Quantitative Strategy: i-Lens Screener
Investable value stocks’ population dwindles to
historical low within mid/small-caps
Vinod Karki
vinod.karki@icicisecurities.com
+91 22 6807 7586
Niraj Karnani
niraj.karnani@icicisecurities.com
+91 22 6807 7607

CNX Nifty: 24,045
ICICI Securities Limited is the author and distributor of this report
27 June 2024
India | Equity research | i-Lens screener
Quantitative Strategy
Investable value stocks’ population dwindles to historical low within mid/small-caps
The proportion of ‘investable value stocks’ (RoE >14% and earnings yield > bond yield) within the top-1,000 universe has halved
to ~7.6%, from 15% over the last one year, largely led by micro-caps, small-caps and mid-caps in descending order (cycle low
was made in Dec’17 at 6%). However, proportion of ‘investable value stocks within large-caps remained steady, at 14%, over
the past year. Our framework for identifying value stocks includes a combination of parameters that spots: 1) unwarranted
market pessimism about ‘long-term prospects’ as measured by our proprietary ‘market-implied long-term growth value’
(MILTGV) framework; 2) scenarios where earnings yield comes up above bond yield; and 3) attractive P/B ratios relative to the
stock’s RoE profile. Value traps are avoided by filtering out sharp earnings downgrades, or relative underperformance, while
keeping a qualitative check in terms of a fundamental BUY/ADD rating from our sector coverage team.
More in the large-cap hat: ‘Investable value stocks’ still exist
As the broader market rally continues, the number of stocks with the minimum
quality attributes – of trailing RoE >14% and value traits of superior earnings
yield over bond yields – has halved from 144 to 76 within the universe of the
top-1,000 stocks by market capitalisation (Exhibit 2). It is essential to note at
this juncture that the drop has predominantly been led by micro-caps (from 79
such companies to 32), small-caps (35 to 19) and mid-caps (16 to 11). Which
essentially goes to say that the number of ‘investable value stocks’ within
large-caps has remained constant at 14.
Value strategy framework
Vinod Karki
vinod.karki@icicisecurities.com
+91 22 6807 7586
Niraj Karnani
niraj.karnani@icicisecurities.com
i-Lens screener
i-Lens is our screening framework for critical
factors related to economy / sectors / stocks
We define value strategy as the identification of those stocks that the market
is pessimistic about, in terms of the company’s long term growth prospects to
start with, while we see the fundamentals of such companies as robust amid
improving near-term growth prospects. Success of the value strategy hinges
on avoiding ‘value traps’ and signs of ‘recognition of value’ by the market.
Screening criteria

MILTGV of ~40% or less (MILTGV – market-implied long-term growth
value)

Earnings yield > bond yield with an eye on other valuation metric such as
P/B.

Applying the asset approach of valuation in terms of P/B ratio, keeping
in mind the sector profile

Avoiding value traps: Stocks are valued lower for various reasons related
to uncertainty about their future fundamentals – the risk of buying into a
‘value trap’ always exists. Also, a value stock could be ignored for an
extended period of time due to behavioural biases stemming from
emerging investment paradigms or themes (example is of ESG risk
exposure stocks growing unpopular).
Hence, the key to value strategy is to minimise the said risks, which we try
to address by using the following three factors –

Avoiding continued relative underperformance

Avoiding sharp consensus earnings downgrades (>10%)

