Over half of 1,600 stocks trading below book value

The stock market crash is defying all conventional wisdom of valuations. Despite the relief rally over last few days, a large no of companies are

Companies trading below book value.
still trading below their book value which means their market capitalisation is less than their net worth.

Put simply, if you could buy these companies at their existing share price and sell their assets in the open market, you could rake in some neat profit. As per an ETIG analysis of actively traded stocks more than half of the companies are trading at prices which are less than their book value.

The study looked at 1,600 actively traded stocks with market cap of more than Rs 20 crore, to focus on firms with a reasonable size. The analysis shows that as many as 873 stocks, or 55%, closed below their book value, as on Monday November 3, 2008. Out of this, 345 companies are trading at less than 50% of their book value.

The list includes stocks such as Tata Steel, Cairn, Hindustan Zinc, Hindalco, MTNL, Videocon Industries, Central Bank of India and Allahabad Bank, in the Rs 1,000 crore plus market-cap range. Among the relatively smaller firms who had lower price compared to their book value were Raymond, Parsvnath, Bajaj Hindusthan, Vardhman Textiles , and Bajaj Auto Finance.

This essentially means that, hypothetically , if you buy the complete equity of these stocks and sell the assets in the market, the realisation would be significantly higher than the price paid to buy the shares. However, this is still a conjectural scenario, as such buy-outs would have to follow the norms of a takeover which requires an open offer based on recent historical prices. Further, only a part of the shares are actually traded and it is not possible to buy the complete holding from the market.

Among the sectors, construction and textiles are the worst hit. Out of 100 companies with more than Rs 20 crore market-cap in the construction sector, 54 are trading below their book value. Similarly, for textiles, 75 out of 96 companies are trading below their book value. Besides construction and textiles, metals had 94 such companies whereas non financial services sector account for about 150 companies trading below their book value.

One interesting trend visible in the data is that there more small and mid cap firms which are trading below their book value and as the marketcap increases, the number of such companies decreases. For instance, three out of every four companies with market cap less than Rs 100 crore are trading below their book value while among the companies with market cap of Rs 1,000-10 ,000 crore bracket, one in five companies have such a low price.

These companies have combined market-cap equal to only 64% of their total net worth. If we exclude companies with marketcap of more than Rs 1,000 crore, which have slightly better pricebook value ratio, combined market-cap falls further to just 54% of their total net worth. So if you have cash worth Rs 110,000 crore, you can acquire companies with total book value of Rs 205,000 crore.

Source: EconomicTimes