Archive for category Nonsense

Entry Price – THE Criteria

Now that everyone and his/her neighbour’s uncle have become an expert in the Euro crisis, having views on how the currency should or should not be pegged, how Greece can avoid bailout, how Goldman rules the world, why Paris Hilton came to India and some such, macro-economic views have no dearth of attention.  Instead, let’s refrain from the pack, and talk about the micro – specifically, why not look at some of the blue chip companies in India and see how they were doing over the past one year and probably learn a lesson or two.

We also know that RBI has been increasing their repo and reverse repo rates (whatever they might mean – but they do mean my loan rates are going up; not necessarily my deposit rates) due to increasing inflation (you know, commodities are at an all-time high, petrol prices are market-linked, food is rotting and yet food prices are high and all that). Given that information, we derive that all real estate and infrastructure companies are in trouble (you know, they have a ton of loans and interest rates are increasing – which means instalments increase and they don’t have money to pay). Therefore, many of these infrastructure companies and real estate companies stock prices will take a beating (and they have and how!). Also, since these infra and RE companies won’t pay, the Banks who have lent (primarily, Govt. banks, although ICICI and Kotak are right up there with them) to these companies are in trouble due to bad loans, provisioning for these loans and hence lower profits etc. Therefore Banking stocks have also taken a beating.

Given all this, let’s exclude the real estate, infra and banking stocks from the list below and see how some of the blue chip companies  (all the listed companies are in the BSE ‘A’ group) have fared over the last year.

Company Current Price Price 1 yr back Loss% Gain to be made for break-even
Jet Airways 263 835 68% 217%
Educomp Solutions 224 615 64% 175%
Bharat Heavy Movers 470 1106 58% 135%
PFC 144 345 55% 140%
Pantaloon 230 504 53% 119%
Reliance Comm. 81 170 52% 110%
Crompton Greaves 154 321 52% 108%
REC 174 345 50% 98%
Sun TV 275 527 48% 92%
SBI 1998 3155 37% 58%
BHEL 1643 2460 33% 50%
Tata Power 100 144 31% 44%
Tata Motors 155 215 28% 39%
Maruti Suzuki 1094 1494 27% 37%
Reliance Industries 791 1008 22% 27%
NTPC 164 211 22% 29%
Infosys 2453 3050 20% 24%

(I have slyly included SBI in the list)

Majority of the financial literature says that when it is a good and sustainable business, just buy and forget about the stock. Explain to me which one of these stocks do not count under ‘not good, not sustainable’ businesses. I agree that 1 year is a very short time frame to look at some of these stocks. However, people who have entered at last year’s prices would do well to look at the ‘gain to be made for break-even’ column and realize the stock has to move up approx. 1.5-3 times from current levels just to break-even.

Time and again, we are taught to invest in good, sustainable businesses. What we are not taught repeatedly is to check the entry price before investing in any particular stock. I am not being a retrospective determinant here – I am equally, if not more guilty to invest with the crowd sometimes. These losses don’t help in a couple of ways a) Gain to be made is much greater than the loss incurred just to break-even b) This loss, if realised, imagine the amount it could have compounded to in a fixed deposit and c) imagine the opportunity cost of investing in some other stock at reasonable price. (ok, that was three)

Moral of the story: Entry price, Entry price, Entry price. Check the damn thing whether it is reasonable or not before you bet on any stock. (A typical stock idea with more than a reasonable price right now is Jubilant Food Works – but then again, that’s my analysis. Your analysis might point to it being a multi-bagger from the current price)

Question: Since all these are good businesses, can I average down so that my effective purchase price is lower – you know in line with Buffett’s ‘invest in a good business at a fair price’ principle?

Answer: Sure you can – if you have the disposable income, if your analysis points out that the stock will make money in the future even from your average-d price.

Personal opinion: Never bet on any airlines. I don’t think they can make money. I am positive on Sun TV and SBI if there are further corrections.

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Consensus Sensex EPS Estimate – Bullcrap!

