Tip for volatile times: Cash rich companies look safer bets

ET INTELLIGENCE GROUP: In uncertain times, many investors perceive cash rich companies as comparatively safer bets. After the stock market correction in the past few months, stocks such as NMDC, Nalco, MOIL, Seamac, Selan Exploration are trading at prices where their market capitalisation is close to the cash in their books.

When a share price slips below cash per share, investors expect a possible share buyback if the stock continues to dip. Also, these stocks are trading around their book value.

With price to earnings multiples of less than 10 and good dividend paying track record, these companies may be perceived as undervalued. Even though growth or top line is concern, these companies are profit making with high operating profit margins.

For instance, operating margins — PBIDTA (profit before interest, depreciation and tax) to sales — for the mining companies NMDC and MOIL are more than 70 per cent. (This also includes interest earnings on surplus cash).

The margins for Seamac and Selan Exploration are around 50 per cent margins while that of Nalco is above 30 per cent. Stocks of most of these firms have underperformed over the last one year due to weak commodity prices. Seamac provides vessels to the oil exploration industry and Selan is involved in the business of petroleum exploration and production.

If the government introduces “safeguard duty” on metal imports, the mining companies not have to take further price cuts. With the government stepping up pressure on ONGC and Oil India to increase production to cut oil imports, Seamac could gain. The government has also announced auctioning of 69 idle oil fields which, due to low oil prices, would be attractively valued and interest cash-rich companies like Selan.