project 1

A PROJECT ON EQUITY VALUATION

ACKNOWLEDGEMENT I, M. Rahul, a student of M.B.A at SCHOOL OF MANAGEMENT STUDIES, J.N.T.U.H cordially convey my gratitude to the following people who have helped me immensely in this project. First and foremost I express my gratitude to the Director of SMS-JNTUH, Dr. A. R. Aryasri, PhD for giving this opportunity to learn practically through this project, for allotting most experienced faculty as guide to my project and also for providing sufficient time to complete this project.I cordially express my gratitude to my guide, Associate Professor. Dr. Sindhu, PhD for guiding me through this project, for providing valuable insights and suggestions, for clarifying my doubts with patience and for all the support and inspiration she gave me to complete this project.Finally I would like to express my gratitude to Dr. G. Surender Reddy, guest lecturer at SMS-JNTUH for clarifying my doubts especially in case of valuation of banking stocks and also for giving valuable inputs.

Rahul Molagavalli09031E0016MBA-4th Semester SMS- JNTUH.

INDEX CHAPTER-1 Introduction Need of the Study Objectives Scope of the Study Research Methodology Hypotheses Tools & Techniques Sampling Data Sources Period of Study Limitations.. Further scope of study

CHAPTER-2 List of Stocks selected and Introduction.

CHAPTER-3 Equity Valuation Models CHAPTER-4 Data Analysis & Empirical Study of Selected Stocks . CHAPTER-5 Findings, Conclusions and Suggestions Annexure. Bibliography..

CHAPTER-1Introduction to Equity Valuation

Equity shares can be described more easily than fixed income securities. However, they are more difficult to analyze. Fixed income securities typically have a limited life and a well-defined cash flow stream. Equity shares have neither. While the basic principles of valuation are the same for fixed income securities as well as equity shares, the factors of growth and risk create greater complexity in the case of equity shares. Identifying mispriced securities is not easy. Yet there are enough chinks in the efficient market hypothesis and hence the search for mispriced securities cannot be dismissed out of hand. Moreover, ongoing search for mispriced securities contributes to a high degree of market efficiency.

FEATURES OF EQUITY VALUATION

Following are the features of Equity Valuation:1) Equity Valuation is a highly specialized process.2) Like other assets in finance, the value of a stock is the Present Value of its Cash Flows. 3) The total equity of a company is the sum of both tangible assets and intangible qualities. Tangible assets include working capital, cash, and inventory and shareholder equity. Intangible qualities, or intangible "assets," may include brand potential, trademarks and stock valuations.4) The valuation may also take the firm's enterprise value (EV) into account; this is calculated by combining the net debt per share with the price per share. Performance indicators include the price/earnings ratio, dividend yield, and the Earnings Before Interest, Depreciation and Amortization (EBIDA).5) Any company under consideration for sale needs proficient, objective valuation, whether its stock is privately owned by one individual or publicly traded on one or more of the major exchanges or in the over the counter market.6) Stocks are typically valued as perpetual securities as corporations potentially have an infinite life, and thus can pay dividends forever.

Equity analysts employ two kinds of analysis. They are as follows:1) Fundamental Analysis 2) Technical AnalysisFundamental analysts assess the fair market value of equity shares by examining the assets, earnings prospects, cash flow projections, and dividend potential. Fundamental analysts differ from technical analysts who essentially rely on price and volume trends and other market indicators to identify trading opportunities.

Need for Equity Valuation:There are several reasons, for which we need Equity Valuation. They are as follows:

Initial Public Offer Merger and Demerger Purchase/sale of equity stake by joint venture partnersLiquidationAcquisition and takeoverDisinvestment.

Objectives of Equity Valuation:1) To comprehend the conceptual determinants of equity by applying various approaches of valuation. 2) To focus on the intrinsic value of a stock using the zero growth model, the constant growth model, and the single-stage growth model.3) To examine the growth of dividends and the earnings per share and its impact on equity price.4) To identify the price of the equity share and the required rate of return.5) To analyze the determinants of the P/E ratio and its effect on equity.

Scope of the Study:The analysis is based on main activities i.e. operating activities of the company and other activities are ignored. The study is based on recent annual reports, past performance, current trends in that sector and statistics of RBI. Only those companies which are listed on the major stock exchanges in India were considered.The concept of return and risk and dividends paid, as the determinants of the value are as fundamentals and valid to validation of the securities. At the outset it is not easy to predict the rates and prices of stocks. Investor can design his/her investment and financing activities in a manner which exploits the relevant variables to maximize the market value of shares.Research Methodology: The project is on equity valuation where the equity share prices of the companies are analyzed. The study is based on the past prices and the financials of companies involved in equity valuation. The nature of data collection is highly based on the information available through Secondary Data. The literature was reviewed first and then different methods of valuation were studied. After studying the literature and valuation models, I used Convenience sampling to choose stocks for valuation. As the information is the biggest constraint I selected companies for which information was readily available. Later the valuation is applied is to different stocks and results are recorded based on which suggestions are made.

