>Several mid-cap stocks fall below their book value – Economic Times

Posted on February 5, 2011 by



MUMBAI: The recent correction in shares may have set the stage for value-hunters to pick and choose ‘multi-baggers’ — a market terminology for describing stocks that could grow many-folds in value. Several mid-cap and select front-line stocks have fallen below their book value, a conventional valuation metric, after the 13-15% fall in the BSE’s mid-cap and small-cap indices from their highs in the past two months.

An ET analysis shows around 20 ‘A’ group and over 850 ‘B’ group companies — nearly 43% of overall mid-cap universe — are currently trading below the net asset value or book value. Book value means the value of company’s total assets (with goodwill) less liabilities.

“This is an opportunity for investors to buy some good stocks,” said Ambareesh Baliga, vice-president, Karvy Stock Broking. “Fundamentals usually take the back seat in an indecisive market like this. Speculators dump good stocks at any price in such conditions. Several stocks in the mid-cap segment could be buys at current price levels,” he said.

Some shares of companies could have fallen below book value because of bleak business outlook rather than a selloff led by poor investor sentiment, Baliga warns. Analysts said investors may buy shares of banks, consumer goods, agri-based companies and logistic companies that are trading below their book value, analysts said.

They are also sceptical about the prospects of large-cap index stocks that are currently trading below book value, as these stocks are weighed down mostly when business outlook is negative.

Analysts are cautious about the prospects of some big companies whose shares are trading below their book value — Aditya Birla Nuvo is currently trading Rs 1,275 per share lower than book value, HDIL (Rs 63), Sterlite Industries (Rs 272), Indiabulls Real Estate (Rs 116), LIC Housing Finance (Rs 190), MTNL (Rs 103), Reliance Infra (Rs 107).

Analysts said most companies trading below book value may have issues relating to business scale and uncertainty over profit growth in the future. Some companies value their assets at prices higher than market value, resulting in higher price to book value and lower stock price.

Price to book value is a metric to value stocks of companies which have large amount of tangible assets in their balance sheet. As per textbooks, if a company is trading at a price to book value of less than 1, the company’s assets are either overvalued or it is earning poor return on its assets.

“PBV less than 1 is definitely a good buy, but then it should be taken on a case to case basis. It should not be the lone criteria to buy a stock,” said Saurabh Agarwal, director, Kennis Group, a Mumbai-based investment consultancy, adding, “Stocks with low market float also tend to trade below book value.”

In other instances, companies with lower corporate governance may have lot of cash — the benefit of which will only be going to promoters. This cash component will not reflect in stock price. Book value is an ideal metric in case of companies that are in investment phase as it can estimate potential earnings of a company for several quarters ahead, analysts said.

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