Averages And Value

Just how does one ascribe value to companies? If every day's market value is an opinion on what a company is worth, the right way of assessing value is by conducting an opinion poll with as large a sample as possible. The representative market value of a company should be a number that embodies the entire year's value. Or the average of all values recorded during the year. Such an average neutralises the impact of the day-to-day events which make markets impulsive. Of course, the manner in which the market revalues companies in response to the same event is vital information. But only in the short term. In the long term, the average is, definitely, a better indicator.

Calculating an average may not be as straightforward as it appears. Of the 5,840 companies listed on the BSE, just 173--barely 3 per cent--traded on each of the trading 240 days. Calculating the average of companies that did not trade on every day may not be an arithmetic problem; it is a methodological minefield. And an objective exercise cannot afford to be burdened by subjectivity. Such a problem could only be tackled by excluding infrequently traded scrips.

But which companies does one exclude? When one plots the trading frequency of companies on the BSE, one discovers a natural gap that stretches from around 20 to 50 per cent. Very few companies trade between 20 and 50 per cent of the days. The inference is obvious: naturally traded companies, the ones where there is a real market, lie above the 50-per cent mark. And those that are artificially traded, by price-fixers and market manipulators, lie below the 20-per cent mark. Therefore, the line had to be drawn at 20 per cent: companies that traded for less than 20 per cent of the days, or 48 days, were eliminated from the investigation.

If that is one of the ways to filter abnormal spurts in value, the methodology, itself, is a kind of a circuit-breaker: average market value is biased against the scamster, whose fortunes are linked to the rise or fall in value. The computation may not snuff out the effect altogether, but it definitely reduces the sting of the scamster. In the process, it creates a listing that is, by and large, free from the effects of market steroids used to prop up a company's value.

The Investor And Value

All told, It was a disappointing year for India's Most Valuable Club, whose value dropped by Rs 9,781 crore. As many as 372 companies were cold-shouldered by the investor: 44 were ousted from the elite list while 246 companies dropped their ranks. Seven companies--Hindalco, Colgate-Palmolive, MICO, India Cements, Birla Corp., Rallis, and SRF--retained their rankings although five of them actually lost value.

In all, 328 companies shrank in value during the year. And nine of them lost more than Rs 500 crore, eroding more than Rs 6,000 crore of shareholder value. The verdict handed out by the investor is partly borne out by the fundamentals. While the aggregate sales of the BT-500 rose by 18.64 per cent, from Rs 2,10,150 crore in 1996 to Rs 2,49,325 crore, net profits declined by 8.37 per cent, from Rs 21,257 crore to Rs 19,477 crore. As many as 29 companies reported losses, up from 14 previous year.

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