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