you look at the loan growth of the company, it has grown at around 16.29% on a CAGR basis, showing a very healthy growth rate.
If I talk about the net interest margin of the company, previous years were the best years for ICICI Bank, where it was delivering margins of around 4.48% or 4.53%. It has come down to around 4.32%. One of the reasons that the net interest margin has come down is that the cost of funds has been going up, which could be the main cause. But if you look at the asset quality of ICICI Bank, it has been consistently improving. Previously it was at around 1.1% of net NPAs, and it has come down to 0.4%. That is phenomenal asset quality that you can find in Indian banks. That is not just with ICICI Bank, by the way. If you look at SBI or HDFC, every bank has been improving their asset qualities.
Now, if I talk about the profit of ICICI Bank, the standalone net profit growth rate has been around 38% on a CAGR basis. This is an extremely high growth rate in terms of the profit that the company has delivered. Now let’s talk about the current period. The last two quarter results have come, but Q3 results have not come yet. So if we compare recent performance columns, we can try to see if there are any fundamental problems with the bank. Looking at the net interest margin, it is very, very stable.
In fact, if you look at all these numbers, I could not find anything that is materially degrading the company’s fundamentals. For example, if you look at the return on average assets (ROA), which is very important for a banking company, it stands at 2.38% versus 2.38%. All in all, I could not find any meaningful deterioration in the fundamentals.
If you look at the NPA trend as I talked about it, net NPA ratios have been improving quarter on quarter. If you look at the last few quarters, it has in fact improved to 0.39%. If I talk about the loan growth rate of ICICI Bank, looking at recent year-on-year growth, it is at around 10.3%. So definitely, the loan growth rate has softened a little bit. Ideally, you would expect ICICI to grow at around 12% or above 13% to 14%. Definitely, the loan growth rate has softened to 10.3%, and that could be one of the reasons that I could distantly think of for why the valuations have corrected for ICICI Bank.
But over the mid to long term, I really could not find any particular structural reason as to why the valuations have been correcting. In fact, recently, I wrote a detailed commentary about this particular bank’s insights that I’m sharing with you now. If you want to get these insights on a daily basis, you can join my YouTube community. It is only for exclusive members, and almost on a daily basis, I try to post there to give you insights. I’m not giving any recommendations there; I am giving insights so that you understand what is going on. The feedback from this community has been excellent. Simply go to my channel, find the join button, and be my guest.
2. Tata Consultancy Services (TCS) Valuation and Plans
With that, let’s now explore company number two. The second company that I want to speak about is Tata Consultancy Services (TCS). What you see on my screen is the TCS PE ratio over the last five years. The median has been around 30.7, and it is currently trading at around 22.9, which one would argue is a massive correction from their median ratio. If you look at the price-to-book as well, there is a very heavy correction here. It used to trade higher, and it has come down significantly. Of course, the median is at around 13.4, showing a huge valuation correction in TCS.
We all know why that has been happening. There is a question around the profitability growth of the company, questions around top-line growth at 2% to 3%, and more importantly, AI. Can AI take away all these jobs? That has been the main question. TCS laid off a lot of people in the past, so all of that bad news has been baked into this valuation correction.
Recently, the Q3 results of TCS came out, and the media was reporting on it. What was the media reporting? They reported that the PAT of the company has fallen 14% year-on-year, which is technically true, but this is just a headline number. What you need to do is go into a little bit of detail around their P&L. So, what I did was I went through their P&L that they declared very recently. What you note is that the profit for the period has dropped sequentially and also dropped on a year-on-year basis.
But if you look at the profit before exceptional items and taxes, it is pretty good. I mean, it has not actually degrown. It stands strong versus the last quarter, and on a year-on-year basis, it has grown. Again, I’m not trying to defend TCS, but I’m trying to give you insights here. What you note here very quickly is that there are exceptional items present. These include restructuring expenses of 253 crores, the statutory impact of new labor codes that the government implemented at 2,128 crores, and provisions towards legal claims of 1,000 crores. As per my understanding, all these are one-off events, and these exceptional items have caused the headline PAT to fall.
So if you ask me if the fundamentals have degraded, no, absolutely not. Yes, the growth of the PAT and the top line is not yet there, and it is definitely crawling at around a 2% to 3% rate, whatever that exact number comes out to be. At the same time, what you need to understand is what TCS’s plan is for the next five years. A couple of points that I would quickly make about TCS’s plans include their AI revenues. They have started talking about their AI services revenue, and it is standing at around $1.88 billion, which is up around 17.3%. Could AI give TCS more revenues and propel the growth of TCS? That is the major question out there.
