The greatest divergence between the intrinsic value of a company and its market capitalisation is found when there is a great amount of fear and panic in the market. Due to the recent carnage, many companies have seen substantial erosion in their market cap and to find some ‘bargains’ we looked at debt-free companies sitting on a high component of cash and cash equivalents, relative to their market cap. Most of the companies in the list that threw up are public sector units, where the cash might be high but there is an implied governance discount. Even with respect to the commodity companies in the list, one needs to keep in mind that the prevailing low commodity prices can hit profitability and cash flows and hence, the cash that is sitting on the books might actually reduce. Read on to find out more about our favoured five.
Here's what you could buy
A list of stocks which have the highest cash relative to market cap
1. Goodyear India
It has about a 22% and 36% share in front tyres and rear tyres respectively in the farm tyres business. Deducting its cash of ₹365 crore, you get a valuation of ₹886 crore for an MNC which had a topline of about ₹1,700 crore and profit of ₹100 crore in 2014. Also, despite the high cash in its books, it has an astronomical return on capital of 34%. While investors are fretting about the subdued growth in the farm sector, the company is driving into the replacement market by expanding distribution. The export market is another focus area to increase profitability.
2. Novartis India
Due to price control, this pharma MNC has suffered over the past year and net profit has dropped from ₹98 crore in FY14 to ₹79 crore in FY15. While that has already been discounted, the big support comes from its cash hoard of about ₹840 crore. The management is also working to offset the impact of pricing by focusing on its core pharma business and is divesting its animal health and OTC divisions. That may take time to show results but a strong parentage and portfolio will help it sail along.
3. Coal India
This monopoly PSU made a profit of ₹3,760 crore in Q1FY16 compared to ₹4,000 crore in the same period last year. Like other commodities, the international price of coal has fallen about 50% but Coal India has not cut prices because it is already selling at subsidised rates to the priority sector. If at all, any impact of that will be on e-auction sales about 10%, which is linked to market prices. Along with a 32% operating margin, Coal India is on a strong footing given its current dividend yield of 6%.
4. Engineers India
This is another PSU that caters to the hydrocarbon space, and has been hit hard due to the savage drop in the price of crude. While pressure might continue on the business front given the tepid growth in domestic capex and deferment of projects due to fresh weakness in crude, the company is well placed given its asset-light business model and a debt free balance sheet and cash holdings which is close to 43% of its market capitalisation. In fact, because of that cash, the company still makes an operating margin of close to 25% as against the core margin of about 7% in the last concluded quarter.
This PSU extracts manganese ore used in steel making and has corrected 30% driven by worries over steel demand. At its current market cap of ₹3,525 crore, the damage seems overdone as net of cash, the company is valued at ₹700 crore on its FY15 profit of ₹428 crore. While there could be realisation pressure, currently it has an operating margin close to 45% and no debt. Besides, cash, which provides downside protection, the company is sitting on mining reserves of 77 million tonne compared to its present sales volume of 0.24 million tonne.