Equity ValuationOne size does not fit all
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Words of Wisdom
Forum Discription: Have you found a golden rule to profitable investing? Share experiences, articulate your thoughts quote a book or a guru.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=12
Printed Date: 04/May/2025 at 8:31pm
Topic: Equity ValuationOne size does not fit all
Posted By: Mamta
Subject: Equity ValuationOne size does not fit all
Date Posted: 18/Jul/2006 at 4:26pm
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The earnings multiplier method is the most popular method .The key question to be answered is the earnings multiplier method are:What is the expected EPS for the forthcoming year?What is the reasonable PE ratio given in the growth prospects,risk exposure,and the other characteristics of the firm?To answer these questions,the investment analyst starts with a historical analysis of earnings(and dividends),growth, risk, and valuation and uses this as the foundation for developing the forecasts required for estimating the intrinsic value .
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The two methods of equity valuation are the dividend discount method and the earning multiplier method.Replies:
Posted By: basant
Date Posted: 18/Jul/2006 at 4:44pm
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Right but the problem does not end there it starts from that point most of the EPS analysis is incorrect and falls way off the mark and as per the PE the market gives a different Pe each morning to a stock - Stock prices change every day and EPS remains constant so the only change is the PE. CLearly PE is much like perception and EPS like performance. I have seen that most of analysts are analysts only for name sake. They are like accountants basically. Company profits are construed on the basis of what the managemnt tells them and there job is to prepare the income statement , balance sheet and the cash flow. So while EPS and PE are truly the drivesr the problem lies in estimating each of these. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Mamta
Date Posted: 18/Jul/2006 at 4:53pm
| The key to investing is not assessing how much an industry is going to affect society, or how much it will grow , but rather determining the competitive advantage of any company and, above all, the durability of that advantage.The products or services that have wide, sustainable moats, around them are the ones that deliver rewards to investors. |
Posted By: Mamta
Date Posted: 18/Jul/2006 at 5:08pm
| Based on how the company has done in the past, how it is fairing currently,and how it is likely to do in future, the investment analyst estimates the expected EPS.An estimate of EPS is an educated guess about the future profitability of the company.A good estimate is based on a careful projection of revenues and costs.Analysts listen to what customer says about the products and services of the company, talk to competition and suppliers, and interview management to understand the evolving prospects of the company. |
Posted By: basant
Date Posted: 18/Jul/2006 at 5:30pm
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ABsolutely. These are the golden words but once a person gets into the investment business he forgets all of these and relies only on company information and what does he do for companies that do not give guidance - Nothing he just takes the past figures and extrapolates. There are multiple analyust reports refusing to take into account any of the profits from a company's new venture -reason being that the company did not give them any figures. The best case in point is TV 18 where none of the analyst reports talked about earnings from their various ventures like internet, Awaaz and CNNIBN. In fact none of the reports talk about it even till date. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Ambarish
Date Posted: 18/Jul/2006 at 11:24pm
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the method mentioned above are based on no. in the balance sheet &
income statement of past present and future of a company and are'nt
these things prone to manipulation so how much should a person rely on
such calculative method and what are the other ways from which
one should ananlyze the performance of a stock ------------- www.halwasiya.uni.cc “Wining is not everything, it is the only thing” |
Posted By: basant
Date Posted: 18/Jul/2006 at 8:46am
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I would think that your apprehension is genuine. But the point is that as Investment analysts we should give each company ONE chance. If they falter in that then investors need not put in their money but the first chance should always be given. If you see through the history of Indian stock markets companies that took shareholders for a ride could do it just once. The RPG group, Non- Av Birla group, etc are allexamples of what shreholders wrath can do to you if you play with their money. Asthey say you can lose your reputation only once. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: shuchi
Date Posted: 21/Jul/2006 at 9:46pm
| hi could u plz explain me wat do we mean by cash eps ...n wat relevance does it have while we analyise a stock? |
Posted By: basant
Date Posted: 21/Jul/2006 at 9:56pm
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Cash Eps is computed by dividing the company's cash profits (PAT + Dep + Amort etc) by the number of shares. It is another way of analysing how much cash a company generates for each outstanding share. For some companies that incure huge upfront investments (Broadcastinmg, toll bridge) and the cash keeps coming in at regular intervels the company would be considered as better investment candidates because they have little alternative to deploy the cash. More so unlike companies in heavy engineering and cement/ steel these companies do not have to make significant investments on capital assets. Buffet paid great stress on cash EPS. while normal eps can be manipulated (changing depreciation provisions it is very difficult to manipulate cash EPS) Overall Cash EPS is a better tool of analysis. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: basant
Date Posted: 23/Jul/2006 at 5:34pm
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Dear Vivek,
Please put the relevant report that you were talking about up on the forum. Let every one see. It will be better. After all we are not fund managers that if the crowd came in to buy we would not get our quota of shares. If you work in some brokerage/inv bank co. then it is diffrenet because you have compulsions but otherwise I would still suggest that the best way to interact will be through this forum and coming back to your argument that a majority of people have to lose well that is the norm we cannot change it but we can surely try and creat an online community of serious investors.
