trading: Blue chips trading below book values on your radar? Tick other boxes, too


Mumbai: Investors combing through the market for potential winners could consider some of the stocks that are trading at or below the actual value of the companies, said analysts. Out of the stocks on the NSE500 Index, 80 are currently trading below their book value following the sell-off in the market. Further, 40 stocks from the NSE500 are currently trading at a price-to-book (PB) ratio of between 1 and 1.5 times.

In a bear market or corporate earnings downgrade cycle, many analysts attach greater importance to PB ratio while valuing companies. Profitable companies with low P/B ratios are always preferable as they usually outperform when the market recovers, said analysts.

Companies whose stock price is less than the book value include ONGC, NTPC,

, , Hindalco, GAIL, , NMDC, HPCL, and SAIL, among others. Some stocks such as , Grasim, Vedanta, BPCL, , , , and Nalco are trading just above their book value.

The book value of a company is its net assets. This means that if a company sold off all of its assets and paid off all its debt, the remaining would be the company’s book value. Price-to-book value is not the only parameter to shortlist the potential value buys, but is an equally important tool to pick a stock, said analysts.

“Fundamentally sound companies with low price-to-book ratio are always preferable as they usually outperform when the market recovers except those with corporate governance issues and high debt,” says G Chokkalingam, founder, Equinomics Research & Advisory. “It is advised to choose stocks on a case by case basis, considering factors such as operational efficiency, cash flow, order book, and price to earnings.”

For instance, Hindalco’s current book value per share is ₹352, whereas its stock currently trades at ₹322, an 8.5% discount to book value. This means the value of Hindalco’s assets is 8.5% more than its equity value. But, valuing a commodities player, like Hindalco, solely on the basis of PB could be misleading as its stock price is also dependent on the stage of the commodity price cycle.

Earlier this year, 28 stocks in the NSE 500 traded below their book values. In theory, companies whose stock price is less than at a PB ratio of less than 1 time are considered cheap. But, this could vary from one industry to another.

Many firms, including NTPC, Tata Steel, Indian Oil, Hindalco, Gail, HPCL, , CESC, and , were trading above their five-year average book value earlier. But, this reading fell for many of them following the sharp correction in their stock prices.

Exide Industries,

, , , Birla Corp, , and CEAT among others are trading below their book values.



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