Hypotheses: While ascertaining the value of equity shares, different assumptions are made regarding the companys future profits, the amount and the timing of the dividends, the required rate of return etc. Therefore, different approaches have been developed for the valuation of equity shares. These different approaches however, make the following assumptions regarding the basic characteristics of equity shares:

1.There is no impact of Dividends on an equity share price.2.There is no significant impact of company related information on its share price.3.There is no significant impact of financing decisions of a company on its share price.

Tools & Techniques:The tools and techniques used in this study are various valuations models used to value the stock such as EVA, MVA, Price Earnings ratios, Balance sheet models, and BETA among others.Apart from this, calculation of covariance of different stocks with the stock indices is done using Capital Asset Pricing Model and the value of BETA (Covariance with the indices) for various stocks is annexed in the annexure. Sampling:The sampling method used is Convenience Sampling. Depending up on the availability of information ten companies belonging to five different sectors including banking sector, FMCG sector, IT industry, auto industry, cement industry were selected. Two companies each belonging to five different sectors are selected randomly and tested for various methods of valuation. The two companies selected were selected in such a way that one was a top company in the sector and the other was a lesser known one. This was to differentiate between performing stocks and nonperforming, undervalued stocks and overvalued stocks.

Data Sources:The data is collected from both primary sources and secondary sources. PRIMARY DATA: The data collected from Brokers by interacting with them personally. The data and information was gathered through various magazines, and annual reports of the companies. SECONDARY DATA

The data collected from various Books, Newspapers and Internet. Detailed calculation of different Equity Valuation Models has been given in Annexure.

Period of Study:

The period of study was Six months. As the project involved in depth study and understanding of various models of valuation and information was not readily available it took Six months. The information was collected from various sources and in that process a lot of time was consumed for gathering the data necessary for valuing itself.

Limitations:

1. Intrinsic values are based on operating income only and no other inflows are considered. 2. Project is restricted to only listed companies. 3. No company visits are possible so assumptions are based on secondary data, current scenario and statistics of RBI.4. Information is the biggest constraint. Because of the lack of availability of information all the valuation models were not used.5. The theoretical values are different from actual values.

Further Scope of Study:

The study can be used to value the stocks but not to time the markets. Further the study depends on the availability of the resources necessary to conduct the analysis. If the information is readily available, then it can be used to derive more results up on carrying out the research. Apart from analyzing and suggesting actions whether to buy, sell or hold the study cannot be used for any other means.

CHAPTER-2

List of Stocks selected for Equity Valuation. The stocks selected for the purpose of valuation were based on the availability of information about the stocks and convenience. For the purpose of valuation five sectors were selected and two stocks each from a particular stock are selected from each of the five sectors. The list of stocks is as follows:

Cement industry: Ambuja cements Prism cement

Automobile industry: Bajaj Auto Maharashtra Scooters

FMCG Industry: ITC Limited Colgate India limited

I.T Industry: Mphasis HCL Tech.

Banking Industry: SBI Yes Bank Cement Industry of India:

The cement industry comprises of 125 large cement plants with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum.

The Cement Corporation of India, which is a Central Public Sector Undertaking, has 10 units. There are 10 large cement plants owned by various State Governments. The total installed capacity in the country as a whole is 159.38 million tonnes. Actual cement production in 2002-03 was 116.35 million tonnes as against a production of 106.90 million tonnes in 2001-02, registering a growth rate of 8.84%. Major players in cement production are Ambuja cement, Aditya Cement, J K Cement and L & T cement.

Ambuja Cement:Ambuja Cements Ltd. (ACL) is one of the leading cement manufacturing companies in India. The Company, initially called Gujarat Ambuja Cements Ltd., was founded by Narotam Sekhsaria in 1983 with a partner, Suresh Neotia. Sekhsarias business acumen and leadership skills put the company on a fast track to growth. The Company commenced cement production in 1986. The global cement major Holcim acquired management control of ACL in 2006. Holcim today holds little over 46% equity in ACL. The Company is currently known as Ambuja Cements Ltd.

