Assessing the Potential of Value Factors in the Indian Market

Categories: General Market Analysis, Investment Management, Investor Education, Equity Investments

Country or region: India

Summary:
We investigated the performance of different commonly used valuation parameters by market participants during the period from September 2005 to March 2018 in the Indian market.


Reference URL: http://www.indexologyblog.com/2018/06/14/assessing-the-potential-of-value-factors-in-the-indian-market/



Abstract

The value factor looks to bucket stocks that have inexpensive valuation and trade at a discount to their fundamental value, with the hypothesis that inexpensive stocks should outperform overvalued stocks. Observations in empirical research suggested that the value factor performed best when the economy was in recovery and growth was accelerating from trough.[1]

We recently investigated the performance of different commonly used valuation parameters (see Exhibit 1) by market participants during the period from September 2005 to March 2018 in the Indian market. The analysis was based on hypothetical equal- and float-market-cap-weighted top quintile portfolios that were semiannually rebalanced in March and September.

Exhibit 1: Valuation Parameters Evaluated in the Analysis
BACK-TESTED UNIVERSE S&P BSE LARGEMIDCAP S&P BSE LARGEMIDCAP

 

(EX-FINANCIALS)

VALUATION PARAMETERS EVALUATED Sales-to-Price (S/P) EBITDA-to-EV (EBITDA/EV)
Book-to-Price (B/P) Free Cash Flow-to-EV (FCF/EV)
Trailing Earnings-to-Price (E/P)  
12-Month Forward Earnings-to-Price (Fwd E/P)  
Operating Cash Flow-to-Price (CFO/P)  
Free Cash Flow-to-Price (FCF/P)  
Dividend Yield (Div. Yield)  

Source: S&P Dow Jones Indices LLC. Data from September 2005 to March 2018. All portfolios (except the S&P BSE LargeMidCap) are hypothetical portfolios. Hypothetical portfolios were rebalanced semiannually in March and September. The stock had to be covered by at least three analysts for it to be in the eligible universe for the forward earnings-to-price parameter. Table is provided for illustrative purposes.

Different cyclical characteristics were observed for various valuation parameters in the analysis (see Exhibit 2). For example, the top quintile portfolios for B/P, CFO/P, E/P, Fwd E/P, and S/P significantly outperformed the equal-weighted S&P BSE LargeMidCap portfolio in up markets, but they significantly underperformed in down markets, displaying strong cyclical behavior synonymous with the value factor. In contrast, the top quintile portfolios for Div. Yield, EBITDA/EV, and FCF/EV weren’t penalized in down markets.

Exhibit 2: Average Monthly Excess Return Versus the Benchmark (%, Based on Equal-Weighted Portfolios)
TREND NUMBER OF MONTHS B/P CFO/P DIV. YIELD E/P FWD E/P FCF/P S/P EBITDA/EV FCF/EV
Up 71 1.22* 0.95** 0.40 0.96* 1.31** 0.61* 1.40** 0.49 -0.67
Down 40 -2.13** -1.07** 0.14 -0.93* -1.52** -0.36 -1.89** 0.10 1.58**
Neutral 39 -1.12* -0.23 0.18 -0.25 -0.15




Date of original publication:

06/14/2018


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