Now I never say accountants cannot make money but the process starts from which business to get invested in rather then which is the better balance sheet. See if you analyse a company like AP Paper Mills it is probably available below or near book value but even 5 years back it was at below book value so even if an investor bought a "cheap" stock 5 years back he would not have made any money, but the stock is still cheap and investors can still hold it or buy a few more the basic premise that I hold is that it is a lot easier to change a bad balance sheet in a great business, but to grow a great balance sheet in a bad business will be tough. And markets pay for growth only. Now an investor makes money in a cheap stock if the stock does not remain cheap but costly. Investors made money in Infosys between 1995 to 2000 only because the PE expanded and the company became very very dear had the PE remained at 1995 levels investors would not have made any money. The trick is to find stocks that are cheap and are on way to becoming costly. That is the point accountants always seem to miss. i do not know why? I am a Cost accountant myself so there is no malice intended but these are thoughts which as you say could be right or wrong. Only time will tell. meanwhile we have no right answers. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: basant
Date Posted: 23/Jul/2006 at 5:55pm
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Sorry I forgot to reply to your other PM.
Now for your question on whether I look at a sector first and then zero it down to the company my answer would be yes, I do. I also know that this is a very high risk high return startegy but then if it suits your mindset so be it. I will share another interesting example. I bought E serve at Rs 150 odd near diwali 2001 as I was very bullish on the BPO sector but then after that I bought HTMT and kept it a while but did not get any reasonable company to buy. The point that I am trying to make is if you can find a great company in a fast growing sector you can go and buy it but if you cannot find that great company look else where. People say that sector investing is risky, yes it is if you buy all the duds and nuts of the sector but if you are invested in the leaders it would not be that riskyl. Also you will have to assume that a couple of your ideas may not work, well that is because stock investing is still an art no matter how many CAPM and SML formats you establish. I am sure there is nothing that works in a market at all times but something will surely work sometimes. Now I am very very bullish on the BPO/call center business but I cannot find any great ideas there, so even though I have looked at a sector I cannot find anything worthehile i will just give it a skip. Probably there are no entry barriers in a BPO industry and that is driving down margins.But for retail or tv bnroadcaster I am sure yu can make good money if you stick to the top leaders. I emphasise leaders not just one because the chance of a company going belly up in a fast roaring sector cannot be ruled out and if that happens the other company will take you through... ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Vivek Sukhani
Date Posted: 23/Jul/2006 at 8:54pm
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Dear sir, Your Replies have tremendous conviction, but then tell me the trick how do you spot a cheap stock turning costly. Ultimately its market driven. I want to ask one thing. If you think infrastructure is going to be the next in-thing, then do you think you should be buying SICAL Logistics, Nahindra Gesco, Ansal developers, BF Utilities, Unitech enterprises etc.?Sir, I beg to differ, but then every bull market goes down with some sector becoming a martyr. we talk of Infosys, Wopro and the like, but then what about HFCL, Silverline and the likes. Even during that period, if you would have invested in Old economy stocks, which were running totally out of favour, we would have been able to mint money.In a nutshell, stock market investing is like entering a chakra-vyuha. You need to make right exits as well, to become a winner. Else you will become an Abhimanyu, definitely brave but got killed.We dont want to be called brave in Stock Market, do we?So, my startegy has always been to have 3 entry-points for a stock which I found cheap on fundamental basis, and invest accordingly.... and I bother not for the sector. I will rather buy GE Shipping rather than Mahindra Gesco.
thanks for replying.
Regards,
Vivek.
P.S-tell me how can I load the reports as an attachemnt here
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Posted By: Vivek Sukhani
Date Posted: 23/Jul/2006 at 9:11pm
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Dear Sir,
Even if an investor would have bought Infosys and Wipro at the fag end of 2000 mania, he would have had to wait a big time before breaking even.And TV 18 is no way near its peak which it made in 2000-2001.All that I want to say, is to pick up stocks on the merits and care not for the sector, for there are many strengths which we tend to over-look, if we become sector specific.I beleive companies are living beings... they have life.So, just as we nityure living beings, we need to nurture our investments.Ultimately, its all belief which counts.
