Showing posts with label Questions and Answers. Show all posts
Showing posts with label Questions and Answers. Show all posts

Friday, June 2, 2017

Is Galloping Eicher Motors' Share Price Justified?

Eicher Motors Ltd. Company Logo

 Actual Question:

 How did the share price of Eicher Motors shoot up to INR15800? What triggered this steep increase?

Answer:


Dear Friend!

I don’t know from where you got the number INR.15800 with reference to Eicher Motors Ltd.’s share. The current price is Rs.29,180 a piece.

Of course the price of the share has been rising continuously and has risen by about Rs.6000 (about 26%) in a span of just three months.

The reason for the continuous price is the bullish ‘Buy’ calls given by almost every brokerage in the country with great company performance expectations.

But, is all this euphoria really justified?

Is it fair to expect the company to deliver performance in exact synch with market expectations?
There is no doubt that Eicher Motors is a wonderful company, but while the share price can soar 26% in three months easily, it is impossible to deliver rise in the turnover and profits 26% in three months!

Please look at the graph below:
Eicher Motors' EPS versus Price Growth Comparitive Graph

You can see how dramatically the gap between the EPS and Price Rise is widening.

Now let us focus whether the Eicher Motors share is in the buy zone as per value investing norms.

Table Evaluating Eicher Motors Stock's Market Conditions

We can see that Eicher Motor’s share is very, very expensive and unaffordable. It is not wise to invest in any share at such high valuations.

Please note that it is not the fault of the company - it is the market’s fault. The company is delivering excellent results, but the market is unjustifiably enthusiastic.

In conclusion the galloping price of Eicher Motors Ltd.'s share price is entirely unjustified and unsustainable and imposes an unfair burden on the company to ever deliver superlative performance.

Suggested Further Reading:
Thank you,

With Best Regards,


Anand

Wednesday, May 31, 2017

Should we Hold Rural Electrification Shares after 10% Price Fall?

REC Company Logo

Dear Friend!

Rural Electrification Corporation (REC) Ltd. is a wonderful company.

I too own 564 shares as on date at an average holding cost of Rs.125.07.

Last week, while I was on vacation in Goa, I received two sms alerts informing me that the scrip has corrected by 5.58 and 5.08%, respectively.

Many people might have been spooked by such alerts, but not value investors. I did not panic at all, for I kew very well that REC is a wonderful company and nothing could go fundamentally wrong with it so suddenly.

After returning from the holiday I investigated the cause for the steep and sudden fall.
I was relieved to fund out that the cause for the market panic was a fairly large provision for contingency of Rs.616.19 crores (most likely towards bad debts) and consequent dip in the quarterly profit after tax to the extent of 24.80% compared to the previous quarter.

Tighter regulations and close monitoring of ‘Non Performing Assets (NPAs)’ from the last couple of years is forcing all financial institutions to come clean on their NPAs. Banks especially public sector banks have been making huge provisions for many quarters in the past. REC and PFC also have been making such provisions, though to a lesser extent.

Please see the following table for the provisions made in the last three quarters:

Table showing profits and profitability of REC for last 3 quarteres

You can see for yourself that though fairly large, this provision is certainly not alarming, nor is the dip in the profits. REC continues to maintain very strong PBT and PAT margins of over 32% and 22% respectively.

In conclusion let me reiterate that the fundamentals of REC are intact, that there is no need to panic, please do hold the shares you already have and continue to buy as the scrip is available at discounted prices with a price to earnings (PE) ratio of 6.02 and a price to book value ratio of 0.65.

Thank you,

With Best Regards,


Anand

Thursday, May 25, 2017

How to Choose the Stockbroker?

Stockbroker and Lady Investor


Actual Question:


Which is better for a long-term investment, Geojit or Zerodha?

Answer:


Dear Friend!

You have raised a very important question which needs serious consideration. The question I presume revolves around the brokerage fees charged by the stock broker firms. I am sticking to cash delivery here, since I do not indulge in intra-day-trading and also because when you said long-term it should mean for taking delivery and holding the stocks for long.