ACL has grown dynamically over the past decade. Its current cement capacity is about 25 million tonnes. The Company has five integrated cement manufacturing plants and eight cement grinding units across the country. ACL enjoys a reputation of being one of the most efficient cement manufacturers in the world. Its environment protection measures are on par with the finest in the country. It is one of the most profitable and innovative cement companies in India. ACL is the first Indian cement manufacturers to build a captive port with three terminals along the countrys western coastline to facilitate timely, cost effective and environmentally cleaner shipments of bulk cement to its customers. The Company has its own fleet of ships. ACL has also pioneered the development of the multiple bio-mass co-fired technology for generating greener power in its captive plants.Prism Cement:

Prism Cement Limited is India's largest integrated Building Materials Company with a wide range from cement, ready-mixed concrete, tiles, and bath products to kitchens. The company has three Divisions, viz. Prism Cement, H & R Johnson (India), and RMC Ready-mix (India). Prism Cement Limited also has a 74% stake in Raheja QBE General Insurance Company Limited, a JV with QBE Group of Australia. The Company is managed by a focused Board comprising of eminent experts from diverse fields ably supported by a professional management team. The Management team ensures high levels of transparency, accountability and equity in all facets of the company's operations.

Divisions:

1) Prism Cements: Prism Cement commenced its production in August 1997 and manufactures Portland Pozzollana Cement (PPC) with the brand name 'Champion' and Ordinary Portland Cement (OPC).

2) H&R Johnson (India): Established in 1958, H & R Johnson (India) is the market leader in the field of ceramic tiles in India.

3) RMC Readymix (India): RMC Readymix (India) is the third-largest ready-mixed concrete manufacturer in India. Set-up in 1996, RMC currently operates 57 ready-mixed concrete plants in 27 cities/towns across the Country.

Automotive Industry

The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world, with an annual production of more than 3.7 million units in 2010. According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 16-18 per cent to sell around three million units in the course of 2011-12.[2] In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea, and Thailand.

The Indian Automobile Industry manufactures over 11 million vehicles and exports about 1.5 million each year. The dominant products of the industry are two wheelers with a market share of over 75% and passenger cars with a market share of about 16%.[18] Commercial vehicles and three wheelers share about 9% of the market between them. About 91% of the vehicles sold are used by households and only about 9% for commercial purposes. The industry has a turnover of more than USD $35 billion and provides direct and indirect employment to over 13 million people.

Bajaj Auto

The Bajaj Group is amongst the top 10 business houses in India. Its footprint stretches over a wide range of industries, spanning automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance, travel and finance. The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest two- and three- wheeler manufacturer and the Bajaj brand is well-known across several countries in Latin America, Africa, Middle East, South and South East Asia. Founded in 1926, at the height of India's movement for independence from the British, the group has an illustrious history. The integrity, dedication, resourcefulness and determination to succeed which are characteristic of the group today, are often traced back to its birth during those days of relentless devotion to a common cause. Jamnalal Bajaj, founder of the group, was a close confidant and disciple of Mahatma Gandhi. In fact, Gandhiji had adopted him as his son. This close relationship and his deep involvement in the independence movement did not leave Jamnalal Bajaj with much time to spend on his newly launched business venture.

Bajaj Auto is the flagship of the Bajaj group of companies. The group comprises of 34 companies and was founded in the year 1926.

Maharashtra Scooters The Company, which was incorporated on 11th June, 1975, started manufacture of "Priya" brand of motorized geared scooters from 13th August, 1976, in technical know-how / collaboration with erstwhile BAL. Subsequently, the Company started manufacture of "Bajaj Super" / "Bajaj Chetak" models of scooters and with the gradual shift in consumer preferences from geared scooters to the motorcycles, the Company discontinued production of geared scooters effective 1st April, 2006. The manufacturing activity of the Company is currently restricted to the manufacture of pressure die casting dies, jigs and fixtures, primarily meant for two and three - wheeler industry. IT Industry:The Indian Information Technology industry accounts for a 5.19% of the country's GDP and export earnings as of 2009, while providing employment to a significant number of its tertiary sector workforce. However, only 2.5 million people are employed in the sector either directly or indirectly. In 2010-11, annual revenues from IT-BPO sector is estimated to have grown over $54.33 billion compared to China with $35.76 billion and Philippines with $8.85 billion. It is expected to touch at US$225 billion by 2020. The most prominent IT hub is Bangalore and Hyderabad. The other emerging destinations are Chennai, Coimbatore, Kolkata, Kochi, Pune, Mumbai, Ahmedabad, and NCR. Technically proficient immigrants from India sought jobs in the western world from the 1950s onwards as India's education system produced more engineers than its industry could absorb. India's growing stature in the Information Age enabled it to form close ties with both the United States of America and the European Union. However, the recent global financial crises have deeply impacted the Indian IT companies as well as global companies. As a result hiring has dropped sharply, and employees are looking at different sectors like the financial service, telecommunications, and manufacturing industries, which have been growing phenomenally over the last few years. India's IT Services industry was born in Mumbai in 1967 with the establishment of Tata Group in partnership with Burroughs. The first software export zone SEEPZ was set up here way back in 1973, the old avatar of the modern day IT park. More than 80 percent of the country's software exports happened out of SEEPZ, Mumbai in 80s.The Indian Government acquired the EVS EM computers from the Soviet Union, which were used in large companies and research laboratories. In 1968 Tata Consultancy Servicesestablished in SEEPZ, Mumbai by the Tata Groupwere the country's largest software producers during the 1960s. As an outcome of the various policies of Jawaharlal Nehru the economically beleaguered country was able to build a large scientific workforce, third in numbers only to that of the United States of America and the Soviet Union. On 18 August 1951 the minister of education Maulana Abul Kalam Azad, inaugurated the Indian Institute of Technology at Kharagpur in West Bengal. Possibly modeled after the Massachusetts Institute of Technology these institutions were conceived by a 22 member committee of scholars and entrepreneurs under the chairmanship of N. R. Sarkar.