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Posted By: basant
Date Posted: 23/Jul/2006 at 9:32pm
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Thanks Vivek. You know in what ever I have read or what I know I do not think that there is any predefined notion for exiting a stock. You know had you sold Infosys at 100 PE you would have looked foolish when the stock ran up to 300 PE. (I did not buy Infy at all and was too busy making a 10 bagger DSQ which finally converted to a .1 bagger), now to come back to the point the one thing that I look for very carefully is the market cap of a company. All these Infy, Wipro, Satyam, ZEE HDFC Bank etc were all very small market cap companies. That means that if the stock prices were to fall either the business would become cheap on an EV basis or maybe the promoter would sell out or something. Normally I am prepared to ignore a PE if the market cap is small and the external scale of opportunity is large. As stocks rise in value the market cap increases. That gives effect to two things 1) The company becomes costlier on all parameters (logical) 2) The scale of opportunity as a multiple to the market cap diminishes. Let me try and explain this a bit further, if we are looking at software as a US $ 50 billion in 2008 (Rs 225,000 crores approx) then Infy was valued at almost 45% of that in 2000 and only .1% of that in 1995 when it came out with an IPO, so there was no room to go. The market cap could expand and go up but the external opportunity being a more of a macro framework does not change so fast. I am just talking about the market cap thing because that is what attracts me the first thing I look at a stock. You may also read the link here that shows how only small market cap companies become large caps and if we get in at a very high market cap then the chances of getting a .1 bagger is equally high as the initial chances of getting a 10 bagger Now when I bought Pantaloon at Rs 50 pre rights adjusted the company was available at a market cap of Rs 80 crores. Today it is still available at a market cap of Rs 3000 crores. Now there are genuine concerns about Reliance’s entry into the Indian retail space and how it is going to blow up pantaloon etc but the point that I would make is the Indian retail market (total) is Rs 10,00,000 crores plus, growing at 13% p.a (GDP + inflation) that means that by 2010 we would be some where near Rs 15,00,000 crores Now if reliance wants 6% of this market let them come and take Rs 100,000 crores there isn’t a problem. Wal Mart with all its efficient businesses has less then 10% of the When I hear this argument about Pantaloon and Shoppers Stop being affected by reliance’s retail plans my mind jumps to two aspects that have created conviction for me in retailing stocks. 1) When reliance Infocom was rolled out similar noises were made for Bharti Tele and all the wise men missed it. 2) the people who are to be really affected would be the typical shop owners either at Can naught Place in Delhi or Camac Street in kolkata or Patni Plaza in Chennai or some odd store in Heera panna in Mumbai. That is because these guys will be the first to face the heat because of inferior family run and family created processes. The listed companies have better processes compared to those. I have talked to so many people in these very markets and no one seems to be thinking twice so why would just one or two or maybe three companies get affected. I know this is a high risk high return strategy but I feel that risk comes from not knowing what you are doing. http://www.theequitydesk.com/market_cap_argument.asp - http://www.theequitydesk.com/market_cap_argument.asp Also you buy the two best stocks in the sector and stay invested. Had you bought Bajaj Auto or Hero Honda you would have made money but had you been clever enough to buy LML you would have lost money. I do not dispute the theory of buying a GE shipping but then if a style has made you money the conviction level goes up manifold and you want to stick with those strategies. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: basant
Date Posted: 23/Jul/2006 at 9:43pm
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Oh! Sorry because of virus concerns we are not allowed to upload files. YOu may scan and paste the stuff. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Vivek Sukhani
Date Posted: 23/Jul/2006 at 9:51pm
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Dear Sir,
I go for companies which have a track record of rewarding shareholders. The rewards may come in many forms-Bonus, dividend, rights etc.However, there are some sentimental parameters as well.I have tremdous fancy for compnaies which send report immediately upon request. Believe you me, I will never sell Foseco india, Abbott India and Infosys as I got their Annual reports before I got the shares credited in my client id( I sent the request for annual report, as soon as I bought them).Its all about corporate reputation and not corporate governance.I know, given their track record,neither foseco nor abbott will declare a bonus in coming years, yet I love them like anything.I beleive investors should look at themselves as stock-owners rather than beggars chasing money.I get surprised to see such pathetic volumes on foseco India, but then if you ever have it, you will realise how beautiful this company is.the conviction grows with sense of ownership and I beleive all wise men like to own right businesses. I also think I am posting my views in an inappropraite space so kindly let me know where I can post my stock views.
