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basant
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   Posted: 10/Apr/2008 at 9:20am |
Originally posted by nitin_jagtap
Originally posted by Vivek Sukhani
A question for you Smartcat Sir and Nitin Sir, even if we may buy a larsen at 30 times ttm.....what next? How much upside is there......how much value is there.
I believe its not as important to figure out what levels we shall be buying. Its important to measure the gap between the value it contains and the price we are paying.A great purchase will be when we get things at discount to fair value rather than buying a thing at fair value.
I think the discussion on this thread is getting carried about the price, something which helps no one. |
IMO True it is very important to know the gap between the price we are paying and the value we are getting to avoid over paying and you have rightly said that a great purchase is when we buy things at price less than fair value ..but we also need to know that some companies command a premium irrrespective of business or market cycles in their own lifespan(typically I would assume a business entity's lifespan at say approx 40 years ) ....at one time it was cadbury then it was tata power then it was crompton then it was ACC then it was century then it was Infy then it Dr Reddy, these companies for long periods of time were fairly valued and even during those times had given very good returns to investors ..before something drastic happened on the business side or in terms of the management .....and now we have examples like HDFC , HDFC Bank , Asian Paints (as I know all these have been in the 25-30 multiple band for atleast 8-10 years as I know).
Once markets recognise the potential of the company,management,business its very difficult to get something like that below fair value.(except when there is panic)
While it is always nice to buy something cheap or undervalued and sell it when its overvalued ...I would also like to mention that when it comes to some stocks the effecient market theory plays in role to perfection to ensure that every bit of information is known to almost all people and hence there is hardly any mispricing of the asset/stock and these stocks will continue to remain fairly valued till something serious on the business side or the management side happens.
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Bang on. It is a case of companies saturating industries and as investors we have the luxory of getting in and out broadly in as much as we see the saturation happening.
In this case valuations take a back seat because the sheer size of the industry makes for profitable growth in cases where the same has been underpenetrated.
I like looking at the gap between the scale of opportunity and the untapped market more rather then near term valuations because chances of making money is relatively less in a cheap company operating in a saturated environement rather then a costly company operating in a space where there is huge untapped potential.
Edited by basant - 10/Apr/2008 at 11:08am
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deveshkayal
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Posted: 10/Apr/2008 at 9:49am |
Basantji has given a broad sense on things to look before investing. I am going into deeper on valuation methodoligies to apply. Hope things will be clearer..
Banks are normally valued on a Price/Book Value basis. Book Value is calculated as Equity Share Capital + Additional money received on shares (if any) + Retained Earnings (which is Profit after Tax - Dividends). So do the calculation for HDFC Bank and find out yourself !
HDFC which has interest in HDFC Bank, AMC, Life Insurance and others is valued on SOTP (Sum-of-the parts basis) because valuation on P/E basis is misleading since Insurance business are capital-intensive business and it will show loss for the first 6-8 years, its EPS will till that time be negative. Asset Management Company which includes mutual fund, portfolio management services (PMS) are valued on 5-6% of Assets under management (AUM). It takes AMC to build a AUM of atleast 10,000 crs to turn into profits. So, it does not make sense to value AMC on P/E basis. AUM figures for Mutual funds are disclosed in the first week of every month.
For L&T, I am not sure if we can value it on P/E basis since it has 22 subsidiaries which are valued on different methodoligies.
Go through the brokerages report, you will get a sense on the things to watch out for, though dont rely on them completely as they are conservative in their estimates and views subject to change. For instance, brokerages estimated Yes Bank to deliver 78% growth in profit, but in fact the bank delivered 108% growth !
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"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett
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Musketeer
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Posted: 10/Apr/2008 at 10:43am |
Originally posted by deveshkayal
Banks are normally valued on a Price/Book Value basis. Book Value is calculated as Equity Share Capital + Additional money received on shares (if any) + Retained Earnings (which is Profit after Tax - Dividends). So do the calculation for HDFC Bank and find out yourself ! |
Thanks, Devesh for your inputs on evaluating insurance business and AMC business.
About calculations of book value, I normally subtract all the liabilities (loans taken + current liabilities) from the assets and divide the result by the number of shares outstanding for getting the book value per share.
