ET Intelligence Group: Last month’s corporate tax cuts, considered by most experts a game-changer for the Indian economy, appear to have left untouched a key investment pocket — companies cheaper than the assets they own.
About a fifth of the stocks on the BSE 500 are trading below their book values, data compiled from Bloomberg showed. Among the biggest such names are State Bank of India, ONGC, Tata Motors, Tata Steel, DLF, and Oil India. This despite that SBI, ONGC, and OIL stand to gain between 440 and 994 basis points due to the tax cuts.
In total, 109 of the BSE 500 companies are trading at one-time book value and together they account for a tenth of India’s market capitalisation. Financial companies constitute a third of these stocks that are trading below one-time book. The median return of the companies below one-time book is negative 24.4 per cent in the past three months. The average price-tobook ratio of such stocks is 0.57, while the Nifty’s price to book ratio stands at 2.78.
The price of stocks trading 25 per cent below their intrinsic value has been one of the key criteria for the Oracle of Omaha, Warren Buffet, to buy into ‘value’ companies. However, for the average investor, using the book value strategy alone might not be sufficient in determining a stock’s intrinsic value.
In the government-banking sector, the low price-to-book value reflects the high probability of more non-performing loans in the future. Therefore, the price-to-book value ratio, after adjusting for future slippages, is much higher compared with the book value based on historical costs.
The continuous de-rating of value stocks over time could make fund-raising difficult for expansion, balance-sheet deleveraging, or the Centre’s divestment programme.