Mphasis Ltd:MphasiS consistently delivers Applications services, Infrastructure services, and Business Process Outsourcing (BPO) services globally through a combination of technology knowhow, domain and process expertise.MphasiS Limited (then, MphasiS BFL Limited) was formed in June 2000 after the merger of the US-based IT consulting company MphasiS Corporation (founded in 1998) and the Indian IT services company BFL Software Limited (founded in 1993).MphasiS supports G1000 companies around the world in the improvement of their business processes. Our unique strength lies in our ability to provide integrated solutions involving Applications, Business Process Outsourcing, and Infrastructure services capabilities. The convergence of technologies such as web services, workflow software and business performance monitoring along with business intelligence and customer focus drive all our services delivery offerings. Our emphasis is on developing flexible platforms that allow our clients to rapidly implement business processes with minimal capital outlays.

HCL Tech: HCL Technologies is a leading global IT services company, working with clients in the areas that impact and redefine the core of their businesses. Since its inception into the global landscape after its IPO in 1999, HCL focuses on 'transformational outsourcing', underlined by innovation and value creation, and offers integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and BPO. HCL leverages its extensive global offshore infrastructure and network of offices in 26 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare. HCL takes pride in its philosophy of 'Employees First, Customers Second' which empowers our 80,520 transformers to create a real value for the customers. HCL Technologies, along with its subsidiaries, has reported consolidated revenues of US$ 3.7 billion (Rs. 16,977 crores), as on 30th September (on LTM basis) 2011.

FMCG Industry: Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics,packaged food products, soft drinks, tissue paper, and chocolate bars.

Indias FMCG sector is the fourth largest sector in the economy and creates employment for more than three million people in downstream activities. Its principal constituents are Household Care, Personal Care and Food & Beverages. The total FMCG market is in excess of Rs. 85,000 Crores. It is currently growing at double digit growth rate and is expected to maintain a high growth rate. FMCG Industry is characterized by a well established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments.The Rs 85,000-crore Indian FMCG industry is expected to register a healthy growth in the third quarter of 2008-09 despite the economic downturn.

Colgate Palmolive India Ltd: From a modest start in 1937, when hand-carts were used to distribute Colgate Dental Cream Toothpaste, Colgate-Palmolive (India) today has one of the widest distribution networks in India a logistical marvel that makes Colgate available in almost 4.5 million retail outlets across the country. The Company has grown to a Rs. 2200 crore plus organization with an outstanding record of enhancing value for its strong shareholder base. The company dominates the Rs. 4100 crore Indian toothpaste market by commanding more than 50% of the market share.Since 1976, Colgate has worked in close partnership with the Indian Dental Association (IDA) to spread the message of oral hygiene to children across the country under its Bright Smiles, Bright Futures Schools Dental Education Program. This program has successfully reached more than 95 million school children covering around 1,94,000 schools in 250 towns across the country since its launch. The program focuses on children so that the message of good oral hygiene is carried home to families and the community at large. In 2004, as an additional effort to create awareness for good oral hygiene Oral Health Month (OHM), was introduced. Since its launch, OHM is conducted each year during September / October, where free dental checkups are conducted by Colgate in partnership with IDA across the country. Conducted in designated towns and cities to establish and promote the importance of good oral hygiene, OHM is Colgates mass consumer contact program.

ITC Ltd: ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India Limited. As the Company's ownership progressively Indianised, the name of the Company was changed from Imperial Tobacco Company of India Limited to India Tobacco Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multi-business portfolio encompassing a wide range of businesses - Cigarettes & Tobacco, Hotels, Information Technology, Packaging, Paperboards & Specialty Papers, Agri-business, Foods, Lifestyle Retailing, Education & Stationery and Personal Care - the full stops in the Company's name were removed effective September 18, 2001. The Company now stands rechristened 'ITC Limited'.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.

