Despite solid gains in the broader market, there are several companies still trading at prices well below their book value. While market experts hope to see multi-baggers in this group of undervalued stocks, the process of picking potential winners and backing it up with conviction is fraught with risk, they say.

An analysis of numbers sourced from ET database reveal that there are about a dozen ‘A’ group and over 600 ‘B’ group companies that are currently trading below the net asset value or book value. Book value means the value of company’s total assets (with goodwill) less the liabilities. Price-to-book value (PBV) is a good metric to value stocks of companies which have large amount of tangible assets in their balance sheet.

Going by conventional wisdom, 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 a poor return on its assets. Ironically, multibaggers spring out of this group, as companies with lower PBV are generally not widely tracked and are underowned. “There could be several good companies in the low PBV segment that could be a future multi-bagger. Banks and NBFCs that are currently trading below PBVs are good buys,” said Anil Bhattar, president-equity, KC Securities.

According to Mr Bhattar, investors should ignore large-cap index stocks that are currently trading below book value. “Index-based large-caps fall below book value when the outlook on the business is negative,” he added. Aditya Birla Nuvo, Videocon Industries, India Bulls Real Estate, Lanco Infratech, Reliance Communications and IVRCL Infrastructure are among companies that are trading below book value.

Analysts said that investors should understand the nature of business before investing in these companies. Most
companies trading below book value have issues relating to scalability of business and earning future profits. Some companies may value their assets at prices higher than market value; this could result in higher PBVs and lower stock price. 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 the stock price.

“PBV less than 1 is definitely a good buy, but then, it should be taken on a case-to-case basis. They should never take a sectoral call in companies trading below book value. Investors should understand buying a stock on just one parameter is fraught with multiple risks,” said Manish Sonthalia, senior VP, fund manager, Motilal Oswal Securities.

According to investment experts, it is good to use book values in companies that are in investment phase and are yet to have stable earnings. “In cases like banks where capital determines your ability to conduct business, it is a useful parameter. Also, if there are companies which have a book value, but most of those assets are unproductive, then the book value does not have much utility,” said Huzaifa Husain, head-Equities, AIG Investments.

Souce: Economic times

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