THE ongoing slump in the stock market has knocked down the valuations of many companies to the extent that their shares are quoting below book value. Some of these companies, particularly those with quality assets and a profitability record, may be vulnerable to takeover threats if their promoters do not shore up their holdings sufficiently. Such possibilities, however, also depend on other factors like industry background and growth potential, say analysts.
An ET analysis showed that the market price-to-book value (BV) ratio has dropped below one for about 900 BSE-listed companies, since the markets started falling rapidly from January. Analysts say some of them might be genuinely undervalued while others could have fallen off the investors’ radar because of declining prospects. Price/BV ratio is one of the parameters to evaluate a company from an investment point of view. BV is net worth (equity plus reserves) divided by number of shares. The parameter, however, is not of much use in a bull market like the recent one, when valuations are driven more by sentiment than fundamentals, according to analysts.
From the sample, ET shortlisted a few high-BV companies quoting at a discount of 50% or more to their share prices. For instance, Century Enka’s book value stood at Rs 225 as on March 31, 2008, while the stock closed at Rs 107 on Thursday. Vaibhav Gems, Mascon Global and Krebs Biochemicals are a few other examples where the stocks are quoting at huge discount to their book values.
Book value may’ve lost importance
A FEW large companies like Zuari Industries and Raymond are also quoting at a discount. Their book values stood at Rs 287 and Rs 232, respectively, against the current market prices of Rs 246 and Rs 228.
According to analysts, low price/BV ratio does not necessarily mean that a company is good for investment or acquisition, as sometimes, book value does not reflect the true picture of financial health. If a company earns a huge one-time extraordinary income in a particular year, its earnings, reserves and book value are also boosted to that extent. As such income is nonrecurring, investors need to study the prospects of the company before taking any call, say analysts.
Some analysts feel book value as a tool to evaluate a company may have lost its importance with investors now adopting a forward-looking approach to value any company in the market. In the recent boom, shares of many companies rose sharply even before they could become operational and start earning profits, they point out.
“Book value cannot always be a yardstick for buying any stock. It should be used as an identification tool. A company with high BV and low price could be a decent takeover target if it has built up quality assets over a period,” said Karvy Stock Broking vice-president Ambareesh Baliga.
Unlike the above-mentioned companies, there are many a with price/BV ratio significantly higher than one.
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