Looking For Value

Several good stocks are trading below their book value. Some can give decent returns in 2014.
Rahul Oberoi/Money Today        Print Edition: March 2014
Looking For Value

Savvy investors are always on the lookout for stocks that are not fully valued or, still better, are grossly undervalued. An important measure of value is the book value per share-total assets minus intangible assets and liabilities divided by the number of outstanding shares. If the price-tobook value per share is less than one, it means the stock is trading below its book value.

But does this in itself make the stock a good investment? Not necessarily. For, experts say that the price-to-book value indicates just whether the stock is undervalued or overvalued, and has to be seen with other factors such as the company's earnings record. However, for most investors, it's a good starting point to look for undervalued stocks.

For the record, more than one-fourth stocks in the Bombay Stock Exchange (BSE) 500 index are trading at less than their book values. Out of these 130 stocks, 84 were below their book values on January 1 last year as well. Of these, 70 gave negative returns in 2013.

The S&P BSE 500 index accounts for nearly 93% market capitalisation of the BSE.

AN INDICATOR

Put simply, book value represents that part of the accounting value of a business that will be left after debts are paid off. You can arrive at the figure by deducting liabilities from assets (he will be left with shareholders' equity). Dividing this by the number of shares will give the book value per share.

"When compared with the market value, book value can indicate whether a stock is overvalued or undervalued. For companies with negative earnings which cannot be valued using the price-to-earnings ratio, the price-to-book value multiple can be used, especially for relative comparison, as the number of companies with negative book value is far less than the number of companies with negative earnings," says Rajiv Mehta, assistant vice president, research, India Infoline.

"It is useful when earnings are low and the price-to-earnings multiple does not reflect the business's true worth. It is especially suited for valuing capital-intensive industries," says Arun Gopalan, vice president, research and investments, Systematix Shares.

Some big companies that are trading below book values are Tata Steel, Bajaj Hindusthan, Steel Authority of India, Reliance Communications and State Bank of Bikaner and Jaipur.

BUT WHY?

A stock may trade below its book value for several reasons, the foremost being lack of investor confidence in the company's future. If it is widely believed that the company's performance will deteriorate, its stock will possibly trade at a discount to its book value. Another reason could be belief that the company is adopting aggressive accounting policies to bloat its net worth.

Pankaj Pandey, head of research, ICICI Direct, looks at the positive side. "If the fundamentals are in place, a stock that is trading below book value may indicate that the company is being incorrectly valued. It may be a good opportunity to own the stock at a discounted price."

"Book value should not be seen in isolation. At times, due to its cyclical nature, the whole industry may be going through tough times. Such companies, as a result, may trade at a discount to their book value," says Modan Saha, joint managing director, Axis Securities.

A good example right now is capital goods, infrastructure and metal companies, which are trading at discount to their book value as their near-term profit outlook is not bright.

SHOULD YOU BUY?

Book value should not be seen in isolation. This is because many companies create revaluation reserves to inflate book value. Many also raise equity at a substantial premium. Investors should adjust for these factors.

Also, in industries such as information technology, where the requirement for capital is low, the book value tends to be low. This does not mean that they do not offer value.

Ideally, while deciding to invest in a capitalintensive industry, the investor needs to ascertain if the current market price is less than the assets' replacement cost or book value.

Sonam Udasi, senior vice president and head of research, IDBI Capital Markets, says book value should be one of the factors to be considered while taking an investment decision. For example, a company's book value may look high, but if the management is unable to add to it, it is futile. Or, an emerging company's book value may be small but may not capture the future growth potential.

Dipen Shah, head, private client group research, Kotak Securities, says, "It all depends upon what type of company we are talking about. Companies with a lot of fixed assets (say manufacturing companies) have a high book value. In contrast, labour-intensive companies may have a lower book value. One needs to differentiate while applying this methodology."

INVESTMENT OPTIONS

We talk to experts to find out which sectors and stocks are looking attractive at this point from the price-to-book value, or P/BV, angle.

IDBI Capital Markets's Udasi says investors can look at large PSU banks with a two-year view. Now we talk about specific stocks.

