BSE 200 index through 10 filters (see graph-ic). With the application of each filter, some stocks dropped out. In the end we were left with just 14 scrips. Of these 14 stocks, we have looked in detail at the fundamentals of the 10 scrips most recommended by analysts (see tables).

Value versus price The price-to-earnings (PE) and price-to-book value (PBV) ratios are favourite tools of value investors. But a low PE or PBV alone does not make a value stock. In fact, such stocks could well be value traps. Many PSU banks, lever-aged enterprises and real estate companies

Heres how we applied 10 filters to identify value stocks

from the BSE 200 universe.

HOW WE DID IT

We started with the 200 stocks in the S&P BSE 200 index. Since it is a large cap index, small and mid-cap stocks get eliminated.

To avoid value traps, only companies that made profits during the past five years were considered29 companies fell out, leaving only 171 stocks.

Of these profitable companies, only those with at least 10% annualised net profit growth were considered67 companies fell out, leaving only 104 stocks.

Next, only companies with positive operating margin were retained to ensure that the net profit is from business operations and not from other incomes1 stock moved out, leaving 103 stocks.

While profits are good, they must justify the investment in the business. Only stocks with at least 10% ROCE were kept8 companies fell through, leaving us with 95 stocks.

Also, the RONW should be at least 15% to ensure that only companies generating

enough profits are considered. 17 companies moved out, leaving only 78 stocks.

The next filter was a debt to equity ratio of less than 2. None

of the companies had a debt-equity ratio of more than 2 so

all 78 stocks remained.

A good company can be a bad buy at a high price. Stocks with a PE of over

20 were kept out40 high priced stocks fell out, leaving us with 18

stocks.

Next, only stocks that paid dividends in the past five years and distributed

at least 10% of their profits as dividend were kept20 companies fell out, leaving us with 58 stocks.

Another valuation metric is the price to book value (PBV). The

PBV can vary greatly, so we kept a liberal cut off of 5. Three companies got dropped, leaving

us with 15 stocks.

Lastly, only stocks with a dividend yield of at

least 1% were considered. One

company moved out. Leaving us with 14

value picks.

Of these, we have analysed 10 stocks for you in detail. These 10 stocks have been chosen on the basis of analysts recommendations.

FOCUS ON LARGE CAPS

S T O C K S200200

AVOID VALUE TRAPS

S T O C K S171171

REASONABLE GROWTH RATE

RETURN ON CAPITAL EMPLOYED

RETURN ON NET WORTH

POSITIVE OPERATING

MARGINS

LOW DEBT EQUITY RATIO

DIVEDEND PAYMENT

RECORD

REASONABLE VALUATION

NOT HIGH PRICE TO

BOOK VALUE

NOT LOW DIVIDEND

YIELD

S T O C K S

S T O C K SS T O C K S

S T O C K S

S T O C K S

S T O C K S

S T O C K S

S T O C K S

S T O C K S

104104

95957878103103

78

58

18

15

14

The Economic Times Wealth, May 18-24, 2015 03Cover Story