Mumbai: Roughly one in four stocks of BSE Ltd’s BSE-500 index, which accounts for close to 94% of India’s total market capitalization, are trading below their book value, an indication of the bearish sentiment that has gripped the market.
A Mint analysis of the movements of BSE-500 stocks shows 150 companies are trading below their book values, including 17 stocks of public sector banks, 29 construction stocks, 10 finance stocks, and 10 steel stocks. The analysis is based on Monday’s closing price of stocks.
On Tuesday, the Sensex, BSE’s bellwether equity index, gained 132.16 points to close at 16,002.51 points, after having lost 1,006 points in three trading sessions.
The Sensex has fallen 22.74% this year, while it gained 17.43% last year.
When the Sensex touched its all-time high of 21,004.96 points in November 2010, only 19 of the BSE-500 stocks were trading below their book value.
Price-to-book value, or P/BV, is the ratio of a firm’s market value to its book value or its networth, which is the sum of equity and free reserves of a company. The P/BV is obtained by dividing the market capitalization of a firm by its net worth.
Among sectoral indices, the realty index has fallen the most this year (46.35%), followed by the metal index (43.23%). Bankex, the index of banking stocks, has lost 26.34%.
In 2010, the realty index lost 25.92% and the metal index 8.09%, but Bankex gained 33.39%.
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Among individual stocks, shares of Network 18 Media and Investments Ltd, Shree Renuka Sugars Ltd, Moser Baer India Ltd, SpiceJet Ltd and GTL Infrastructure Ltd have shed at least 70% each since January.
“It is a credit-tight market with high interest rates. The banks have some exposure to the power sector and there have been concerns (about loans turning bad), and these are reflecting in the stock performance of public sector banks, especially,” said V. Jayasankar, senior executive director and head of equity capital markets, Kotak Mahindra Capital Co. Ltd.
Mid-cap stocks have almost disappeared from investors’ radar, said Girish Nadkarni, executive director, head-equity capital markets and institutional equities, Avendus Capital Pvt. Ltd. A little more than half of the stocks in the BSE-500 index are such stocks. “Investors are looking at the healthiness of the balance sheet rather than the profits,” he added.
Five Nifty-50 stocks, including those of Reliance Communications Ltd, Reliance Infrastructure Ltd and Steel Authority of India Ltd, are trading below their book value.
Among the 30 Sensex stocks, Hindalco Industries Ltd and Tata Steel Ltd are trading below their book value. All Sensex stocks are part of Nifty.
Book value is a good margin of safety in cases where shareholders are comfortable with the management’s view of sharing cashflow or networth by way of dividends or buybacks, said Deepak Jasani, head-retail research, HDFC Securities Ltd. “But cashflow and the capacity to repay debts also needs to be viewed,”2 he added.
India’s “secular investment story” has taken several twists over the year, wrote Aditya Narain, analyst at Citigroup Global Markets India Pvt. Ltd, in a report dated 2 December. The “democratic government has become directionless, the fortune at the bottom of the pyramid” has turned into a structural inflation infuser, the “capital inflow window” has tipped into a currency crunch, and India’s much-feted “entrepreneurial energy” has become more of a corporate governance quagmire, said Narain in his report.
One of the key reasons behind the fall in stock prices is the sell off by foreign institutional investors, or FIIs, the mainstay of the Indian stock market. Till Monday, this class of investors have sold $147.9 million worth of stocks net of buying. In 2010, FIIs pumped in a record $28.6 billion in Indian equities.
The momentum of capital inflows into India could be constrained unless there is an appreciable improvement in domestic macro dynamics, HDFC Bank Ltd economists Abheek Barua, Shivom Chakravarti and Jyotinder Kaur wrote in a recent report.
High interest rates and lingering policy impediments mean lower growth, they said. The Reserve Bank of India has raised its key policy rate 13 times since March 2010 to tame a persistently high inflation. While inflation has started showing signs of being reined in, the local currency is depreciating fast to add to the woes of Indian firms. The rupee has fallen the most among Asian currencies.
India’s most-tracked equity index has also lost the most when compared with other Asian indices. The Nikkei of Japan has fallen by 16.39%, while China’s Hang Seng and the Shanghai Composite Index have fallen 19.92%.
Graphics by Yogesh Kumar/ Mint
Ravindra Sonavane contributed to this story.