Fundamental BUY/ADD rating from our sector analysts
Previous Reports
02-09-2023: Value stocks
15-08-2023: GARP stocks
25-04-2023: Value stocks
29-03-2023: GARP stocks
Please refer to important disclosures at the end of this report
i-Lens screener | 27 June 2024
What is MILTGV (Market implied long term growth value)?
Measuring market pessimism by ‘reverse engineering current stock price’ and
earnings yield: We view a stock entering the value zone as its MILTGV begins dipping
below 40%. This, in simple words, means that the market is assigning <40% of the
stock’s current market price to earnings growth beyond the explicit period ending
FY26E, thereby reflecting a lower price relative to potential growth in the long term.
For deep-value stocks, the market-implied value for speculative growth beyond the
explicit period falls to zero or negative value.
Is the macro environment conducive for value stocks?
Our smart beta factor analysis (link) indicates that the value factor has started to
outperform since FY21.
We attribute this outperformance of the value factor to macro demand in the economy,
which is largely emanating from sectors related to: 1) the investment cycle (includes
the capital intensive sectors pertaining to fossil fuel energy, other materials, etc.,
apart from engineering and capital goods – refer our capex report); 2) credit cycle
accompanied by bottom formation in the NPA cycle; and 3) buoyant demand and
emerging price stability for commodities.
Stocks related to the aforementioned sectors are typically capital-intensive, cyclical
and value stocks. Our back-testing indicates that as long as the investment,
commodity and credit cycle continue to be robust, value stocks will have the necessary
catalysts to keep outperforming.
Exhibit 1: Value stocks from our coverage universe sorted in ascending order from ‘deep value’ to ‘value’
Company
(Link to latest
Report)
I-Sec
Mcap
rating (INR Bn)
Quality
Balance sheet risk
and cashflow
profile
Valuations –
asset
approach
Valuations –
income approach
RoE
FY26E
Financial
leverage
CFO/
Profit
P/B FY26E
(x)
EY*
FY26E MILTGV
(%)
South Indian bank
BUY
72
13.1
NM
NM
0.7
18%
-38%
ONGC
HPCL
Oil India
Coal India
Karur Vysya Bank
CESC
PNB Housing
SBI
GAIL
NMDC
City Union Bank
Hindalco Ind
Gulf Oil
Axis Bank
Sun TV
NTPC
BUY
BUY
BUY
ADD
BUY
BUY
BUY
BUY
BUY
ADD
ADD
BUY
BUY
BUY
BUY
BUY
3,359
712
758
2,892
166
201
203
7,517
1,401
756
125
1,540
57
3,929
296
3,499
14.0
20.1
16.6
33.4
15.9
13.9
11.7
16.3
14.7
23.1
12.2
11.2
25.7
16.5
17.7
13.6
0.35
1.41
0.37
(0.29)
NM
1.03
NM
NM
0.26
(0.35)
NM
0.39
(0.30)
NM
(0.03)
1.43
1.92
1.50
1.73
0.48
NM
1.70
NM
NM
1.27
1.33
NM
2.28
1.12
NM
1.13
1.95
0.9
1.3
1.2
2.7
1.2
1.5
1.0
1.6
1.5
2.2
1.0
1.2
2.8
1.8
2.0
1.9
16%
15%
12%
12%
12%
9%
10%
10%
9%
10%
10%
9%
7%
8%
7%
7%
-31%
-17%
-6%
2%
20%
28%
29%
30%
31%
31%
33%
35%
41%
43%
43%
43%
Earnings
momentum
Pessimism
Deep
Value
Value
Avg.
Upgrade/
Downgrade
for FY24A
and 25E
Price momentum
(relative performance)
3M
Gap
with 52
week
high
1% -12% -26%
1%
10% 43% 20% -6%
82% 28% 12% -12%
-4% 128% 63%
2%
53% 81% 18%
1%
21%
7%
0% -7%
1% 46%
3%
6%
22% -32% -23%
2%
6% 25% 21%
5%
14% 76% 30% 15%
19% 88%
8%
8%
-7% -25% -9%
4%
9% 41%
9% 18%
10% 86% 38%
1%
1%
6%
6% 16%
6% 17% -21% 10%
5% 66%
8%
4%
1%
13%
1%
1%
4%
2%
5%
2%
1%
1%
0%
0%
1%
4%
1%
1%
18%
1year
6M
Source: Bloomberg, Capitaline, I-Sec-research
Note: For latest reports on our coverage universe, please click on the company name. Avg upgrade/downgrade is considered as of May’24 end vs Dec’22 end. Consensus
estimates are considered above.
* EY – Earnings yield
India | Equity Research
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i-Lens screener | 27 June 2024
Exhibit 2: Probability of finding investable value stocks halves over the past one
year within the top 1,000 universe (% stocks with EY > BY and RoE >14%)
Top1000, EY>BY and ROE>14
Median
25%
20%
15%
10%
7.6%
5%
Jun-24
Dec-23
Jun-23
Dec-22
Jun-22
Dec-21
Jun-21
Dec-20
Jun-20
Dec-19
Jun-19
Dec-18
Jun-18
Dec-17
Jun-17
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
0%
Source: Bloomberg, Capitaline, I-Sec research
Exhibit 3: Percentage of investable mid and small caps approaching historic low
(% of stocks with EY > BY and RoE >14%)
35%
Mid
Small
Micro
30%
25%
20%
15%
10%
5%
Dec-23
Jun-24
Dec-23
Jun-24
Jun-23
Dec-22
Jun-22
Dec-21
Jun-21
Dec-20
Jun-20
Dec-19
Jun-19
Dec-18
Jun-18
Dec-17
Jun-17
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
0%
Source: Bloomberg, Capitaline, I-Sec research
Exhibit 4: Percentage of investable large cap stocks have remained intact
