Is Galloping Eicher Motors' Share Price Justified?

 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:

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.

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:

• Margin of Safety
• How to Calculate the Intrinsic Value Shares?
• You Only Find Out Who is Swimming Naked When The Tide Goes Out - Warren Buffett’s Quote

Thank you,

With Best Regards,

Anand

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

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:

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

Can we Buy a Stock Because it is Going Up?

"For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up."

Warren Buffett

What is the Better Investment Instrument Between Stock and Bond?

There is not a shred of doubt that only shares can give excellent results and create real wealth over a long period of time.

Bonds and Debentures just fixed income securities that offer no scope of capital appreciation, at least in India as of now. In advanced financial markets bond markets are highly mature allowing scope for a bit of capital appreciation and enhancing interest yield. Therefore they are merely like fixed deposits in banks with higher risks.

Investing in stocks directly however requires investing knowledge and there are two options before the investor:

Option 1: Making Investments Directly in Shares

Devote a couple of hours every day and learn and practice value investing. The best and only book I will recommend is “The Intelligent Investor” by Benjamin Graham.

You may also visit this blog “Wealth Vidya” and a few other value investing sites.

Caution:

Please beware of a number of books and websites that encourage people to engage in day-trading, margin-trading and trading in futures and options, commodities and currencies. All these are not investing activities but purely speculative acts that have the potential to destroy the capital and even lives of people.

Option 2: Investments in Index Mutual Funds:

Those who cannot afford to learn investing have this easy and wonderful option of investing in Index Funds and Exchange Traded Funds (ETFs).

Long term Investing:

Whether you choose option one or two, please always remember that the secret behind investment success is the law of “Miracle of Compounding”, which requires you to keep investing and be invested for 20 to 50 years.

Conclusion:

There is not an iota of doubt that only shares or stocks are the investment vehicles that can yield investment success and real wealth creation.