Indian Banking Industry:

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country.

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.

YES BANK:

Since inception in 2004, YES BANK has fructified into a Full Service Commercial Bank that has steadily built Corporate and Institutional Banking, Financial Markets, Investment Banking, Corporate Finance, Branch Banking, Business and Transaction Banking, and Wealth Management business lines across the country, and is well equipped to offer a range of products and services to corporate and retail customers. YES BANK offers a full-range of client-focused corporate banking services, including working capital finance, specialized corporate finance, trade and transactional services, treasury risk management services, investment banking solutions and liquidity management solutions among others to a highly focused client base. The Bank also has a widespread branch network of over 325 branches across 200 cities, with over 312 ATM's and 2 National Operating Centers in Mumbai and Gurgaon. Since inception, YES BANK has adopted innovative and creative technologies that facilitate robust systems and processes and facilitate in the delivery of world-class banking solutions that significantly improve the business and financial efficiency of our clients.

State Bank of India:

State Bank of India is the countrys largest commercial Bank in terms of profits, assets, deposits, branches and employees. The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. SBI provides services which include personal banking, NRI services, corporate banking, Agriculture financing, Treasury operations, and other services.

Chapter-3

Equity Valuation Models:There are various models of Equity Valuation. But depending up on the frequency of usage and convenience very few are used for valuation of stocks. They are as follows.

1) Balance sheet based approach models: Liquidation Value Book Value Debt- Equity Ratio Current Ratio

2) Price based approach models: P/E Ratio (P/E)/G Ratio P/Book value Ratio

3) Dividend Discount Models: Constant Growth Model Zero growth Model Single Period Valuation Model

4) EVA (Economic Value Added) approach of Equity valuation 5) MVA (Market Value Added) approach of Equity Valuation

Balance sheet based models:

1) Liquidation value: The liquidation value per share is equal toLiquidation value (L.V) = (Value realized from liquidating - Amount to be paid to all the creditors and all the assets for the firm and to preference share holders ) Number of outstanding equity sharesLiquidation value of equity gives the amount that investors or common share holders would get if the business is liquidated. The current market price should always be greater than the Liquidation value per share. The logic is that if the current price is less than what a share holder would get if business is liquidated then it is better to stop the operations and liquidate the assets which gives more money to the investor than investing in that stock.

2) Book value: The book value per share is simply the net worth of the company (which is equal to paid up equity plus reserves and surplus divided by the number of outstanding equity shares). Balance sheet figures rarely reflect earning power and hence the book value per share cannot be regarded as a good proxy for true investment value. Book Value= (Equity Capital+ Reserves & Surplus)/No. of shares outstanding

Book value of a share gives the amount of assets owned by the equity investors. It should always be greater than current market price of a share because investing in a share should fetch something more. If the current price is less than Book value per share then it is better not to invest in the share. Book value of a share is always almost equal to Liquidation value.

Debt-Equity Ratio:Debt Equity ratio is the ratio of the debt of a firm to its equity. Debt is the amount borrowed by a firm and Equity is the Capital funded by the owners or the equity share holders of a firm. In this case equity capital does not include reserves & surplus. Debt-Equity Ratio= Debt of the firm/Equity capital Debt should not be too much because it is an obligation and requires frequent interest payments. It should not be too low as well. Debt Equity Ratio varies from industry to ratio.

Current Ratio: Current ratio is a Liquidity ratio which measures the ability of a company to meet its short term obligation. It is the ratio of Current Assets of firm to its Current Liabilities. Current assets are cash, inventory, work in progress, and prepaid expenses.Current Liabilities are Income tax, Dividends, and Over Draft. Current Ratio=Current Assets/Current LiabilitiesCurrent Ratio should neither be too high nor too low. A high Current Ratio Indicates the firm is not using its current assets well. It shows the current assets are idle. A low Current Ratio indicates the inability of a firm to meet its short term obligations

Price Based Approaches of Equity Valuation: P/E RATIO: When it comes to valuing stocks, the price/earnings ratio is one of the oldest and most frequently used metrics. It is also known as "price multiple" or "earnings multiple". A valuation ratio of a company's current share price compared to its per-share earnings. P/E Ratio= Current market of a share/Earnings per share

A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

(P/E)/G RATIO: The PEG ratio was developed to address shortcomings in the use of the P/E ratio. Specifically, it was created to adjust the P/E ratio for relative projected future earnings growth rates of different firms. A ratio used to determine a stock's value while taking into account earnings growth.

