Mumbai: In a stark marker of just how badly Indian markets have been hit by recent events, about one in four companies on the Bombay Stock Exchange’s BSE 500 index, which accounts for 93% of India’s total market capitalization, were trading below their book value on Friday.
A Mint analysis shows 140 stocks trading at levels lower than their book value. The list of undervalued stocks includes 20 banking and 21 real estate and construction industry companies—the two sectors that have been hit the hardest by rising interest rates and a credit crunch in the world’s second fastest growing major economy.
And while stock analysts rate these falling stocks as “attractive buys”, they simultaneously caution that values might fall even further because of global economic uncertainty.
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The BSE Sensex, India’s most tracked equity index, has already fallen more than 48.11% this year after gaining 45% in each of the previous two years. The BSE 500 has dropped 54.21% since January. The index had gained more than 63% in 2007 and close to 39% in 2006. Mint’s analysis is based on closing figures on Friday.
Price to book value, or P/BV, is the ratio of a firm’s market value to its book value, which is the net worth—the sum of equity and free reserves—of a company. The P/BV is calculated by dividing the market capitalization (or cap) of a firm by its net worth. While the market cap is based on the stock prices of Friday, the 2008 fiscal year-end books of these companies were considered for this analysis. Ideally, the net worth of banks should be calculated taking into consideration their non-performing loans. This analysis, however, has not followed this norm due to non-availability of such data.
Of the 30 Sensex stocks, three are trading below their book value. They are Hindalco Industries Ltd, Tata Steel Ltd and ICICI Bank Ltd. While Hindalco is trading at 0.82 times its book value, Tata Steel is trading at 0.77 times, and ICICI Bank is trading at 0.87 times its book value. Overall, 28 of the 140 stocks are trading below 50% of their book value; 56 of them between 50% and 75% of their book value; and the remaining 56 are trading about 75% below their book value.
“PB is dependent on the last reported book value,” said Deepak Jasani, head of retail research at HDFC Securities Ltd. “Going forward, whether the book value will rise or fall is worrying people.” This is true especially of real estate, which has seen falling housing prices amid rising operating and capital costs, and of banks, which are directly exposed to the churning in global financial markets.
“Everyone’s over-committed to projects, costing has gone haywire,” said Monal Desai, vice-president and head of institutional equity derivatives at Prabhudas Lilladher Pvt. Ltd, a Mumbai-based brokerage, referring to the real estate sector. Also, “there has been quite a lot of redemption pressure from both foreign and local players”.
The BSE 500 stocks may not be in the best of health, but the Sensex is still trading at a price to book value ratio of nearly 2.8. This is much higher than the 1.6 P/BV level when the market bottomed out during the bear phase in 2000 following the bursting of the dot-com bubble. Incidentally, the Sensex’s P/BV is among the highest among emerging markets in Asia, more than twice that of Thailand’s 0.984 and South Korea’s 1.048, but analysts warn that it could go down as markets feel the fallout of the deepening crisis in the US and across Europe that has already claimed some Wall Street icons including Lehman Brothers Holdings Inc.
“Whether the markets have bottomed out or not is the moot point,” said Jasani of HDFC Securities. Foreign institutional investors, or FIIs, the big drivers of India’s equity markets, have pulled out more than $10 billion (Rs48,700 crore) so far this fiscal after investing a net $17.36 billion last year, largely because of a call for capital in their credit-starved home markets. But it’s not just the FII pullout or a local liquidity crunch that is causing low P/BV levels.
“My sense is that the market is letting you know that the earnings potential is quite diminishing,” said Vinod Kumar Sharma, director and head of research, Anagram Securities Ltd. “Earnings are falling below current levels.” High input costs, rising interest rates and tight liquidity will likely dent profits at Indian firms in the quarter through September.
A recent report by online brokerage Sharekhan Ltd estimated that the second quarter earnings of Sensex firms (excluding oil companies, whose results are linked to factors such as global crude prices and government policy) will rise by 10.1%, the lowest in nearly four years.
Some brokerages, however, maintain this is the time for investors to enter the market. “Values are emerging. Now, you must go shopping,” said Raamdeo Agrawal, joint managing director of Motilal Oswal Securities Ltd. But he cautions that “you should also be ready for things becoming worse. (You) need to understand the underlying asset and not change your view. Bull markets are born in pessimism.”