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“ANALYSIS OF PB RATIO OF SELECTED INDUSTRIES”


“ANALYSIS OF PB RATIO OF SELECTED INDUSTRIES”
                                                Sudindra V R
1.      INTRODUCTION TO PRICE TO BOOK VALUE RATIO
In valuation price to book value ratio is commonly used significant ratio.  This ratio is used along with supplementary valuation tool like price earnings ratio, economic value/EBITDA etc. This is most appropriate for identifying stock opportunities in financial companies especially banks.  Price to book value is furthermost significant relative valuation tool to measure stock valuation, it compares the current market price of shares to book value using balance sheet evidence.
PRICE TO BOOK VALUE = PRICE PER SHARE/BOOK VALUE PER SHARE
If the price to book value is 3x, this entails that the current market price of the share is trading at 3 times the book value. Book value is identical to shareholders equity or net worth and book value per share is shareholders equity.
2.      PRICE TO BOOK VALUE OF AUTO SECTOR (Consolidated- as on 15/03/2016 S&P BSE AUTO)
Sl. No.
Name of the company
PB Ratio

UNDER/OVERVALUE
1
Ashok Leyland
6.37
Undervalued
2
Bajaj Auto
6.04
Undervalued
3
Bharath Forge
5.47
Undervalued
4
Bosch
7.65
Overvalued
5
Cummins India
8.05
Overvalued
6
Exide industries
3.04
Undervalued
7
Hero Motor corp
8.64
Overvalued
8
Mahindra and Mahindra
2.89
Undervalued

9
Maruthi Suzuki India
4.54
Undervalued
10
MRF
3.2
Undervalued
11
Tata Motors
1.69
Undervalued
12
Eicher Motors
21.29
Overvalued
13
Industry average
6.57
INFERENCE: Auto industries mostly have price to book value of greater than 1x, due to their asset book value tend to under estimate their replacement value. As it is capital concentrated industry, price to book value ratio can be used as deputation and not as a principal valuation tool. Based on above calculation industry average of auto sector is 6.57 times. Excepting Bosch, Cummins India, Hero Motor corps and Eicher Motors all other stocks are undervalued.
3.      PRICE TO BOOK VALUE OF SOFTWARE SECTOR (Consolidated- as on 15/03/2016 S&P BSE IT)
Sl. No.
Name of the company
PB Ratio
UNDER/OVERVALUE
1
HCL technology
4.73
Undervalued
2
Hexaware technology
4.66
Undervalued
3
India InfoTech
0.09
Undervalued
4
Infosys
5.15
Undervalued
5
Mindtree
5.38

Overvalued
6
Mphasis
1.73
Undervalued
7
Oracle financials
8.31
Overvalued
8
TCS
9.09
Overvalued
9
Tech Mahindra
3.65
Underval
ued
10
Vakrangee
12.24
Overvalued
11
Wipro
3.53
Undervalued
12
Industry average
5.32
INFERENCE:  IT industry commonly have higher PB ratio, due to higher amount of intangible assets and low tangible assets. Value derived from the same may not be correct. These companies are high growth companies hence PE ratio or PEG ratio is suitable for valuation. From the above table it can be generally infer that Mindtree, oracle financials, TCS and Vakrangee stocks are overvalued.
4.      PRICE TO BOOK VALUE OF BANKING SECTOR (Consolidated- as on 15/03/2016 S&P BSE BANKEX)
Sl. No.
Name of the company
PB Ratio
UNDER/OVERVALUE
1
Axis bank
2.23
Overvalued
2
Bank of Baroda
0.78
Undervalued
3
Bank of India
0.24
Undervalued
4
Canara bank
0.38
Undervalued
5
Federal bank
1.08
Undervalued
6
HDFC bank
4.10
Overvalued
7
ICICI bank
1.53

Undervalued
8
IndusInd bank
5.35
Overvalued
9
Kotak Mahindra
5.28
Overvalued
10
PNB
0.39
Undervalued
11
SBI
0.89
Undervalued

12
Yes bank
2.94
Overvalued
13
Industry average
2.09
INFERENCE: Banks have assets and liabilities which are periodically marked to market, as mandatory under regulation, balance sheet value replicates present market value  unlike other industries where balance sheet represent historical cost. Hence PB ratio can be used as valuation tool for banking sector. Normally PB ratio should be closer to 1 or near to industry average. Some companies will be having high PB ratio for a bank with significant growth opportunities due to technology, location and desirable merger. Based on above information among private sector banks ICICI and Federal bank are undervalued and AXIS, HDFC, IndusInd bank and Kotak Mahindra banks are overvalued. All public sector banks are undervalued, as the NPA’s are very high among the public sector banks.
5.      CONCLUSION
Price to book value ratio significantly used in valuing financial companies especially banks. It can be used as proxy to auto sector as it is capital intensive and under estimation of replacement cost. IT sector have higher amount of intangible, low tangible assets and faster growth companies PB ratio may not be correct method of valuation.  It is found that the low PB ratio among public sector banking stocks due to high non-performing assets and the private sector banks have significant growth opportunities which reflects in overvaluation in PB ratio.
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