Would that give a different figure than the one obtained as you mentined?
You've given some indicative figures to employ while evaluating AMCs.
What data would be required to evaluate an insurance business and how to interpret that data?
Edited by Musketeer - 10/Apr/2008 at 10:48am
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vijayM
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Posted: 12/Apr/2008 at 1:21pm |
dear Basant ji,
I have tried to build an Excel sheet to analyse stocks. This is only a beginning & more parameters need to be added to it. I have PEG, ROE, MCAP/SALES, BV in my mind. The following table is mainly based on Buffett's method of finding "intrinsic value" of stocks. I need ur input/advise to improve this analysis sheet.
| SL NO. |
COMPANY |
TTM |
EPS GR RATE |
EPS GR RATE |
CONFIDENCE |
BOND |
INTRINSIC |
CMP |
% RISE |
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EPS |
NEXT 3 YEAYS |
AFTER 3 YEARS |
|
RATE |
VALUE |
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POSSIBLE |
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% |
% |
% |
% |
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(3 YEARS ABS) |
| 1 |
L & T |
67 |
40 |
9 |
50 |
10 |
7694 |
2777 |
177 |
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30 |
9 |
50 |
10 |
6168 |
2777 |
122 |
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20 |
9 |
50 |
10 |
4860 |
2777 |
75 |
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10 |
9 |
50 |
10 |
3752 |
2777 |
35 |
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| 2 |
BHEL |
59.22 |
40 |
9 |
50 |
10 |
6800 |
1828 |
272 |
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|
30 |
9 |
50 |
10 |
5452 |
1828 |
198 |
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|
20 |
9 |
50 |
10 |
4296 |
1828 |
135 |
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|
10 |
9 |
50 |
10 |
3785 |
1828 |
107 |
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| 3 |
HDFC BANK |
43.6 |
40 |
9 |
50 |
10 |
5007 |
1330 |
276 |
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|
30 |
9 |
50 |
10 |
4014 |
1330 |
202 |
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|
20 |
9 |
50 |
10 |
3162 |
1330 |
138 |
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10 |
9 |
50 |
10 |
2411 |
1330 |
81 |
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| 4 |
PRIL |
6.78 |
80 |
9 |
50 |
10 |
1648 |
475 |
247 |
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60 |
9 |
50 |
10 |
1159 |
475 |
144 |
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40 |
9 |
50 |
10 |
778 |
475 |
64 |
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20 |
9 |
50 |
10 |
492 |
475 |
4 |
The row in bold refers to most probable growth rate for that stock as per my assessment. Please comment on that assumption also alongwith assumed values of parameters in different columns.
Waiting for ur reply.
vijay
Edited by vijayM - 12/Apr/2008 at 1:32pm
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If a business does well, the stock eventually follows:Warren Buffett
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basant
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Posted: 12/Apr/2008 at 2:38pm |
Actually these things will change withe ach quarter so itb gives you a broad approximation at most.
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vijayM
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Posted: 12/Apr/2008 at 11:06pm |
Basantji,
I agree with that. I have some doubts.
1] whether the above calculations are correct at a given point of time? (they will keep changing with results and that is agreed)
2]The method doesnot include equity capital information anywhere in calculation. How is that so?
3]When u say these will change with each qtr, what are the parameters u r referring to?
regards
vijay
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If a business does well, the stock eventually follows:Warren Buffett
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basant
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Posted: 12/Apr/2008 at 11:34pm |
EPS calculates the EQUITY; with every quarter griwth eps, sales almost everything can/will change that is why it is better to be approximate when it comes to setting price targets.
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vijayM
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Posted: 12/Apr/2008 at 11:46pm |
basant ji
One more point. If we consider the case of L&T, it was quoting at 4700 in January. If one has used the method of calculating Intrinsic value as I have demonstrated in that table, with 40% growth rate the stock would have looked cheap at 4700 with int value being 7694. (However PEG (1y proj) was >1.5 when it was at 4700.) We all know that now it is at 2777. How to understand this?
It had value at 4700 & now has more value at 2777. How investor should judge a fair price for buying under such situations?
vijayM
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If a business does well, the stock eventually follows:Warren Buffett
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