Price to book value numbers could help you in crisis

Price to book value numbers could help you in crisis
28 Oct, 2008,Amriteshwar Mathur, ET Bureau

MUMBAI: What is a good yardstick for an undervalued stocks in times of crisis such as the current one? The answer to that, many market watchers say, is price to book value(P/BV). Book value is the measure that each shareholder stands to get, were the company to be liquidated.

Conventional wisdom suggests that there is very little chance of going wrong if an investor were to put his money in a stock with a P/BV of less than one. Already 21 stocks in the BSE-100 index have seen their price to book value fall below one, as a result of the unprecedented erosion in their stock prices.

Stocks that fall into this category include PSU oil marketing companies like HPCL and IOC, and metal stocks like Tata Steel, Hindalco and JSW Steel.

In the case of oil marketing companies, the recent softening of crude oil prices has not helped much. For one, they are still holding inventory purchased at very high prices. Also, these companies also have refining divisions, which are the major contributors to their profitability. Gross refining margins have fallen sharply in line with the slide in regional refining margins, and is likely to weigh on earnings.

In the case of metal stocks, investors are concerned that a global economic slowdown over the next few quarters could adversely hit demand for commodities in general.

Similarly, investor concerns for the growth prospects of the real estate, cement and construction sector over the medium term has resulted in scrips like Grasim Industries and IVRCL Infrastructure & Projects quoting at a price to book value of less than one. At Monday’s close of 4343.2, the broader BSE-100 index trades at a P/BV of 2.06 times.

Says Ramdeo Aggrawal, managing director, Motilal Oswal Financial Services, “Investors would need to look at the fundamentals of each sector over the medium term where stocks are trading at a price to book value of less than one, and decide if there are growth possibilities at the current stock prices.”

Adds Anuj Choksey, co-head, institutional equities, KR Choksey Shares and Securities, “Valuations of metals shares and those connected to the construction sector are trading at ridiculously low levels as investors are assigning pessimistic valuations at the first signs of a slowdown.”

Meanwhile, the Sensex went below 8,000 intra-day on Monday, as there was no let-up in the selling fury that has gripped Dalal Street over the last couple of weeks. This has been a hallmark of emerging markets in general. So how does India compare with them? At Monday's close, the Sensex is trading about 9.5 times trailing 12-month earnings.

In contrast, other indices like the Shanghai Composite Index ended at 1,723 on Monday trade at a P/E of 13.35 times, while the Brazilian Bovespa at Friday's close of 31,481 is trading about 7.5 times. Of course, the Russian stock market index, the Russian RTS Index which has lost nearly 70% since its peak over the last few weeks, trades at an abysmal P/E of 3 times.