DISCOUNTS TO THEIR BOOK VALUES.
OCT 11 - OCT 16 1999
Rishi Chopra (ETig)
MORE than 30 per cent of the ET 500 companies in terms of market capitalisation have their share prices quoting at significant discount to their book values finds an Economic Times Research Bureau study. The ET 500, a set of top 500 companies in terms of market capitalisation, was analysed and brought out certain interesting facts. Most of these companies belong to textile, shipping, fertilisers, steel and chemical industries. For instance, the book value of Indian Rayon is Rs 252 while its share price is only Rs 71 while Jindal Strips quotes at Rs 34 a discount of almost 80 per cent to its book value of Rs 193.
The book value of a stock is defined as the net worth of the company divided by the number of outstanding shares. It takes into account the various reserves and surplus as disclosed by the company. In terms of investment strategies a discount to the book means the company becomes a good buying proposition since the companies assets are available at a discount. However, there is a catch. There may be genuine reasons due to which the price may be lower than the book, which the market recognises
If the value of the assets as disclosed by the company in the balance sheet do not represent their actual worth, then the share price of the company will discount the same. Also, many companies have their assets revalued and post the same as revaluation reserves in their balance sheets. This inflates the assets, which cannot be readily sold such as the companies land and building in which it operates and pushes up the book value.
In many cases, the operating efficiency and the inherent strength of a company's brand and goodwill will have it commanding a premium over its competitors. For instance, Videocon International has book value is Rs 216.82 while its share price is only Rs 85. The balance sheet shows of Rs 205.67 crore on account of revalued assets and approximately Rs 150 crore investments in group and associate companies. Same, is the case with Videocon International. On the other hand, the share price of its counterpart BPL quotes at more than three times to its book value. The return on net worth (RONW) of Videocon is only 8.7 per cent as compared to 20 per cent of BPL. Even the return on capital employed (ROCE) of Videocon is only 12.28 per cent as compared to 19 per cent of BPL.
Another sector where asset valuation jacks up book values is textiles, largely due to revaluation of huge mill lands. Simultaneously, the textile industry is currently going through a downturn and is facing stiff competition. The exports have been severely affected due to sanctions by EU and the East Asian crisis resulting in squeezed margins.
The stock prices of these companies reflect the dire straits that the industry is in but the book value remains high : hence the mismatch. Good examples are Arvind Mills, Bombay Dyeing, Nahar Spinning, Shree Krishna Polyester which are quoting at huge discounts. For instance, the book value Arvind Mills is Rs 115.65 while its share price is only Rs 28.70. The ROCE of Arvind Mills is 3.38 per cent while that of Bombay Dyeing is only 2.92 per cent.
Investments made by companies in associate and group companies, which cannot be readily valued, are also not taken favourably by the market, though they push up book value.. For instance Arvind Mills and Nahar Spinning have a sizeable portion of its investments in various group and associate companies while Bombay Dyeing has made huge investments in mutual fund units
Cyclicity is one important reason for low stock valuations. Most of the cyclical industries have large assets, which account for high book value. Moreover, if the company is in the downward phase of a cycle then its price is to book valuations will be low. One such industry is steel where we have companies such as Tata SSL, Jindal Iron, Mukand and Bhushan Steel. The excess capacities in the local market and the surplus in the Asian region have exerted a downward pressure on the sale realisations of domestic companies, which has in turn has severely affected their bottom-lines. This has forced the players to cut the prices and offer significant discounts to optimise utilisation levels and retain market shares, which has resulted in losses for many companies.
Similarly in a cyclical industry like chemicals too, we have fairly high book values for companies such as Oswal Agro, Tata Chemicals, Mangalore Chemicals, Gujarat Alkalies, and Gujarat Heavy Chemicals. These companies operate in a capital-intensive industry and are facing a downturn cycle where their profitability is being affected on account of low product prices. In fact, the collapse of the caustic soda market has seen Gujarat Alkalies adversely impacted. Shipping again is a cyclical industry; it is highly capital intensive and a risky business. Shipping is currently going through a rough phase with the business of the dry bulk sector being seriously effected due to the East Asian crisis.
The Baltic Freight Index is at its all time low. Companies such as Essar Shipping, GE Shipping, Shipping Corporation of India quote at huge discounts to their book values with the major chunk of their assets comprising of fleets.
Sectors such as power where the future growth prospects are low also effect valuations. This is seen in companies like Tata Hydro Electric, Tata Power, Andhra Valley Power, and CESC. Power being a defensive industry, most of these companies have not shown any major growth and have no such plans in the near future because of which their prices have been discounted by the market.
Industries such as fertilisers, which are under government controls, have seen their share prices being effected badly. Government policies often determined by political compulsions influence the structure and profitability of the fertiliser industry. The book values of companies such as Gujarat State Fertiliser Corporation, Chambal and Nagarjuna Fertilisers is much above than their underlying share prices.
Financial companies and institutions have most of their money stuck up in receivables, which form a part of the current assets. Most of this money can be bad debts or not recoverable. Hence many of these companies quote at significant discounts.
For instance, IDBI quotes way below its actual book value of Rs 135.76. This shows that the markets perceive its NPA's to be much more than it has actually disclosed in the balance sheet. In comparison, the share price of ICICI is more in tandem with its book value. In addition, we have various companies such as RPG Cables, Eicher, Greaves, Punjab Wireless, Suashish Diamonds which are quoting at significant discounts to book values. |
