Check out the stocks that are undervalued compared to their fixed assets


by 5paisa Research Team Last Updated: Dec 13, 2022 - 11:28 am 6.7k Views

Companies are valued by a mix of factors and methods. While the most common tool analysts use to value companies is to assess their future earnings and assign a multiple on it, they also look at other parameters including the value of assets.

This becomes even more important for loss-making companies.

Even otherwise, we see many companies’ market capitalisation is totally out of sync with their earnings or net profits. While it could be a case of a temporary disruption in earnings, which could even persist but is factored into the valuation, in others, analysts also add the value of assets to arrive at the right pricing for such stocks.

One way to filter companies whose intrinsic value is much higher than what the market is pegging it at currently, is where the value of fixed assets is higher than the market cap of the stock.

We ran an exercise to pick some stock ideas based on this method. However, we added some additional qualifiers to factor out firms with high debt as in such cases the firm has a potential risk of losing track and then the assets become a tool to recover money by the lenders.

We also added another filter of stocks without bloated price earning multiples. In particular, we picked stocks with a market cap of over Rs 200 crore (to factor out very small firms) having price to earnings multiple for the last twelve months in the reasonable range of under 25, with revenue growth in the quarter above 5% and ratio of long-term debt to equity being less than 1.

There are around 33 stocks that fit the bill.

Most of these are from the small-cap basket. Indeed, there are only four large caps in the group, all from the oil & gas and utility field: ONGC, OIL, IOC and NHPC.

Stocks with a market cap above Rs 1,000 crore include Kama Holdings, Shipping Corporation, Jaiprakash Power Ventures, Bengal & Assam Co, Uflex, Chennai Petroleum, Jindal Saw, Electrosteel Casting, Kirloskar Industries, Gallantt Ispat, RPSG Ventures, GMR Power and Patel Engineering.

Emami Paper Mills, Jay Bharat Maruti, Jai Balaji Industries, Rajapalayam Mills, Swelect Energy and Jindal Poly Invest are the other stocks with market cap over Rs 500 crore that meets the criteria.

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