(P/E)/G Ratio= (P/E Ratio of a share)/ Average Annual growth in EPS

P/BV RATIO: It reflects the markets expectation. Book value of an asset reflects its original cost. It might deviate significantly from market value if the earning power of the asset has increased or declined significantly since its acquisition. The Price/ Book value ratio is the ratio of market value of equity to book value of equity, i.e. the measure of stakeholders equity in the balance sheet. It is calculated as follows, Price/Book value of a share (P/B.V) = (Current market price of a share)/ (Book value of a share)

Dividend Discount Models: According to the dividend discount model, conceptually a very sound and appealing model, the value of an equity share is equal to the present value of dividends expected from its ownership plus the present value of the sale price expected when the equity share is sold. For applying the dividend discount model, we will make the following assumptions:1) Dividends are paid annually this seems to be a common practice for business firms in India; and2) The first dividend is received one year after the equity share is bought.

Single Period Valuation Model: In the single period valuation model it is assumed that the investors hold the share for a single period that is usually one year. Where Po=Current price of the equity share D1=Dividend expected a year hence P1 =Price of the share expected a year hence r=rate of return on the equity share.

Expected Rate of Return:The intrinsic value of an equity share, given information about 1) The forecast values of dividend and share price, and2) The required rate of return

r= (D1 / P0) + g Where r = rate of return on the equity share. D1=Dividend expected a year hence P1=Current price of the equity share g= Expected growth of EPS

Zero Growth Model: If we assume that the dividend per share remains constant year after year at a value of D,

On simplification it becomes: Po= D/r

Constant Growth Model (Gordon Model):

One of the most popular dividend discount models, called the Gordon model as it was originally proposed by Myron J. Gordon, assumes that the dividend per share grows at a constant rate (g). The value of a share, under this assumption, is:

Applying the formula for the sum of a geometric progression, the above expression simplifies to: Po= D/(r-g)Economic Value Added Approach: Economic Value Added is a financial performance method to calculate the true economic profit of a corporation. EVA method is based on the past performance of the enterprise. The underlying economic principle in this method is to determine whether the firm is earning higher rate of return on the entire invested funds then the cost of such funds. If the answer is positive, the firms management is adding to the shareholders value by earning extra return for them.

It is a single, value-based measure that was intended to evaluate business strategies, capital projects and to maximize long-term shareholders wealth. Value of Shareholder is very important and therefore EVA is Value-Based Metrics seen as good measures of a companys performance. EVA can be used for the setting of the goals, capital budgeting, corporation value etc. Value of the stock with the help of EVA can be calculated as follows,

EVA=NOPAT-(WACC*TCE)

Where, NOPAT= Net operating profit after taxTCE = Total capital employedWACC = weighted average cost of capitalEVA value shows the economic profit generated by the company. It should always be positive. This method of valuation is very useful for valuation.

Market Value Added Approach: MVA measures the change in the market value of the firms equity vis--vis equity investment. Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. If MVA is positive, the firm has added value. If it is negative, the firm has destroyed value. The amount of value added needs to be greater than the firm's investors could have achieved investing in the market portfolio. Though the concept of MVA is normally used in the context of equity investment therefore it has greater relevance for equity shareholder. Value of the stock with the help of MVA can be calculated as follows, MVA= Market capitalization value-Total capital employedThe value of MVA should always be positive which indicates the equity share has made some value over the investment.

CHAPTER-4

Empirical Valuation of Stocks

Ambuja Cements:

Financial Information:values in rupees

PARTICLUARS31/12/201031/12/200931/12/2008

Net Profit12,636,100,000.0012,183,700,000.0014,022,700,000.00

Dividend paid for the year (as a % of earnings)0.310.300.24

Dividend amount3,972,200,000.003,655,900,000.003,349,700,000.00

No. of shares outstanding at the end of the year 1,529,859,000.00

1,523,711,000.00

1,522,599,000.00

Dividend per share2.602.402.20

Earnings per share8.288.009.21

Retention ratio0.690.700.76

Equity Capital3,059,700,000.003,047,400,000.003,054,200,000.00

Debt650,300,000.001,657,000,000.002,886,700,000.00

Total Capital3,710,000,000.004,704,400,000.005,940,900,000.00

Reserves & Surplus70,227,900,000.0061,659,200,000.0053,680,100,000.00

Return on Equity0.170.190.25

Average Return on Equity for the three years= (.17+.19+.25)/3= .20 Average Retention Ratio= (.69+.70+.76)/3 = .72 Expected Growth Rate of the firm g = Average return on equity*Average retention ratio= (.20*.72) = .14 or 14% Current Market Price as on 25/10/11 = 153.85 Compounded annual growth rate of dividends ((d.p.s 2010/d.p.s 2008) ^1/3)-1) = 0.06 Dividend Expected one Year hence = current dividend *(1+compounded growth rate of dividends) =2.60 *(1+0.06) = 2.74 Risk free rate of return Rf (return on government bonds) = 9% Expected Return on Market Rm (as anticipated by industry experts) = 15% BETA (Co-variance of Ambuja stock with market indices) = -0.07 Required rate of return or Cost of Equity = (RF+BETA *(Rm-Rf)) = 9%

