In the quest to find value from the current fall, we have collated a list of 10 stocks from trendlyne that are in the affordable PE range whose fixed assets value is greater than their market capitalizationand without a debt-to-equity ratio of less than 1.
Companies use fixed assets to generate income over the long term. It appears in the balance sheet at net book value minus depreciation and any impairment charges.
Top 10 stocks filtered where the value of the fixed asset is greater than the current market capitalization include names like , , , , , , , etc. among others.
Can all the stocks be categorized under value bets? Maybe not, suggest experts.
“Most of the companies in the list have businesses that are cyclical in nature. These companies have over the years added assets; however, they have been unable to sweat those assets to achieve any meaningful ROCE (return on capital employed),” Siddhart Oberoi, Founder, Prudent Equity, said.
Return on Capital Employed (RoCE) means the amount of earnings or profit a company generates taking into account not only the shareholders’ equity but also the debt and other sources of funds.
“Among the entire list, only Tata Steel and
have been able to achieve double-digit ROCE, that too due to rise in steel prices over the last two years. Before that, even their return on capital remained abysmal,” he said.
At least 7 out of the 10 stocks have fallen up to 39 per cent so far in 2022. In the traditional sense, a company is considered undervalued in case the market value of the company is lower than the fixed assets.
However, in reality, this is not always true as the net realizable value or the market value might be materially different than the book value.
“You can’t ascertain the correct market value unless the company disposes of some of its assets or gets liquidated. In the case of liquidation, historically in India, fixed assets are sold at a haircut or value less than the market value,” Punit Patni, Equity Research Analyst,
“In short, this type of data is relevant only for companies having assets that are marketable or market value can be easily ascertained eg banks, NBFC’s,” he said.
What are the other parameters to track?
Companies having fixed assets more than the market cap does not necessarily entail that these companies are undervalued. Investors should use other metrics to value a company before taking a buy or a sell decision, suggest experts.
“While having more assets is a positive for any company as assets have the ability to generate income, it is also important to look at the company’s liabilities,” Rohit Khatri, AVP- Fundamental Research,
Broking Ltd, said.
“The prudent approach would be to look at the book value of the company which is assets minus the liabilities which will give a true picture of the company’s financial position,” he said.
Khatri further added that a prima facie assessment suggests that most of these companies operate in capital intensive business which would require higher fixed assets.
Patni of Swastika Investmart Ltd recommends investors to understand fundamentals, management quality, competitive landscape, cash flows, return ratios like ROCE, ROE, ROIC, etc, and debt & leverage ratios.
What should investors do?
Investors should analyze various parameters highlighted above to make a buy or sell decision. Most stocks could remain under consolidation mode but some of them like Tata Steel,
HPCL, and Birla Corp could be a long-term play.
It is important to track how the company is utilizing its assets by using the fixed asset turnover ratio. An expanding ratio entails that the company is able to generate higher revenue with no change in fixed assets, suggest experts.
“The usual checklist of industry growth prospects, company fundamentals, and valuations are important to track before investing. Within the aforementioned stocks, most of these belong to highly cyclical sectors and have witnessed decent improvement owing to growth or margin concerns,” Khatri of Religare Broking Ltd said.
“Therefore, while we are constructive on some of the names like Tata Steel, BPCL, HPCL, and Birla Corp, the near-term underperformance cannot be ruled out,” he said.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)