Category: Valuation

Historical Price to Book valuation of Nifty 500 stocks

Last week I was compiling how consistent wealth creators are faring vis a vis there 2008-09 prices.

I wasn’t the only one thinking on those lines, the guys at Ventura did even better and put together a comprehensive 20 year Price to Book Value of Nifty 500 stocks

Fantastic, you can download a copy from here

Some observations

1. Don’t do bottom fishing with 100 percent allocation, the price can go even lower if history is a guide

e.g. I was reviewing one the companies removed from scorecard KRBL P/B of 0.8 sounds cheap unless you see 0.2 in 2008/9

2. Don’t buy just because it’s cheap
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DLF market cap is the same today … Read the rest

How to Value Ashiana Housing

How to Value Ashiana housing ?

Prof Bakshi has beautifully explained this in one of the comments on his blog, I am reproducing it below for you to read and think.

The approach I like is to take the pre-tax operating cash flows and then deduct (as you’ve mentioned) the amount of money that would needed to be spent from these cash flows, for the acquisition of land for future projects. Here, I would reduce only that part of land purchase cost which is in lieu of EAC. In capex terms that we are more familiar with, this would be analogous to maintenance capex i.e. the amount of capex a company needs to do to maintain its current unit volume and not to grow beyond that. So maintenance capex in manufacturing companies is analogous to the amount of money Ashiana needs to spend on land every year just to maintain the current level of EAC. That cost should be deducted from annual pre-tax operating cash flow. The resulting number would represent the amount of pre-tax owner earnings that the business generates without counting any growth. You can then estimate the present value of that owner earnings stream

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What drives value of a business – Part 2

You can read the part 1 of this two part series here on what drives value

Lets review balance variables which impact valuation models

Past Prices

For a lot of cyclical companies – How they have been valued in past can help us guide on the band of multiples they can trade. However using a valuation model just based on past prices and multiples can be flawed, see the below diagram

value-6

As you can see past prices and even current prices are influenced by many factors, as long as business performance is driving prices up and down we can use past price in building current valuation model but that’s rarely the case

Apart from business performance, the stock price would be affected by

  • Economic /business cycle
  • Demand and supply (Mr Market’s mood)
  • Perception of company and its promoters

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What drives value of a business – Part 1

Here is one page snapshot on what drives value of company (and its ownership parts called shares)

Value-1

In this post I am not going to dig into those valuation parameters as I have detailed post on these parameters in past, you can read them here and here

We are going on spend some time today on inputs that drives these valuation parameters to draw some conclusion to refine at the process on how we approach on valuing business

Given we are dealing with 7 input factors this post would be in two parts

Free Cash flows

Value-2

Let’s draw some inferences

  • A company which converts its revenue to cash flows higher in proportion to other companies in similar industry should be valued more
  • A company which has relatively less cash expense (better credit terms, tax advantage, deferred expenses) compared to other companies in similar industry should be valued more
  • A company which has lower capital and maintenance expenses compared to other companies in similar industry should be valued more

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Get a framework to understand Value

One of the many difficult question to answer in investing is what drives value of business

What makes one business to trade at a premium to other business in eyes of market participants and how does one identify any such business which is out there and still not recognised by Markets

There is an excellent thread on Valuepickr and I keep going to as it does a great job of answering these question

First lets understand they key value drivers, Most of what I am proposing below is based on this excellent paper by Bear Stearns1 .

Value increases by

  1. Growing operating profit and investing in NPV positive opportunities
  2. Increasing ROIC (by taking capital out of the business or identifying high return projects)
  3. Reducing WACC (Lowering risk)
  4. Extending competitive advantage period (CAP)

Let’s give this a fancy name – 4 pillar framework

Can we put above theory in practice lets tackle each of the above components one by one

1. Growing operating profit and investing in NPV positive opportunities – This sounds fairly intuitive, has two parts

How can a company improve its operating profit – By Expanding operations or By expanding margins (EBIT as % of sales) – Read the rest

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Case Study – Value Companies – Noida

Valuing companies is a combination of art and science The DND Flyway (Delhi Noida Direct Flyway) is an eight-laned 9.2 km  access controlled tolled expressway which connects Delhi to Noida, an industrial suburb area. It was built and is maintained by The Noida Toll Bridge Company Ltd which we will try to value in this post

We discussed few valuation methodologies for a fast grower like CERA in previous post in today’s post we will try to value a slow grower /annuity kind of business

We will use below methods

Company Type Valuation model Basis Driven by Assumptions
Slow Growers Average PE Value Method The company is valued at its average PE for last 5 years Earnings Implicit assumptions that company would trade at average PE
  Economic Value Method Current EPS is converted to perpetuity with model discount factor Earnings Share is treated as perpetual bond
Liquidating business/ Cyclical / No growth business Graham Number Theoretically, the maximum price that a defensive investor should pay for the given stock Earnings To be used in bear phase for cyclical business
Fast growth Companies Graham Intrinsic Value The formula as described by Graham in the 1962 edition of Security Analysis Earnings The
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Case Study – Value Companies – CERA

Valuing companies is a combination of art and science – CERA sanity ware is a fast growing consumer focussed bathroom solution company in India, which we will try to value in this post

Before valuing any company answer these basic questions, this will enrich your research

 

  1. Do you understand the business ? Is this an industry you are comfortable talking about ?
  2. What does the company do to make money ?
  3. Is company taking undue advantage of any of its stakeholder ?
  4. Will Company be in business for next 5 to 10 years ?
  5. What is the competitive advantage of the business ? (Moat)
  6. Does company has ability to raise prices ?
  7. Is the product differentiated ? Corollary to the above question ?
  8. Is management honest and competent ?
  9. Is the business capital-intensive ?
  10. Is the business doing mindless imitation of peers ?
  11. Are debt proportions for company meaningful ?
  12. Is it selling for substantially less than they’re worth, or B) that the intrinsic value of the business was going to grow at a compound rate which was very satisfactory

Then equip yourself with various valuation methodologies to answer question 12, I use below as guide, and its evolving … Read the rest

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How to Value Stocks using Benjamin Graham style

Beloved readers,

Presenting the first tool from Tankrich – Benjamin Graham stock value calculator.

Here is the story….

Circa 2010

Five classmates decided to put Benjamin Graham’s teaching into  mathematical calculation to understand if a stock is overvalued or undervalued for their class presentation in MBA . What followed was days of research and a collaborative effort to come with a simplified model which is easy to use and understand.

We did it – 10/10 on presentation and a pat on back  from one of the most loved professors at school for bringing theory into practice.

Circa 2014

Retail investors don’t often get exposed to time less  principles of Benjamin Graham, so I thought why not use my class project and turn that into a online stock value calculator. Some of the key features of this calculator

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