Stock Valuation: Liquidation Value: Total assets as on 31/12/10 = 73,951,300,000.00 Debt as on 31/12/10 = 650,300,000.00 Liquidation value = Total assets total liabilities = (73,951,300,000.00)-(650,300,000.00)= 73,301,000,000.00Liquidation Value per share = Liquidation value/no. of shares outstanding= 73,301,000,000.00/ 1,529,859,000.00= 47.91 The Liquidation value of a stock shows what an equity investor would get per share if the company is liquidated immediately. The price of a stock should always be higher than Liquidation value. If the price is less than liquidation value then it is better to sell the stock which means the investor makes more money by selling in the market than by holding the stock. Liquidation value of Ambuja cements is 47.91 which mean the investor gets 47.91 INR by selling the stock in the market. The current price of the stock is INR 153.85. Current price > Liquidation value, which means the investors get more value by holding the stock. So it is better to hold the stock. Book value: Equity capital = 3,059,700,000.00 Reserves & surplus = 70,227,900,000.00

Book value = Equity + Reserves & surplus = (3,059,700,000.00+70,227,900,000.00)= 73,287,600,000.00

Book value per share = Book value/no. of shares out standingBook value per share = 73,287,600,000.00/1,529,859,000.00 = 47.90

Book value of a stock shows the amount of Investors stake in the stock. It should always be less than the Current price of the stock, which means the investors get more money than their investment which is Book value.

Book value of Ambuja cements is 47.90 and the Current price is 153.85, which means the investors get more money than their investment which is Book value. So, it is better to hold the stock.

Debt Equity Ratio:

Debt = 650,300,000.00 Equity capital = 3,059,700,000.00

Debt Equity Ratio = Debt/Equity = 650,300,000.00/3,059,700,000.00=0.21

Debt equity ratio shows the ratio of debt to equity. It should always be neither too high nor very low. Very high debt indicates that the company is full of debts and very low value indicates that the company is not using financing opportunities.

Debt equity ratio is 0.21, so the company has fewer debts and has more scope for financing in the future. So, it is a good stock.

Current ratio: Current Assets = 32,008,200,000.00 Current Liabilities = 29905500000

Current Ratio = 32,008,200,000.00/29905500000= 1.07

Current ratio indicates the ability of a company to meet its current or short term obligations. It should always be greater than 1 and should be even more for stocks of particular industries, but should not even be too high which indicates the money is idle. It differs from industry to industry.

Current Ratio of Ambuja cements in 1.07 which indicates the company is able to meet its current obligations easily. So, it is a good stock.

EVA Model:

Equity capital (e) = 3,059,700,000.00Cost of equity (as determined in required rate of return)(ke) = 9%Debt (d) = 650,300,000.00Interest paid on 31/12/2010(i) = 486,900,000.00Cost of debt (i/d) = 486,900,000.00/650,300,000.00 = .75d/total capital = .18Tax rate (t) = .24E/Total capital = .82

Weighted average cost of capital WACC = ((Ke* e/t) + (Kd*d/t)) = 17%

Economic Value Added EVA = (Net profit-(WACC*Capital)) = 12,004,105,643.53

EVA shows the economic profit generated by the company and it should always be positive. EVA of Ambuja cements is positive. So, it is a good stock.

MVA Model:

CURRENT MARKET PRICE as on 21/6/11 = 153.85No. of shares outstanding = 1,529,859,000.00MARKET CAPITALIZATION=no. of shares*market price = 1,529,859,000.00*153.85= 197,351,811,000.00Total capital invested in the firm = 3,710,000,000.00

Market value added MVA = Market capitalization-total capital= 197,351,811,000.00 - 3,710,000,000.00= 193,641,811,000.00

MVA indicates the value generated in the market over investment or total capital. It should always be positive.

MVA of Prism cements is positive, which means a value in excess over the investment is generated. So, it is a good stock.

Price Based Valuation: P/E Ratio: Current Price as on 25/10/2011 P = 153.85 Earnings per share E = 8.28

P/E Ratio = 153.85/8.28 =18.58

P/E ratio indicates the price that the investors in the market are ready to pay for each rupee of earnings. It indicates the demand for a stock. It should be compared to industry average.

