By Yogesh Chabria

It's not the best of times for the stock market. But the good news is that some companies remain undervalued for short periods of time. Well, the trick to creating wealth is scoping out these undervalued companies by doing some value shopping. 

VS is all about buying stocks of companies, which have assets that are worth more than their current stock price. In other words, you should be buying stocks that have a high value and are traded at a low price irrespective of what level the Sensex is at.

Black sheep or hot stock?
Let me explain with an example. Say you want to buy all the available shares of a company from the market. Your purchase price will be the current market price per share multiplied by the number of shares. Assume this figure is Rs 1,800 crores.

Also, assume that the company’s assets are worth over Rs 4,000 crores. Your margin of safety will then be Rs 2,200 crore (Rs 4,000 crore-Rs 1,800 crore).

This means that if the value of the assets were to fall, you have a buffer of Rs 2,200 crore. By buying shares of this company, you are buying something, which has higher worth of assets for a lower price.

Play the sleuth 
The math looks easy enough. But how do we go about finding such companies? The trick lies in keeping your eyes open for information and analysing them. For example, take the hospitality sector in India. The news dailies mention that land prices have gone up all across the country and so have hotel room rates.

Now, let’s assume that there's a company, which has four fully operational 5-star hotels in Mumbai, Bangalore, Goa and Kerala. If the company were to set up another 5-star hotel today in a prime location -- after considering land, constructions, licences and permission, the cost would work out to be around Rs 800 crores.

Based on this estimate, the value of the four properties of this company without considering brand value, management, cash reserves, future growth plans and systems in place, should work out to be Rs 3,200 crore (Rs 800 crore x four 5-star hotel properties).

This means the company has property worth around Rs 3,200 crore. This is not the total worth of the company as the company plans to almost double capacity by 2010 by opening new properties.

This stock is value-for-money
I am sure you have already guessed this company is The Leela Palaces Hotels and Resorts. Conde Nast Publications of the United Kingdom has rated the company’s Bangalore property as one of the best business hotels in the world and the company also has a very strong brand value in the luxury hotel segment.

It's obvious from all the figures given above that this share is a value buy. Not only that, the company also has a very low PE (Price to Earning) ratio -- less than 11, which is much less than peers in its group. Price to Earnings (PE) is the price you pay to buy a share of a company in order to get one rupee of profit of that company.

So, by buying this stock, you are actually paying Rs 11 to earn a profit of Rs 1. If any of its peers has a PE of Rs 14, it means to earn a profit of Re 1 in that company, you will be paying Rs 14, which is obviously more expensive.

What makes it a value buy: It's pretty simple. The stock price today is much lower than what the assets and brand are worth. The stock price should have been at least Rs 100, but fortunately for us the markets are imperfect and the stock price isn’t that much as yet. 

Once you learn and gain knowledge about how to select quality companies at the right price, you will feel much more empowered. Happy wealth creation, my friends!

The above data is based on the closing price on February 14, 2008.

Yogesh Chabria, an investor and author, wants to empower retail investors with knowledge. His latest book Invest The Happionaire Way, will soon hit bookstores. Drop him a line by visiting his blog,  www.blog.happionaire.com

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