Check out the companies whose market cap is lower than their asset value


by 5paisa Research Team Last Updated: Dec 23, 2021, 02:34 PM IST

Companies are typically valued on the basis of their future earning potential, even though investors look at various parameters to arrive at their version of what should be the correct valuation for a stock.

Depending on which sectors the stocks belong to, for instance, a company that is actually making losses and cannot be benchmarked against conventional valuation parameters would still have a market value assigned. This could be based on aspects like their revenue, brand equity and market dominance as also the value of their assets.

The assets could be both financial and physical or fixed, and some investors tend to look at picking undervalued stocks by the difference between the market capitalisation and the actual value of fixed assets. This means if a company’s fixed assets are sold it would get more money compared to its current valuation in the stock market.

To be fair, the company’s financial assets could nullify such gains. This could be a reason why investors peg an ‘x’ valuation to a stock rather than ‘y’ which could seem like a no-brainer.

We conducted an exercise to pick stocks in the affordable price-to-earnings multiple range whose fixed assets value are more than their market capitalization, and without carrying high debt on the balance sheet.

In particular, we looked at stocks with trailing twelve-month PE ratio under 25 and market capitalisation of at least Rs 200 crore (to weed out the bottom side of micro caps) and year-on-year revenue growth for the quarter above 5% with fixed assets value more than their market cap.

We also filtered companies with annual long-term debt-to-equity ratio of over 1. This exercise throws up a list of 54 stocks.

If we scan through the list in the large-cap space, or firms with a market valuation of over Rs 20,000 crore, seven companies fit the bill.

Large-cap stocks

Interestingly, five of these are public-sector companies: ONGC, Indian Oil, Bharat Petroleum, Hindustan Petroleum and Steel Authority of India Ltd.

The two private-sector firms that find themselves in this club are steel producers Tata Steel and Jindal Steel & Power.

One reason for the complexion of this list being tilted towards oil and metal stocks is that much of their asset value is locked in the value of the commodity they are dealing with investors discounting them given swings in price cycles.

Mid-caps and small-caps

Looking at the mid-cap space with the same filter, three companies meet the check list. These are Apollo Tyres, Kama Holdings and Shipping Corporation.

The sectoral picture of the list spreads even more if we consider small-cap companies with a filter of firms with a market value of over Rs 1,000 crore.

This set has names like Deepak Fertilisers, Ceat, Great Eastern Shipping, Jaiprakash Power, Uflex, JK Paper, Jindal Saw, Tata Steel Long Products, IRB InvIT Fund, Arvind, Sarda Energy, Bengal & Assam Company, Jayaswal Neco, Nava Bharat Ventures, West Coast Paper, Electrosteel Casting, Sanghi Industries, HSIL, Sunflag Iron & Steel, and DCW.

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SENSEX
54,288.37
-30.10 (-0.06%)
Nifty 50
16,250.60
-8.70 (-0.05%)
Nifty Bank
34,313.00
11.10 (0.03%)

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