One out of every 10 BSE 200 firms is trading below its net asset value (NAV) despite the significant run-up in the market since May 9.
An analysis of Capitaline data shows that 21 firms in the BSE 200 universe currently have a market capitalisation below their net asset value or net worth, which includes paid-up capital and retained earnings.
The number of such firms stood at 34 in the beginning of the year. These companies include several PSU banks, which have run up considerably YTD, but are still trading below 20-30% below their book value.
The banks include the likes of Karnataka Bank, Oriental Bank, Central Bank of India, Syndicate Bank and Bank of India. Typically, PSU banks trade at 1.5-2 times the book value, while private sector banks trade at three times book value. Since May 9, the BSE Banking and BSE PSU indices have surged 15% and 27%, respectively.
Those trading below their net asset value also include metal firms, such as Hindalco and SAIL, as well as realty firms like Unitech, HDIL and Indiabulls Real Estate. Since May 9, the BSE Realty and BSE Metal indices have gained 42% and 24%, respectively.
Experts suggest that companies trading below their net worth is not a good sign as it indicates that the firm has a asset quality or corporate governance issue and is not performing well. It could mean that the promoter is incompetent or the projects that the company is involved in have hit a roadblock. These companies are generally perceived to be cheap.
According to experts, rising NPAs is the major cause of under-valuation of PSBs, leading to a lower market capitalisation of these firms. For the capital-intensive firms, it’s the discount given to the capital work in progress that has contributed to lower valuations.
In general, higher net assets can arise because of the higher intangible assets on the books, which lack economic value. For example, Hindalco Industries’ sizeable intangible assets have contributed to its high net worth — at the end of FY13, the company’s intangible assets stood at R16,435 crore whereas its net worth stood at R35,330 crore.
According to AK Prabhakar, an independent analyst, another 75-80 BSE 500 companies can potentially start to trade above their net worth once the economy gets back on the growth track. PSU banks, in particular, are expected to benefit in the coming months, he says.
According to a report by ICICI Prudential MF, interest rates have significant room for correction over the medium term, which will enable consumption and can drive the investment cycle. “Cyclical recovery can fuel loan growth of private and public sector banks. On the back of economic pickup and lower interest rates, corporate interest burden could reduce and profitability could improve, creating cyclical tailwind for bank’s asset quality,” states the report.