The PB ratio of the Nifty on Friday dropped by nearly 20%from 4.31 on September 28 to 3.45 on September 29. Essentially, this has made Nifty’s valuations cheaper on the basis of PB ratio without the index falling.
The National Stock Exchange (NSE) altered its methodology for calculating the PB ratio of all its equity indices starting Friday. This modification involves factoring in the net worth of each index constituent (stock) at the consolidated level in the annual financials. Currently, this is measured on the basis of standalone earnings.
Earlier in April 2021, the NSE had changed the methodology to calculate earnings in the price-to-earnings (PE) ratio, another popular valuation parameter, from a standalone basis to consolidated levels.
The PB ratio is the market price per share in comparison to the book value per share. It gives investors an understanding of whether a stock is trading above or below its intrinsic book value. For investors pursuing equities investing at a markdown to their genuine worth, the PB ratio is an invaluable resource in their decision-making process, say analysts.
“The fundamental objective of PB analysis is to evaluate whether the current market valuation of a company’s stock is either overvalued or undervalued in comparison to the inherent value represented by its existing book assets,” said Vinod Nair, head of research at Geojit Financial Services. “Lower the ratio, say below 1 time to the current stock price to book value per share, the more attractive it is to invest.”
An analysis by ET reveals a substantial gap between the standalone and consolidated net worth of Nifty50 companies, amounting to nearly ₹7 lakh crore. For instance, Reliance Industries showcases a consolidated net worth of ₹7.16 lakh crore, which is ₹2.36 lakh crore higher than its standalone figures. Likewise, the variance between the standalone and consolidated net worth of companies such as Coal India, Hindalco, Sun Pharma, and Grasim ranges from ₹30,000 crore to ₹40,000 crore.
The change in calculations has made Nifty’s valuations cheaper, but they are still higher than the regional peers. For instance, China’s Shanghai Composite Index is presently trading at a PB ratio of 1.35 times. The PB ratios of Brazil’s Ibovespa and Korea’s Kospi indices stand at 1.47 times and 0.90 times, respectively. Hong Kong’s Hang Seng Index (HSI) and Singapore’s Straits Times Index (STI) are both trading at a PB ratio of 1.1 times each.A PB ratio less than one time suggests that the stock is trading below the company’s book value, presenting a potential opportunity for investors to purchase the stock at a relatively low price. A PB ratio above one usually implies that the market price trades at a premium to the company’s book value.
The PB ratio of any company should be compared to its peers in the industry or measured as against its historical averages, such as five-year or ten-year periods, to decide whether the stock is undervalued or overvalued.
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