‘MCap to sales ratio gives valuation comfort

Every market participant is aware of the uncertainty prevailing due to the current lockdown and its implications. Many investors have same old questions whether to enter the market at current valuations or will there be any further downfall. The valuation matrix called as market cap (MCap) to sales ratio can further help investors in judging the level of valuation comfort.

The market cap to sales further helps in valuing the company by comparing it with market capitalisation (current stock price multiplied by the total number of shares) to its revenue as per trailing twelve month (TTM) basis. When it’s considered on per share basis, it is referred as price to sales ratio. As earnings can be considered as a manipulative data, many investors prefer ‘MCap to sales ratio’ over price to earnings, often called PE multiple.

The data complied of top 800 BSE listed companies by the latest market cap and their MCap to sales ratio; suggest the cheapness in the valuations. The average figure of MCap to sales ratio, as on April 22, 2020 of these companies stood at 1.38. The same ratio on December 31, 2019 stood at 1.75 thereby, showing at least 20 per cent overall discount in valuations since the last four months. This ratio was further high at 1.86, as of end of June 2019.

On stock specific basis, this ratio further helps in spotting correct opportunity. TCS is currently trading at MCap to sales ratio of 4.23, which lowers from 5.23 at the end of Q3FY20. After its stable performance in Q4FY20, such valuations show good entry point. Further, the data also shows that FMCG companies trade at a much higher valuation than that of their sales. Like, Hindustan Unilever, Dabur India and Emami get up to eight times more valuations in comparison to their sales.

The data also shows that some revenue losses due to the lockdown may have been discounted in current prices. Although, on valuation front, the stocks may look attractive but the impact on revenue after the lockdown will keep investors at edge.