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Wednesday, April 23, 2008

Why doesn't the Govt. control Realty Prices??

The government's threats of price control to the steel & cement sectors have been keeping the prices of shares in these sectors down. If the govt. thinks that these sectors are behaving as a cartel, then there are bigger cartels in other industries. Why doesn't the govt. control prices of real estate? Buying a house has gone beyond the reach of the Indian middle class. Prices of housing have gone up threefold in the last two and and a half years. A flat in Mumbai which used to cost 50 lakhs two years ago, is now quoting at 1.5 crores! It's impossible to buy a 3BHK flat in any decent area of Mumbai for less than 1.5 crores. Can the Indian middle class afford that? To my mind, the whole vicious cycle of inflation started with the sky-rocketing prices of real-estate in India. Everything else followed. Has the govt. taken any action on the Builders' cartel?

There is another cartel in the Pvt. Banking space. The charges these banks are levying from their customers for demat transactions, maintenance and other services are exhorbitant. Has the govt. taken any action on them? There is another cartel in the Food sector. The prices of food items like grains, fruits, vegetables, milk etc. have gone up a lot in the last two years. Has the govt. issued a threat to them for bringing down their prices?

So why is the govt. singling out just the steel and cement sectors for price control? In an overall inflation scenario, which is across the board, such targeting of the steel & cement industries is ridiculous.

Cheers!

12 comments:

vickys said...

Hi Superstar...
nice to see ur new post...
i have purchased essar oil at 270 and reliance infra at 1300....
what would you advice me ...do i keep/sell them??

Vicky

bidhan said...

Dear SuperStar

Cybermate Infotek Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on April 30, 2008, inter alia, to consider the following items of agenda :

1. To consider the Un-Audited Quarterly Financial Results far the quarter ended March 31, 2008.

2. To consider proposal to recommend dividend or bonus issue, if any.

3. To discuss & approve the Business Plan for a Strategic Business Unit (SBU) for providing RFID solutions in the Mobile computing space in accordance with the Reseller agreement entered with Motorola.

4. To discuss and adopt the terms and conditions of services for networking as well as Software Services to be provided to M/s. Andhra Pradesh Power Generation Corporation Ltd (APGENCO), Hyderabad.

5. To discuss and adopt the terms and conditions of contract of Services entered with M/s. Ariston Tek, Inc, New York; USA.


Hope the company is doing great!
What is your expectation about cybermate share kindly suggest

Thank you,
Regards,
Bidhan

ravi said...

Hi Sir,
How are you?
Sir can you educate us on following things.
how to calculate the copmany PES
?How to estimate the right Price? How to make fundamental analysis?
generally people says it is available at 15 time and 16times like that ?what does it mean ?What is meant by Bok value?
where do we get companys current oreder book value?
Please enlighten us on those issues such that we can select the companys more accuratelly

shashjpn said...

Hi Superstar,
what our view on ALOK INDUSTRIES after its anual results ?
and howz arvind mills now?

Thanks.

hardikpndy said...

*Understanding P/E Ratio and its significance*
**
The most commonly used valuation metric by investors is the price to
earnings ratio or commonly referred to as the P/E ratio. Though commonly
used, it is also misunderstood for various reasons. Here is an attempt to
simplify this valuation metric.

*How is P/E calculated?*

It is calculated by dividing market price of a stock by EPS (earnings per
share). EPS in turn is calculated by dividing the net profit of the company
by the number of shares outstanding.

*Having calculated the P/E, what does it stand for? *

Lets assume a stock is trading at Rs 100 and its EPS is Rs 20. The P/E
multiple is 5 (100 upon 20). Assuming that the company's EPS is likely to be
Rs 20 each year, it will take 5 years for the investor to realize Rs 100. Of
course, the assumption here is that the company's EPS is not growing at all.

Now taking the example of commonly traded stocks like Infosys and Tisco.
While the former trades at a P/E multiple of 25 times, the latter trades at
7 times. Why is it so? It is believed that the stock price of a company
tracks its long-term earnings growth potential. In an economy, some
companies (or sectors) are likely to grow at a faster (like say software or
pharma) rate. So, the P/E multiple of companies from these sectors are
likely to be higher and vice versa. Depending upon growth expectations, the
P/E multiple could vary.

There is one crucial factor here i.e. expectations. Though Infosys may be
trading at 25 times earnings, if EPS is expected to grow by 25% per annum,
the investor could realize the money in four years.

*P/E € ’¶ Is it a discount or a multiple? *

There are two ways of quoting P/E valuations:

1.

Tisco is currently trading at Rs 350 *discounting* its earnings by 5.5
times

2.

Tisco is currently trading at Rs 350 at a P/E *multiple* of 5.5 times

Which is right? The answer to this lies in the formula for calculating P/E
itself.

P/E is Market price divided by EPS. If we were to reverse the formula,

Market price = P/E *multiplied* by EPS. Stock prices reflect future earnings
potential and not past performance. Discounting the current price with
historical EPS is not a right way to analyse companies.

Take a hypothetical case. If Tisco's EPS for the next year is expected at Rs
50 and the growth in EPS is around 15%, the market price is calculated by
multiplying Rs 50 with 15 times i.e. Rs 750. When determining the stock
price, one does not discount earnings but multiply earnings.

*What is the 'right' P/E multiple for a stock? *

The answer to this question is not easy. In the previous example, we have
assigned a P/E multiple of 15 times because EPS is expected to grow by 15%
in the immediate year. Is this the right way? Not necessarily. Here, it is
important to understand industry characteristics of the company.

