Are there any firms or sectors that are trading at valuations (based on enterprise value) which are lower than what was seen in March 2020?
To begin with, let’s introduce the concept of Enterprise Value.
Enterprise Value (EV) is defined as Market Cap + Debt – Cash.
Basically the amount you need if you have to buy the company completely and assume/repay all of its net debt.
Let’s consider the case of SAIL (Steel Authority of India Ltd)
As of today, following are the Stats for SAIL.
Market Cap: Rs 28,000 crore
Debt : Rs 15,000 crore (From FY22 numbers, rounding off)
SAIL EV : Rs 43,000 crore
In March 2020, SAIL had the following numbers.
Market Cap: Rs 12,000 crore
Debt : Rs 55,000 crore
SAIL EV: Rs 67,000 Crore
So the enterprise value of SAIL is lower than what it was in the month of March 2020, when we had the pandemic low. The Debt Equity then (assuming market values) was 5:1. It is around 1:2 now. The company is in a far better shape to survive a downturn in the steel sector.
If you check, even Tata Steel will show similar trends, with EV being at the same level as March 2020, but Debt to Equity coming off from 3 times to 0.3 times.
A risk though is that the payables of SAIL have jumped by nearly 10K crore in FY22. This has increased cash flow from operations, & they have used it to repay debt. This needs to be watched carefully. Profitability in FY22 was a one off, and may go back to cycle averages.
Disclaimer: This is not a recommendation to buy or sell any security. Metals is a volatile sector to evaluate & valuations for them may give a distorted picture at cycle turns. The volatility also does not make it suitable for everyone’s risk profile.
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