I have an online trading account with Kotak Securities. The declared brokerage charges for cash delivery is 0.5%. But many times after seeing the big difference between the total value of securities I had purchased and the amount debited from my account, I had wondered whether I am being charged 5% and not 0.5%!

To be honest with you, so far I have not attempted to investigate the matter of brokerage charged by Kotak Securities thoroughly and completely. I strongly believe that they will charge only 0.50% that they have shown on their website.

Coming back your specific question of whether Geojit or Zerodha is better, presently Zerodha does not charge any fees on cash delivery. I believe that Geojit charges 0.30% for delivery based trading. Therefore obviously Zerodha is better, for every penny saved is two pennies earned. 

If you already have a trading account with any stockbroker, it is difficult to have another trading account as you must give a power of attorney (POA) to the stockbroker and giving two POAs creates conflicts. Zerodha had admitted to me that when two trading accounts are involved, I could only buy through Zerodha and any sale of securities can be effected only through my first broker, Kotak Securities.

An online trading account is a long term relationship and should not be based purely on freebies

Further and most importantly, a 0.50% or 0.30% or 0% is not going to have any significant impact on the long-term investments. What is important for making the important decision who is:

Size, Sponsor:
During great market crashes, many of the customers of stockbrokers, especially those indulging in margin trading become bankrupt and default. As a result, small brokerage firms’ financials get impacted severely and sometimes they also default. Therefore large firms sponsored by equally large organisations are preferable.

For example, Kotak Securities is sponsored by Kotak Mahindra Bank, might be in a position to honor its financial commitments.

Vintage:
Companies that have been in existence for a very, very long time are preferable.

Why?

Their long existence gives an indication that they had successfully weathered many severe financial storms in the past and may reasonably be expected to be resilient in the future.

Zerodha being a recent entrant does not have a long vintage.

Financial Means:
The stockbroker must have a strong, stable and reliable financial strength. You are entrusting your life’s savings with your stockbroker. There are two components of financial assets you are entrusting the broker with:

Hard cash you deposit in advance to buy stocks and lying with the broker. This is relatively a small sum though.

The value of stocks, which will surely amount millions in the case of serious investors over long periods of time.

In case the broker becomes bankrupt, your life’s savings are under serious risk.

Reliable Service:
  • The software platform and other services should be reliable.
  • The software should have minimum downtime.
  • The broker  should provide reliable support through telephone, email and persoanl visits as and when required.

In conclusion, selecting a broker is not simply based on brokerage fees charged but a serious matter as the fate your hard earned savings and investments are in the hand of your stockbroker.
Thank you,
With Best Regards
Anand


Saturday, May 20, 2017

Why the Net Assets Value (NAV) of Mutual Fund Units Falls After Dividend?



Actual Question:


Why does MF NAV drop after paying dividend?
I assume dividend paid by MF is the dividend paid by stock-companies.

Answer:


Dear Friend!

Your question has two parts as follows:
  1. Why the NAV drops after paying Dividend?
  2. Is the dividend paid by the mutual fund is the same as paid by the companies in whose stocks the mutual fund invested the money.

Let's examine them one by one.

Why NAV of Mutual Funds Falls after paying Dividends:


Till the time the dividend is paid the value of the dividend gets accumulated and reflected in the NAV and once the dividend is paid out, naturally the NAV comes down. Please see the example below:

Table showing the decrease in value of NAV after dividend

In the case of stocks also the same things happen. The price of the share falls after the record date fixed for dividends. Then people popularly term the phenomenon as the stock has become ex-dividend.

Is the dividend paid by the mutual fund is the same as paid by the companies?


Under normal circumstance this should be the case, which is the prudent, conservative and correct policy. However, it is not uncommon for mutual funds to pay more dividends than actually earned, by dipping into the capital sum invested. This is obviously to please/ impress the investors that the fund had earned and paid handsome dividend, when it is not actually the case. Please see the following example:

table showing how dividend paid from capital by mutual funds


In conclusion, when dividend is paid, cash accompanied by value is lost and therefore the NAV of the mutual fund unit drops. Many a time funds pay dividends out of capital which is very objectionable practice.

Thank you,

With Best Regards


Anand