A pungent headline that. And I apologize for it. But I am sick and tired of these TV analysts touting consensus Sensex EPS estimates (and thereby, the Sensex value) for FY12, and why this market is cheap.

For one thing, I have no idea whether this market is cheap or not.

But I’d like to clear the consensus Sensex EPS estimate bullcrap.

This bit of news from Bank of America Merill Lynch ticked me off. Inspite of the bearish tone of the entire article, the analyst says that the consensus estimate for Sensex EPS is Rs. 1200 for FY12.

Some time back (when Sensex was around 17800 levels), another analyst Samir Arora said that we were trading at 15 times FY12 earnings. (which is the same as Sensex EPS to be around 1200).

I really don’t understand/know how can they say all this with a straight face. Seriously.

Let’s look at the data for the past 10 years.

Year Sensex Price/Earnings Sensex EPS EPS Growth(%)
May-01 3631.91 18.86 192.57
May-02 3125.73 16.19 193.07 0.26
May-03 3180.75 13.21 240.78 24.72
May-04 4759.62 17.28 275.44 14.39
May-05 6715.11 14.94 449.47 63.18
May-06 10398.61 20.41 509.49 13.35
May-07 14544.46 20.84 697.91 36.98
May-08 16415.57 20.66 794.56 13.85
May-09 14625.25 17.88 817.97 2.95
May-10 16944.63 19.96 848.93 3.79
May-11 18518.81 19.94 928.73 9.40

To ensure consistency, I have taken Sensex values for the past 10 years for the month of May. Apart from the news item from BoA, which appeared today (in May), there is another bit of logic for taking the month of May as a starter for the analysis. By April end, companies constituting 50% of the Sensex would have declared results and by May end, almost all constituents of the Sensex would have declared results. And hence, Sensex value in May is a good data point.

[So, when these analysts say FY11 earnings, FY12 earnings etc, they are usually talking about Sensex EPS in the April-May period of every year (immediately after the declaration of Q4 results of the previous year).

Sensex and P/E ratio taken from this link. Sensex EPS is derived by dividing Sensex by P/E ratio (very elementary, but still!). EPS growth is just a derivation of the values of Sensex EPS year on year.]

What has been the typical growth percentages in Sensex EPS? Except for the May 04-May-05 period and May-06-May-07 period, the growth in Sensex EPS has been very normal (our GDP growth has varied between 8-12% over these years, along with say average inflation of 8-12%). The growth in Sensex EPS has typically been in line with the GDP growth (give or take some inflation).

So, why did I call the analysts estimates bullcrap?

Well, when they say FY12 earnings consensus is 1200, they are implying a growth of FY11 EPS of 928.73 to FY12 EPS of 1200, implying a CAGR of 29.21%. Our GDP growth is estimated to be around 8-8.5% a year, and inflation around 12%. For a nominal growth of 20%, how the hell can Sensex achieve a CAGR of 29.21%? Absolutely ridiculous. How can this even be a consensus estimate? Whose consensus is this?

(Of course, there is a chance of an outlier, an extreme outlier where this can happen, but these guys are touting it as if its given).

And people are taking this 1200 figure to be golden and are extrapolating Sensex figures to be 24000 all over TV (CNBC etc).

Seriously, is this the kind of financial reporting that these folks undertake? With all their conscience and a straight face? It’s a bloody farce.

Let’s say we do really well and keep our growth in pace with GDP (give or take inflation), let’s say Sensex EPS grows at 12% in this financial year FY11-12. In that case, FY12 Sensex EPS value would be 1040 and given today’s Sensex at 18559, we are looking at a Sensex P/E of approx. 18. That is, we are quoting at 18 times FY12 earnings and not some 15 times FY12 earnings.

Is 18 times future earnings cheap or expensive depends on your personal perception of India’s growth. Should we invest at these levels? I have no clue. But at the very least, we can stop giving bhav to these consensus estimates

P.S – In Hyderabadi hindi, we’d say to the BoA ML guy, ‘kaisa dikru, howla dikru? deewana dikru? kahan se aaya yaaro…dimaag ki dahi banaane’ 🙂

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