Market Cap as a measure of wealth accretion
Let us understand the use of Market Value with the illustration of 4 listed stocks that have seen a sharp shift in Market Value since the beginning of the year. Check the table below:
|Particulars||Reliance Industries||Britannia Industries||Tata Steel||Tata Motors|
|Number of Shares outstanding||633.65cr||12.01cr||112.65cr||288.74cr|
|Market Price as on July 24||Rs1,115.70||Rs6,426.75||Rs523.00||Rs261.50|
|Market Cap on July 24, 2018||Rs7,06,963cr||Rs77,185cr||Rs58,916cr||Rs75,506cr|
|Market Cap on Jan 1, 2018||Rs5,76,463cr||Rs56,906cr||Rs81,356cr||Rs1,22,556cr|
|Market Cap Change||Rs1,30,500cr||Rs20,279cr||Rs(-22,440cr)||Rs(-47,050 cr)|
By doing a time series analysis of the Market Value of a company, it is easy to figure out which companies have created value for shareholders and which are the companies that have depleted shareholder value. In the above instance, clearly it is Reliance Industries and Britannia that have expanded shareholder wealth in the calendar year 2018. During the same period of 7 months, Tata Steel and Tata Motors have actually depleted shareholder wealth. This can be partly explained due to the downside in the steel cycle for Tata Steel as well as fears of slowdown in JLR demand for Tata Motors.
Market Value Accretion versus Market Value Added
These are two different kinds of measures and they both need to be understood in a different context altogether. For example, Market Value Accretion is just the change in the market value. It is a time series measure of the Market Value of a company. In our above comparison, it is very clear that since the beginning of 2018, Britannia and RIL have positive accretion, while Tata Steel and Tata Motors have experienced negative Market Value Accretion. Market Value added is a slightly different concept and it is more reference to how much value a company has raised compared to funds raised.
Market Value Added (MVA) actually adds a new additional dimension to Market Value Accretion. MVA measures the difference between the market value of the company and the equity of the company. Here total equity includes share capital, share premiums and general reserves created out of profits. Let us again take an illustration of a company over a 2-year period and see how the Market Value Added (MVA) has moved.
|Particulars||Company X (2017)||Particulars||Company X (2018)|
10 lakh shares of 10 each
12 lakh shares of 10 each
|Share Premium||Rs2,50,00,000||Share Premium||Rs3,50,00,000|
|General Reserves||Rs1,50,00,000||General Reserves||Rs1,80,00,000|
|Total Equity||Rs5,00,00,000||Total Equity||Rs6,50,00,000|
|Stock Price||Rs45||Stock Price||Rs50|
|Market Value||Rs45,00,00,000||Market Value||Rs60,00,00,000|
|Market Value Accretion||Rs15,00,00,000|
|Market Value Added||Rs40,00,00,000||Market Value Added||Rs53,50,00,000|
How do we interpret this deluge of numbers? It is actually quite simple. The total equity of the company has gone up by 30% because the capital base has expanded due to raising funds at a premium. At the same time, the reserves are also up due to profits being ploughed back into the company. However, the real picture is evident when we compare the Market Value Accretion with the Market Value Addition. The Market Value Accretion is Rs15cr but the Market Value Added is only Rs13.50cr. When the MVA is lower than the Market Cap Accretion, it is an indicator that the company has not been able to create wealth commensurate with the expansion of equity. MVA forces the company to compensate not only for the share capital but also for the share premium and the general reserve.
Three approaches to evaluating Market Value
Market Value Added is one of the best ways to detect if the company is creating value that is commensurate with the increase in equity. Remember, equity dilutes net worth and hence needs to be factored in. There are three ways to look at Market Value.
- Firstly, the Market Value is looked as a ratio of the total profits of the company. This is nothing but a proxy for the P/E ratio. You can also look at the inverse of the P/E with the earnings yield. This can be compared to yields on debt to measure attractiveness of equity.
- Market Value can also be looked at in terms of its ratio of the equity. This is measured by the Price/Book Value ratio. This measure is more useful for banks and financials.
- Finally, you can also look at the dividend yield by dividing the total dividends declared by the Market Value of a company. At an overall market level, this dividend yield is a good measure of undervaluation/overvaluation.