Stocks on sale or complete scrap? 48 stocks trade below book values
The list includes PSBs, realty players besides usual suspects from the debt-crippled firms.
But don’t jump the gun; you may be treading a minefield.
Book value of a company is the worth of its assets carried on balance sheet. It is calculated by subtracting the accumulated depreciation from the cost of the asset.
Book value is also the net asset value of a company, which is worth the total assets minus the intangible assets (goodwill, patents) and liabilities.
If the price-to-book value (P/B) of a stock is ‘3x’, it means an investor is paying three times the book value to buy that stock.
On BSE, several otherwise popular stocks are currently trading at price-to-book value ratios below 1, meaning the stock prices have fallen below net asset values of these companies.
The list includes public sector banks, top realty players besides the usual suspects from among the debt-crippled firms.
Data compiled from corporate database Capitaline shows the long list has beaten-down names such as Videocon, Reliance Communications, Unitech, Jaiprakash Associates and Jindal Steel.
That, when companies like SPARC, P&G Hygiene, HUL, Gillette India and Bombay Burmah are trading at P/BVs of 71.94, 54.74, 41.29, 39.06 and 35.18, respectively.
Reliance Communication has been going through hard times. The loss-making telecom operator plans to shut down its voice call service from December 1. Last Friday, telecom regulator Trai directed its customers to move to other networks by the end of the year.
Debt-laden Jindal Steel and Videocon Industries figured in the Reserve Bank of India’s second list of loan defaulters referred for bankruptcy proceedings. Their names also cropped up in a leaked list of ‘Paradise Papers’ that name companies with suspected shadow investments in offshore destinations.
Other stocks trading at price-to-book values (P/BV) less than 1 include Shipping Corporation of India, Reliance Infra, Jindal Saw, Indian Overseas Bank, Canara Bank, Reliance Power, Aban Offshore, HDIL and RattanIndia Power.
A P/BV less than 1 shows the stock is available below its book value. Since the P/BV used is relative valuation, one can take a view by comparing the company’s ratio with its peers, says Satish Kumar, Research Analyst, Fundamental Research Desk, Choice Broking.
A lower P/BV ratio could mean a stock is undervalued. But it may also mean something is fundamentally wrong with the company. One should analyse the reason for the low P/BV ratio before making an investment, said Kumar.
Should you buy?
Taking a buy call on a stock based simply on low P/BV ratio is not prudent. Stock prices reflect expected growth in earnings over long periods with low volatility.
A stock may be quoting at low P/BV because of a highly volatile business, or high leverage or because it is in a mature or declining phase, says Deepak Jasani, Head of retail research at HDFC Securities.
In such cases, one should avoid buying the stock, unless it provides good dividend yield.
Some analysts believe price-to-earnings (P/E) and other return ratios are better indicators than P/BV, although the last can be used to check whether one is overpaying for a stock, which may otherwise look attractive on other parameters.
Besides P/BV, one should always check price-to-earnings, debt-to-equity, interest coverage and asset turnover ratios and also the return on equity of a stock before taking a decision to buy it, said Sahil Kapoor, Chief Market Strategist, Edelweiss Investment Research.
If a company trades at a P/BV less than 1, this means either investors find the company’s assets overvalued or the company is earning poor returns on its assets, or both.
“Business and management should be top priority while picking a stock to invest in,” he said.
Where to use?
P/BV is often used in capital-intensive businesses or financial businesses with plenty of assets on the books. Book value completely ignores intangible assets such as brand name, goodwill, patent and other intellectual properties created by a company. Hence, service firms are unable to make any sense of it as they carry few tangible assets.
“This ratio is used mainly for valuing financials and seasonal sectors,” said Kumar of Choice Broking.
Market experts say it is difficult to spot a fundamentally strong company at a price-to-book value of less than 1.