For a commodity stock like Tisco, EPS tends to grow at a faster rate when
steel prices are recovering or are at the peak and the EPS is likely to
decline at a faster rate during downturns. To qualify this statement, if we
look at EPS growth of Tisco from 1994 to 2004, the compounded growth in
earnings is 17%. However, the CAGR growth in the last three years was 193%
(the recovery phase). So, if one believes that steel demand is likely to
trace long-term economic growth and that 15% growth is unsustainable, the
P/E multiple should be ideally much lower than 15 times. Similarly, the
long-term growth prospects for software companies could be much higher than
commodities. So, the P/E multiple for software stocks could be at a premium.

Determining the P/E multiple for a stock/sector also depends on:

1.

*Historical performance* € ’¶ Why does Infosys trade at a higher P/E
multiple compared to Satyam? By historical performance, we mean, focus of
the management (without unrelated diversifications) , ability to outperform
competitors in downturn/upturns and promise vs performance. This can be
gauged if one looks at the last three to five year annual reports of a
company.

2.

*The sector characteristics* € ’¶ Margin profile, whether it is asset
intensive and intensity of competition. Less asset intensive sectors (say,
FMCG) are considered defensive and therefore, could trade a premium to the
overall market.

3.

And more importantly, *expectations* . Take the case of textile stocks.
Expectations of significant growth opportunities post the 2005 quote regime
phase out has resulted in upgradation of P/E multiple of the textile sector.

*When is P/E not useful? *

1.

*Economic cycles *- In FY02, Tisco was trading at a P/E multiple of
20.5 times its FY02 earnings. Was it expensive? Based on FY05 expected
earnings, Tisco is trading at a P/E multiple of 5 times its earnings (at Rs
250). Is it cheap? If one ignored Tisco in FY02 on the basis that it was
'expensive' on the P/E multiple in FY02, the opportunity loss is as much as
350%. Businesses operate in cycles. During downturn, EPS will be low but P/E
will be inflated and vice versa. At the same time, during expansionary
phase, corporates invest in capacities. In this case, high depreciation
costs suppress earnings. P/E, in this context, may mislead investors.

2.

*Not actively tracked* € ’¶ There are number of companies in the Indian
stock market that are not actively tracked by investors, analyst and
institutions. For example, Infosys' average price was Rs 2 in FY94 and the
P/E multiple was 17 times. At times, P/E multiple may be lower because some
sectors/stocks are not in the limelight.

3.

*Expectations* € ’¶ On the downside, some stocks may be trading at a
significant premium because earnings expectations are higher. High P/E also
does not mean a good stock to buy. What if the expectations are unrealistic?
One needs to exercise caution to this extent.

4.

*Means little as a standalone number* € ’¶ P/E, as a standalone number,
means little. Besides P/E, it is also important to look at margins, return
on net worth, cash generating ability and consistency in performance over
the years to assign a value to a stock.

5.

*Market sentiment *€ ’¶ During bear phases or when interest in stocks is
low, valuations could be depressed. Since equities are considered less
attractive during these periods, valuations are likely to be below
historical average or below earnings growth prospects.

*When is P/E useful? *

*A powerful metric* € ’¶ Unlike metrics like discounted cash flow method and so
on, P/E is relatively a simple and at the same time, a powerful metric from
a retail investor perspective. Though the factors behind determining the
'right' P/E multiple are important, a historical perspective of a stock's
P/E could make this exercise less complex.

To conclude, valuation of stocks involves subjectivity. A person X may
assign a higher P/E multiple to the stock as compared to a person Y
depending on the risk profile and growth expectations. In the end, it all
boils down to how the company is likely to perform.

It is not that stock market is always right when it comes to valuing a
stock! As Mr. Benjamin Graham puts it "in the short term, the market is a
'voting' machine whereon countless individuals register choices that are
product partly of reason and partly of emotion. However, in the long-term,
the market is a 'weighing' machine on which the value of each issue
(business) is recorded by an exact and impersonal mechanism". Watch the
earnings!

Cheers!
Hardik

Atul said...

There is a very simple answer to your question "Why doesn't Govt. control Realty Prices??".

The answer is:
1. 95% of ministers (both ruling party and opposition party) do have large stack in Real Estate.

2. Govt., especially, FM is clearly supporting Builder Lobby. The Steel and Cement prices are directly hurting Builder Lobby of india. Other prices, like food is affecting general public, for which Govt is not et-al concerned about.

3. Builder Lobby is far more powerful to Govt, as compared to any other industry in India. For two reasons:
- They are Mafia Dons converted to Builders. By nature, they are powerful for Politicians.
- They are feeding Indian Politicians far more powerfully then any other industry.

India is growing... but where !!??? The final winner will be surely - Only Builders. Everybody else will go down the drain, in this Growth story.

nitin said...

Hi Superstar

what are your views on Spicejet with the news that promoters are interested in selling stake.

Nitin

Kurian said...

Hi Super*

Can you please advice me how much JKLakshmi shares I shud buy
I am new to this trading
Suppose i have a 1 Lakh cash reserve,Do you feel its worth buying 1000 shares? Please advice

Lava said...

Hey Superstar,

I have been waiting for your take on the current market situation...Why don't you post ur insight into the present situation and the attractive buys for now....

sanjay said...

HI gem
wheather market goes down your reco will surely work in future,so dont tilt yourself so long.at least let us all know what the genious think about current market situation.
Thanks

vickys said...

Hi dude....
we know that you around as you r approving out Q's ... but dont understand why are you not answering them. ......

deepakps said...

Hi Superstar,
I have following shares in my portfolio:
200 GMR @ 200
200 Powergrid @120
500 Alps@ 40

I am new to market and want to buy JK Lakshmi Cement at CMP 96 and Mercator Lines at CMP 100. please tell me whether i can buy or not?

Comment on JK Lakshmi and Mercator lines.