A low PE ratio stock has a more possibility of price rise in the future if its company’s business fundamentals are strong. Strong fundamentals lead to growth in sales, EPS, and other metrics like net worth that ultimately provide better returns to the investor.
You can find P/E or EPS value on any financial portal like Moneycontrol, or ETMarkets. But you can’t randomly pick any stock from the list displayed on Moneycontrol.
You should know how to pick the right low PE ratio stock for your portfolio which we are going to discuss in the next section. Let’s first discuss the 5 lowest PE ratio stocks in India across different sectors.
Disclaimer – The stocks mentioned below are just for educational purposes. We are not into stock advisory, don’t risk your money by investing based on the discussion in this article.
Lowest P/E Ratio Stocks in India
- PE ratio – 5.22
- PEG ratio – 0.01
Bharat Petroleum Corporation Ltd. (BPCL) is a PSU company with a market capitalization of Rs. 93,646.64 Cr. BPCL stock has a low PE ratio of around 5.22.
BPCL has a similar PE ratio if compared to its peers but it has given returns as compared to its competitors.
BPCL is popular for dividend distribution and has given double dividends in September 2021 which were final dividends of Rs. 23 per share and a special dividend of Rs. 35 per share.
Strong past performance, low PE ratio, and high dividend payout make it an attractive choice for investors.
#2. J K Lakshmi
- PE ratio – 15.92
- PEG ratio – 0.32
J K Lakshmi is another undervalued stock with a PE ratio of 15.92. Though the company’s sales growth remained limited to 10.85% over the last five years. But the good news is that the company has reduced its debt and delivered a decent profit growth of 72.82% CAGR over the past 5 years.
If you compare the peers’ PE ratio, J K Lakshmi has the lowest PE ratio among the competitors.
#3. Tata Steel
- PE ratio – 7.23
- PEG ratio – 0.09
Tata steel was Asia’s first private integrated steel company established in 1907. Tata is ideal for dividend lovers with a decent dividend payout of 42.70%.
The company has also reduced its debt to Rs. 84,237 crores with debt repayment of Rs,5,894 crores which is a good sign for the investors because the company is generating enough profits to repay the debt.
However, the company has experienced a poor sales growth of 8.92% in the last 5 years which may improve in upcoming years.
Tata Steel has a PE ratio of 7.23 which is much lower than the industry average of 14.36% and comes at a third lower in peers making it an ideal bet.
#4. Chambal Fertilizers
- PE ratio – 8.18
- PEG ratio – 0.1
Chambal fertilizers is an established company with a market cap of Rs.14,769 cr. The stock has a PE ratio of 8.18 and the company has maintained an ROE (Return on Equity) of 23.24% for the last 3 years and one year ROE is 31.52%.
The company has decent profit growth of 42.28% in the past 3 years.
If you compare its performance with peers, Chambal Fertilizers has the lowest PE ratio and the highest ROE percentage making it a profitable choice.
#5. Aurobindo Pharma
- PE ratio – 7.45
- PEG ratio – 0.31
Aurobindo Pharma is another stock that currently has a low PE ratio of 7.45%. The pharma stock had price corrections in the last 6 months with a strong dip in August 2021 after USFDA warnings.
But on the contrary, Aurobindo Pharma has reported a profit growth of 23% in the first quarter of 2020-21 and has given a decent profit growth of 21.38% CAGR over the past 5 years.
Aurobindo Pharma is also a part of the Indian government’s PLI scheme under Atamnirbhar Bharat to increase domestic manufacturing in the pharma sector which will also help the pharma company to boost revenues in the future.
While talking about competitors’ PE ratio comparison, Auropharma has the most undervalued stocks with the lowest PE ratio of 7.45 only making the current price level a good entry point.
Also read – How to calculate the fair value of a stock
How to Pick A Stock With A Low PE ratio
Low price-to-earnings ratio (P/E ratio) refers to the undervaluation of a stock which means the current stock price is lower than its actual worthy price. That indicates that buying that stock may result in rising in the stock price and profit-making.
P/E = Share price / Earnings Per Share
“Share price” = current price at which the stock is trading
“EPS (Earning per share)” = EPS is derived from the net profit of the company and the no. of outstanding shares in the market
EPS = Profit / No. of shares
Higher EPS presents the stronger business fundamentals of a company.
According to Benjamin Franklin (author of The Intelligent Investor), a good P/E ratio is below 15.
But since that book is written way back in 1949 when retail investment was not so popular, then this P/E ratio range may or may not be accurate. Most investors still rely on this ideal range.
However, in today’s scenario when the demand for the stock is high because more retail investors participating in the stock market, in that case, some good stocks perform well even at a higher PE ratio due to high demand.
we’ll have to look for other factors too, that will be more relevant in today’s scenario.
I am going to share 3 popular methods to check if the P/E ratio is relatively low or high so that you can validate if the particular stock is actually undervalued or not.
Method-I (Analyse PEG ratio)
PEG ratio gives a comprehensive evaluation of stock to know whether it’s undervalued or overvalued. In the PEG ratio, we check the future growth rate of a stock which means at what growth rate a company will rise in near future.
PEG = PE/FGR
FGR is the future growth rate.
PEG ratio is a company’s stock PE ratio divided by the growth rate for a particular time period. You can estimate the average growth rate of a company by understanding its average annual growth in the past 3 to 5 years.
Or portals like value research online, or finology also provides you with the PEG ratio of any particular stock. So if you are a newbie, you can easily find the PEG ratio online.
The formula is PEG<1 is undervalued and PEG>1 is overvalued. PEG =1 could be a fair deal if the business fundamentals of a company are strong and its PE value if compared with index and competitors (will discuss in upcoming sections) is relatively low.
So PE along with PEG ratio gives you a better evaluation of a stock’s profitability.
Method-II (Compare it with Index)
You can compare the P/E ratio of your shortlisted stock with Index P/E, if the stock P/E ratio is lower than the Index PE, then you can consider it an undervalued stock that may arise in the future, so you can think of investing in that stock.
For example, Aurobindo Pharma stock is a part of the Nifty200 index. The stock has a current PE ratio of 7.45 while the PE ratio of the Nifty200 index is above 26.5 as shown below.
Now you can understand that the stock is undervalued because it has a lower PE ratio than the index’s own price to earnings ratio.
Method-III (Compare with Competitors)
You can also compare the PE ratio of your shortlisted stock with other companies operating in the same sector to understand if it is undervalued or overvalued. A low PE ratio among competitors shows that the stock is undervalued and there are chances that the stock will rise in the future.
Taking the same example again, if you compare Aurbindo pharma’s competitors’ PE ratio, it has the lowest PE ratio than other companies in the pharma sector giving an impression of an undervalued stock.
Now you understand how to calculate the PE ratio and you can use above discussed factors to get the valuation of a stock. But do keep one thing in mind that during stock analysis, you can’t rely on one particular thing.
PE ratio is an important factor in the stock analysis but solely relying on the PE ratio could be disastrous, you should also check the company’s fundamentals, management, and other factors like intrinsic value, debt to equity ratio, cash flow to get the clear picture before making the final decision.