Secondly, if you look at the total contract value, the deal pipeline of TCS is still very, very healthy at $9.3 billion. I don’t think that is a problem for TCS. In fact, one of the bigger things that you need to notice about TCS is that very recently, they published in a press release that they have signed a deal with TPG. TCS’s HyperValt business, which is going to be their data center business, is going to put together 18,000 crores of money into this venture. Now, could this business really scale three years or four years down the line? That is where your bet needs to be when it comes to AI and data centers. The normal bread-and-butter business of TCS is definitely a 2% to 3% growth sort of business. The major growth could come only from AI and data centers, and that’s where this valuation correction that we have seen could rebound back if we see growth coming from those sectors. Again, this is not a recommendation that you invest in TCS, but I hope you get this rounded view about the valuation correction, their latest quarterly results, as well as the future outlook in terms of their AI and data centers. If you like this, I request you to hit the like button, subscribe to my channel, and let me know in the comments. A simple thank you motivates me to bring such content to you at zero cost.
3. Reliance Industries Financial Performance
With that, let’s also move to stock number three. The third company that I want to discuss is Reliance Industries. If I talk about the PE ratio of Reliance Industries, the last five years’ median has been around 26.2. At the time of recording this video, it is trading right around that same median PE of 26.2. If you see the price-to-book ratio as well, the company’s median PB has been around 2.1, and it is at around 2.3 right now. It has corrected from its higher point. Right now, Reliance is a massive mammoth. If we try and look at the different businesses that they have, such as oil-to-chemicals, retail, and others, what you need to understand is that previously, Reliance’s business did not do well overall. As you can see from the data, Reliance’s energy business EBITDA was down by 8%. Even Reliance Retail hardly grew, standing at 9%. Jio Platforms, yes, showed a 17% EBITDA growth. Right overall for that period, if I talk about the PAT number, it only grew by 2.9%, and that performance is what you see reflected immediately in the stock valuations. For example, if you look at the price, it dropped. It is a very clear pattern: the moment Reliance was not doing well business-wise, prices came down and the valuations corrected. That was the main reason.
Now that period is gone, and let me show you the performance of this company over the last two quarters. Looking at the Q1 data, the energy business EBITDA is up by 7%. Look at Jio with 24% EBITDA growth. Look at Reliance Retail: from its lower growth, it has gone up to like 13%. If I talk about the overall PAT increase, it is up 76%. Of course, there are some exceptional items in there, but if you look at the EBITDA level, which removes all your exceptional items, it is at around 35% growth, which is what really mattered in Q1.
If I talk about Q2, here again, the business has recovered a lot. The energy business EBITDA shows 13% growth, the Jio platform shows 18%, and Reliance Retail shows 17%. All the businesses started firing, at least in the first two quarters. So one could argue that while previously the fundamentals were not that great, in the first half of the current fiscal period, there is definitely a recovery in the businesses. Therefore, for example, if I talk about Q2, the PAT is growing at around 14%. Now, Q3 numbers have not yet come out, so I do not know what those numbers will be, but definitely, earnings for Reliance in the first half have been much better. Could this valuation correction rebound back? We don’t know yet. Again, it depends on Q3 earnings, market sentiments, and a lot of other sentimental factors. But definitely, Reliance’s business has recovered in the first half. The second half we are yet to see. Valuations as of now show a median PB of 2.1 while it sits at 2.3, and a PE ratio median of 26.2 while it currently trades at 26.2. Hope this makes a lot of sense to you. Please go and explore the different businesses of Reliance as well so that you can do a bit more detailed analysis here. I have only scratched the surface to give you the headline view. Please don’t take this as a recommendation, but I hope you can go and explore Reliance Industries.
4. Varun Beverages Limited Growth & GST Impact
Let me now move to stock number four. Company number four is Varun Beverages Limited. What you see on my screen is the PE ratio of Varun Beverages. The last five years’ median has been around 63, and it has come down below that to 56.2. I mean, it used to be higher back when the valuation correction started, and since then it has come down to almost the 55–56 level. I don’t know when you are watching this video, so please go and check the recent valuations. If I talk about the price-to-book of this company, again, it used to be much higher, and it has come down to almost 9.1, whereas the median has been around 13.8 in the last five years. This represents a huge correction in the valuations for Varun Beverages in the last eighteen months or so.
