trading: Are blue chips trading below book values on your radar? Check other boxes as well
In a bear market or corporate earnings downgrade cycle, many analysts attach greater importance to the PB ratio while valuing companies. Profitable companies with low P/B ratios are always preferable because they typically outperform when the market recovers, analysts said.
Companies with stock prices below 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 business is its net assets. This means that if a company sold all of its assets and paid off all of its debts, the remainder would be the book value of the company. The price-to-book ratio isn’t the only metric to pre-screen potential value buys, but it’s an equally important tool for picking a stock, analysts said.
“Fundamentally sound companies with a low price-to-book ratio are always preferable as they generally outperform when the market recovers, except for those with corporate governance issues and high leverage,” says G Chokkalingam , founder of Equinomics Research & Advisory. “It is advisable to choose stocks on a case-by-case basis, taking into account factors such as operating efficiency, cash flow, order book and price-earnings ratio.”
For example, Hindalco’s current book value per share is ₹352, while its stock is currently trading at ₹322, an 8.5% discount to book value. This means that the value of Hindalco’s assets is 8.5% higher than the value of its equity. But valuing a commodity player, like Hindalco, solely on the basis of PB could be misleading because its stock price also depends on the stage of the commodity price cycle.
Earlier this year, 28 NSE 500 stocks traded below their book value. In theory, companies with a stock price below a PB ratio of less than 1 times are considered cheap. But this can vary from sector to sector.
Many companies, including NTPC, Tata Steel, Indian Oil, Hindalco, Gail, HPCL, , CESC and , previously traded above their five-year average book value. But, that reading has dropped for many of them following the sharp correction in their stock prices.
, Birla Corp, , and CEAT, among others, are trading below book value.