 


Dewan Housing Finance Corporation:

 

For the past 25 years, the company has been specialising in providing home loans to lower and middle income families. It has been scaling up rapidly and has expanded its balance sheet by four times over the last five years.

The gross non-performing assets are less than 0.75% of the total loans. It also has a conservative provisioning coverage ratio of over 100%. Provisioning coverage ratio is the ratio of provisioning to gross non-performing assets.

"Dewan Housing's return on equity, or RoE, has been 20% a year for the last 10 years. Its earnings are also not volatile, with lowest RoE in the last 10 years being 15.2% (in 2006-07). For a company that has a huge market to serve, strong moats, long operating history and rising business profile, it is available at a very low valuation of 0.8 times book value and around five times 2013-14 earnings," says Gokul Raj P, portfolio manager, HBJ Capital.

 


Bank of Baroda:

 

The second-largest public sector bank has a well-diversified book with 32% exposure to overseas markets. "Unlike other PSU banks, the market share of the bank rose between 2006-07 (3.5%) and 2012-13 (4%). Though gross non-performing assets, or NPAs, rose from 1.36% in 2011 to 2.40 in 2013, we expect the pace of asset quality deterioration to slow down. Domestic net interest margins are expected to be 2.8% by 2014-15," says Pandey of ICICI Direct.

On February 13, the stock was at Rs 531.60, with a price-to-book value of 0.65.

 


Oriental Bank of Commerce:

 

In 2013, the stock fell 36% from Rs 358 to Rs 228.80. Net NPAs rose from 2.21% in March 2012 to 2.27% in March 2013. Still, Saikiran Pulavarthi, head of research, Espirito Santo Securities, is bullish on the bank. "The bank is trading at a P/BV of 0.5 primarily due to asset quality concerns. We recommend the stock as a play on economic recovery and interest rate cuts as the bank will benefit significantly from both asset quality improvement and treasury gains (as interest rates fall)."

 


National Aluminium Company (Nalco):

 

The stock fell 23.38% to Rs 37.85 in 2013. The net profit for the year ended March 2013 fell 31.39% from Rs 849.50 crore to Rs 582.83 crore.

Gaurav Mehta, vice president, institutional equities, Ambit Capital, sees an upside.

"Our 'buy' stance on Nalco is driven by the company's decision to reduce exposure to aluminum, rising exposure to the highmargin alumina segment and strong balance sheet (cash per share of Rs 19, 50% of the current market price). At the current market price, the stock is trading at 2014-15 EV/EBITDA of 3.9 times, much less than the eight-year average of 7 times. The 2014-15 P/BV is 0.8, which appears in line with peers. However, Nalco has cash per share of Rs 19 and on an ex-cash basis is trading at a P/BV of 0.6, which is cheaper than its peers, which are at 0.7." On February 13, the Nalco stock was trading at Rs 32.55 with a P/BV of 0.68.


Vardhman Textiles:

 

VTL, one of India's largest integrated textile manufacturers, is trading close to book value. At present, China is buying cotton from farmers at a substantial premium to the international prices. While this has made yarn and textile manufacturing unviable, Saha of Axis Securities believes this is an opportunity for companies like VTL which earn a significant amount from yarn exports. Rupee depreciation may also generate higher margins. VTL has expanded during the lean period, which is reflected in its steadily-increasing book value. Given the improved business environment, it can be a good investment for 2014, says Saha. In 2013, the stock rose 50.32% to Rs 375.80.

 


BEML:

 

BEML is a public sector undertaking that makes rail coaches, spare parts and mining equipment. It offers high-quality products for diverse sectors of the economy such as coal, mining, steel, limestone, power, irrigation, construction, road, aviation, defence and rail. On February 13, the stock was trading at a 40% discount to its book value.

Saha of Axis Securities says, "We believe that BEML will be the biggest gainer once regulatory hurdles that are impacting the mining sector are removed. Given the green shoots of revival visible in the economy and the improved order book from defence organisations, BEML is poised for a turnaround in 2014. We believe the concern over past trucks orders is overdone and that BEML can be a good investment for 2014 at the current market price."

 

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