Large Tech, Government-Run Firms With Low Debt, High Cash A Good Bet?
Are government-owned enterprises and IT stocks attractive buy?
Enterprise value, a measure that factors in debt and cash, of 15 large information technology and government-run companies in NSE Nifty 500 Index is lower than their market capitalisation, data compiled by BloombergQuint shows.
Analysts say such companies have low or no debt and thus fewer risks, making them a good buying option.
Companies with lower enterprise value compared to market capitalisation are very attractive, because these companies have good amount of liquid cash and if the outlook is good, then they are most likely to outperform in the near future.Vinod Nair, Head - Research, Geojit BNP Paribas
What Is Enterprise Value?
Enterprise Value (EV) is the sum of market capitalisation and net debt (total debt minus cash). A company with a lower EV compared to market cap is a net cash entity – simply put, it has more cash than debt. So, enterprise value serves as a better measure than market capitalisation, which is solely based on stock price.
Companies with EV lower than market capitalisation can be good bets as they have a great margin of safety.P Phani Sekhar, Fund Manager - PMS, Karvy Capital
BloombergQuint compiled data for NSE Nifty 500 companies, and found that 133 of these have an EV lower than their market cap. The top 20, considering only those with a minimum market capitalisation of Rs 5,000 crore, include seven information technology (IT) firms and eight public sector units (PSUs). Of the 20, BloombergQuint has shortlisted two group of companies that have a common theme -- IT and PSUs.
The two biggest companies in NSE Nifty 500 by market capitalisation -- Tata Consultancy Services Ltd. and Reliance Industries Ltd., did not make it to the list. Cash-rich TCS has an EV lower than its market capitalisation, but ranks 23rd on the list, while Reliance Industries has more debt than cash in its books.
The list does not include financial institutions, which are highly leveraged and EV is not a suitable metric to calculate their worth.
Cash-Rich Large Companies
Total cash (Rs 69,360 crore) with seven IT players -- Infosys Ltd., HCL Technologies Ltd., Wipro Ltd., Mphasis Ltd., Oracle Financial Services Ltd., Eclerx Services Ltd. and Cyient Ltd. – is five times their combined debt (Rs 12,915 crore).
Though IT companies have a “negative near-term outlook”, Nair said such firms “with rich historical valuations have high chances of giving good long-term returns”.
IT companies have seen a selloff recently due to a slowdown in discretionary spending in the U.S. and possible changes in H-1B visa regime.
Combined cash of the eight government-owned enterprises – Coal India Ltd., NMDC Ltd., Bharat Electronics Ltd., Bharat Heavy Electricals Ltd., National Aluminium Company Ltd., Engineers India Ltd. and MOIL Ltd. – is 10 times (Rs 87,190 crore) their total debt (Rs 7,943 crore).
For the cash-rich public sector companies, future growth will depend on how they use the surplus cash, Nair said.
Debt (Rs 41. 8 lakh crore) of all NSE Nifty 500 companies, excluding banks and non-banking finance companies, is over four times their total cash (Rs 9.1 lakh crore).
In comparison, the 133 companies in the index with EV lower than market cap hold over seven times cash (Rs 3.7 lakh crore) than their total debt (Rs 49,431 crore).
The remaining NSE Nifty 500 companies (excluding financial institutions) have a higher EV than market capitalisation. The total debt for them is seven times (Rs 41.3 lakh crore) their combined cash reserves (Rs 5.4 lakh crore).
(The data, compiled by BloombergQuint, has been sourced from Bloomberg. It was last updated on January 18, 2017.)