(% of stocks with EY > BY and RoE >14%)
25%
Large
20%
15%
10%
5%
Jun-23
Dec-22
Jun-22
Dec-21
Jun-21
Dec-20
Jun-20
Dec-19
Jun-19
Dec-18
Jun-18
Dec-17
Jun-17
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
0%
Source: Bloomberg, Capitaline, I-Sec research
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i-Lens screener | 27 June 2024
Exhibit 5: Value zone shrinking - sectoral profit pools and their valuations (size of the bubble indicates
sectoral contribution to NSE 200 profit pool in FY26E)
12
Consumer staples,
2%
Cons Disc, 2%
10
Mid to high
valuation
FY26E P/B
Private banks, 26%
8
Tobbaco, 2%
Media, 0.2%
IT, 9%
Metals, 6%
6
Very High valuation
Healthcare, 4%
Energy, 8%
4
Real Estate, 1%
PSU
Banks, 8%
Autos, 7%
2
Utilities, 4%
Industrials, 15%
Financials (Ex-banks), 8%
0
-
5
10
15
20
25
30
35
40
45
50
55
FY26E P/E
Value zone
Source: Bloomberg, Capitaline, I-Sec research
Note – Energy excludes RIL. Industrials include RIL, cement, materials and telecom along with other industrials.
Exhibit 6: Zero margin of safety in terms of ‘risk spread’ of mid and small-caps
over large-caps
Mid
Small
Micro
17%
12%
Attractive zone
7%
Unattractive
zone
Unattractive zone
2%
Jun-24
May-23
Apr-22
Mar-21
Feb-20
Jan-19
Dec-17
Nov-16
Oct-15
Sep-14
Aug-13
Jul-12
Jun-11
May-10
Apr-09
Mar-08
Feb-07
Jan-06
Dec-04
Nov-03
Oct-02
-3%
Source: Bloomberg, Capitaline, I-Sec research
Note: Large-cap – top-100 companies by market-cap rank, mid-caps – next-150 companies (101-250th rank), small-cap
companies – next-250 companies (251 to 500th rank), and micro-caps – next-500 companies. Above chart refers to
trailing earnings yield spreads of mid-, small- and micro-caps over large-caps at each point in time. Only profitable
companies are considered in the calculations.
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i-Lens screener | 27 June 2024
Exhibit 7: Investment rate driving demand in the economy – conducive for
outperformance of balance sheet driven companies with valuation comfort
ICOR (RHS)
36%
GFCF / GDP (%)
9.0
34%
8.0
32%
Investment rate
approaches previous
peak while ICOR
improves
30%
28%
7.0
6.0
5.0
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
3.0
2004
24%
2003
4.0
2002
26%
Source: CEIC, I-Sec research
Exhibit 8: Factor performance by quintiles for fiscal years since FY22 (average percentage returns) – Value , beta
and size outperform
Three factors from Fama and French
model
Factor ranking
High
Low
Q1
Q2
Q3
Q4
Q5
Size (Market cap)
FY22
31
14
21
17
18
FY23
-5
-2
-2
6
3
Market risk (Beta)
FY24
47
56
78
66
47
FY22
22
19
26
21
11
FY23
-0
6
-8
3
-1
Valuation(P/B)
FY24
70
67
46
70
44
FY22
20
19
15
18
29
FY23
-12
-6
2
3
14
FY24
40
36
51
73
95
Source: Bloomberg, Capitaline, I-Sec research
Note: Each factor has been ranked from high (Q1) to low (Q5) within the BSE200 universe and average stock returns of each quintile is provided in the table. For instance,
in size (m-cap) factor, big-size stocks are placed in Q1, whereas small-size stocks are placed in Q5.
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i-Lens screener | 27 June 2024
Exhibit 9: Performance of P/B portfolios over long series (FY21–24 represents a
departure from its performance trend seen in FY11–20)
128
Q1
Q2
Q3
Q4
Q5
64
32
16
8
4
2
FY24
FY25
FY23
FY22
FY21
FY20
FY18
FY19
FY17
FY16
FY15
FY14
FY12
FY13
FY11
FY10
FY09
FY08
FY06
FY07
FY05
FY04
FY03
1
Source: Bloomberg, Capitaline, I-Sec research
Note: Performance indicated in terms of cumulative performance of annually rebalanced, equal weighted portfolios of
factor quintiles. Chart is log scaled.
Exhibit 10: Cheapest P/B stocks had outperformed quite
significantly in FY03–12…
16
Q1
Q2
Q3
Q4
Exhibit 11: …but underperformed quite significantly in
FY13–20…
4
Q5
Q1
Q2
Q3
Q4
Q5
8
2
4
1
2
FY20
FY19
FY18
FY17
FY16
FY15
FY14
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY13
0.5
1
Exhibit 12: …and have been outperforming since FY20
Q2
Q3
Q4
Q5
4
2
FY25
FY24
FY23
FY22
1
FY20
The portfolios are rebalanced every financial
year and use total returns.
Q1
8
FY21
We have back-tested single-factor portfolios
on parameters such as ‘price to book’.
and seen how portfolios with the lowestranked stocks in terms of the factor (Q5 or
Quintile 5 – in this case lowest P/B) – have
performed against the portfolio with the
highest-ranked stocks (Q1) over time.
Source: Bloomberg, Capitaline, I-Sec research
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i-Lens screener | 27 June 2024
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