Regards,
vivek
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Posted By: basant
Date Posted: 23/Jul/2006 at 10:02pm
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Great thoughts I feel this is one of the secret sensors to differentiate between an honest management and a bad management. But you know with Foesco, Infy and the other ones you named they are absolutely great companies where investors will make a decent alpha from the market but these stories are already discovered to a very large extent. Any way why don't you put your stock ideas in the Fundamental section under stock ideas. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Vivek Sukhani
Date Posted: 23/Jul/2006 at 10:35pm
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Although I agree with whatever Mamta has said, yet I the very dynamics of estimating EPS is very fluid. Ultimately, subjectivity comes into the scene and this explains why a particular stock appeals to me and why it doesnt appeal to you.P/E relects the investors' expectations, and as members of community we need to agree to disagree.Ultimately, i dont think a day or two of analysis can prompt you to buy stocks... its a process of continuous observation.Fundamental Analysts keep their eyes open and ears closed which most of the so-called analysts never do. they have their ears open and eyes closed.
regards, vivek
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Posted By: The Lord
Date Posted: 23/Jul/2006 at 10:47pm
| so what the details that you observe about a company before getting into that company what i'm trying to ask here is what prompt's you to buy a stock of a particular company |
Posted By: Vivek Sukhani
Date Posted: 23/Jul/2006 at 10:54pm
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I beleive newspaper reports are the most vital piece of information you require, before embarking on a aparticular company. Its about the vibes which a company sends.Take some examples. Look at companies like Havell's and Pidilite. the way they are carrying on their expansion plans. After having observed that, you get down to Balance Sheets, cash flows and Profit and Loss Account. I am a great devotee of mathematical school of Stock Investing yet I agree with Mr. Basant that first observe and then analyse.
regards,
Vivek
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Posted By: kulman
Date Posted: 04/Sep/2006 at 1:20am
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On Sharad18's view about Sesa Goa, I would like to add that by paying Rs. 940 odd for Sesa today, our initial rate of return itself is nearly 20%. Its like buying @Rs. 940, a fixed income bond with future value of approx. Rs. 1,600 @ initial rate of return of Rs.200.
I request you all to visit this link
http://www.moneychimp.com/articles/valuation/buffett_calc.htm - http://www.moneychimp.com/articles/valuation/buffett_calc.htm which is a calculator. I need your views (especially Basantjee's) on this method of determining approximate intrinsic value.
Thanks ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: basant
Date Posted: 04/Sep/2006 at 1:52am
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I visisted this link but I do not think that this model would work for all any company in India.
Reasons:
1) It does not assume a growth rate of more then 8% In India the long term GDP grows is at 5% - 8%. Add inflation 5% that makes it 13% corporate India should grow by at least this figure
2) There is no mention of RoE/ Dividend yield/Book value. EPS is just one section of the model.
3) The model is the same for Infosys and Geometric - no place to quote whether it is the sector leader or not. Leaders get higher valuations.
4) I think that the model uses the basic corporate finance dividend discount model -- value of a share is Dividend/(K-g). That arithmetic rarely works in equities.
5) Sesa Goa and HLL will give you same values inspite of having very different business models.
In a nut shell it does not appear reliable.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: kulman
Date Posted: 04/Sep/2006 at 2:19am
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Very good instant reaction, Basantjee. Thanks for your comments.
I always remember your "footnote": If you could tell the future from a Balance Sheet (or for that matter CALCULATOR) then accountants and mathematicians would be the richest people in the world!
Thanks again and look forward to your reaction to SHIPYARD sector forum. Could you please comment on thaem, especially Bharati Shipyard and ABG Shipyard? ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Vivek Sukhani
Date Posted: 24/Sep/2006 at 2:13pm
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Actually, I got the inspiration for this topic as I was reading one of the posts by Mr. Basant that he gets worried more by falling EPSand rising prices rather than rising EPS and falling prices. Although, I agree with you Basant, yet sometimes I feel supply side is also very important if you want the stock price appreciation. Very often you will come across companies, which have ecellent credentials yet there is no movement in them. I will give you a very simple example, there is a company by the name of walchandnagar Industries Limited. This company has excellent financials and is also active in Nuclear technology yet this company rarely gets its due importance.Its dividendyoeld is very low, but otherwise has excellent financials.Ot compares very well woth other engineering companies. But, its stock market price is on a downwardspiral.
Another company which is into Process equipments and advanced engineering solutions is Alfa Laval. But its price is hovering around current levels for so many days. I readits in-house magazine Here very regularly and am quite amazed to see such a pathetic price this company is commanding. I had also sent you the scanned pages of annual report of Porritts and spencer Asia Limited. Another case in point, is Foseco india Limited.
But then, I also get convinced by the way Lanxess India has displayed what good numbers can do. Areva T&D is also a case in point. Infact, I wanted to study this maze of supply side effects in greater detail, but was unable to get the thread.
Infact, one of the best lines I remember from Peter Lynch is when he mentions that ease of getting a divorce is not a good logic for marrying a person and similarly ease of making an exit is also not a compulsive reason to make an entry in a company's stock.You will find many people saying that isme to volumes hi nahi hai, or yeh kharid liya to baichega kisko?Thats the manifestation of the malaise of supply-side effect.
Basant and other forum members, will be glad if you can throw some light on this....
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