Industry average is 14.98. P/E ratio of Ambuja stock is 18.58 which is greater than the industry average. So, it is a good stock.

P/B.V Ratio: Current Price as on 25/10/2011 P = 153.85 Book Value = 47.90

P/B.V Ratio= 153.85/47.90 = 3.21

Price to Book value ratio shows the ratio of price to Book value per share or the equity investors stake. It should always be greater than 1 which indicates excess value over investors stake.

P/B.V of Ambuja cements is 3.21 which is greater than 1, which indicates excess value over investors stake. So, it is a good stock.

(P/E)/G Ratio:

P/E Ratio = 18.58 Annual growth of Earnings per share = ((e.p.s 2010/e.p.s 2008)^ 1/3)-1 = -.03

(P/E)/G Ratio = 18.58/-.03= -533.01

P/E ratio shows the demand for the stock and the growth indicates prospects for development. (P/E)/G ratio should be negative which means the actual growth is more than the demand.

(P/E)/G ratio of Ambuja cements is negative, which means the actual growth is more than the demand. So, it is a good stock. Dividend Discount Models:

Zero Growth Model: Current Dividend D= 2.60 Return on Equity r= 0.09

Fair value of equity = D/r = 2.60/0.09 = 30.33

Fair Value should be less than Current price in order to sell the stock and should be more than the current price to buy the stock.

Fair value is 30.33 < current price 153.85, which indicates that the stock is overpriced. So, it is better to sell the stock.

Single Period Valuation:

Required rate of return r1= 9% (as calculated above) Expected dividend one year hence=current div(1+growth)(D1) = 2.74 Price one year hence=current price(1+growth)(P1)= 176.16

Fair value of equity = (D1+P1)/ (1+r1) = (176.16+2.74)/.09 = 164.79


Fair value is 164.79 < current price 153.85, which indicates that the stock is underpriced. So, it is better to buy the stock.

Constant growth model: Expected Growth g = .14 Required rate of return r = 9% Expected Dividend one year hence D1= 2.74

Fair value of equity = D1/(r-g) = 2.74/ (.09-.14) = 46.21



Prism Cement


PARTICLUARS31/12/201031/12/200931/12/2008

Net Profit957,900,000.002,510,500,000.00962,300,000.00


Dividend amount491,000,000.001,054,100,000.00447,500,000.00

No. of shares outstanding 503,357,000.00

503,357,000.00

298,250,000




Equity Capital5,033,600,0005,033,600,0002,982,500,000

Debt11,698,400,0008,015,700,000-

Total Capital16,732,000,00013,049,300,0002,982,500,000

Reserves & Surplus7,044,700,000.006,661,400,0003,634,000,000

Return on equity=net profit/(equity+reserves)0.080.210.15

Average Return on Equity for the three years= (.08+.21+.15))/3= 0.15 Average Retention Ratio= (.48+.58+.53)/3 = .53 Expected Growth Rate of the firm g = Average return on equity*Average retention ratio= (.15*.53) = .08 Current Market Price as on 25/10/11 = 45.70 Compounded annual growth rate of dividends ((d.p.s 2010/d.p.s 2008) ^1/3)-1) = -0.13 Dividend Expected one Year hence = current dividend *(1+compounded growth rate of dividends) =0.98 *(1-0.13) = 0.85 Risk free rate of return Rf (return on government bonds) = 9% Expected Return on Market Rm (as anticipated by industry experts) = 13% BETA (Co-variance of ambuja stock with market indices) = -0.28 Required rate of return or Cost of Equity = (RF+BETA *(Rm-Rf)) = 8%

Stock Valuation: Liquidation Value: Total assets as on 31/12/10 = 23,776,700,000.00 Debt as on 31/12/10 = 11,698,400,000.00 Liquidation value = Total assets total liabilities = (23,776,700,000.00)-( 11,698,400,000.00) = 12,078,300,000.00 Liquidation Value per share = Liquidation value/no. of shares outstanding= 12,078,300,000.00 / 503,357,000.00= 24.00The Liquidation value of a stock shows what an equity investor would get per share if the company is liquidated immediately. The price of a stock should always be higher than Liquidation value. If the price is less than liquidation value then it is better to sell the stock which means the investor makes more money by selling in the market than by holding the stock. Liquidation value of Prism cements is INR 24.00 which means the investor gets 24.00 INR by selling the stock in the market. The current price of the stock is INR 45.70. The investors make more value of their stock by holding it instead of liquidating.Book value: Equity capital =5,033,600,000.00 Reserves & surplus = 7,044,700,000.00

Book value = Equity + Reserves & surplus = (5,033,600,000.00+7,044,700,000.00)= 12,078,300,000.00

Book value per share = Book value/no. of shares out standingBook value per share = 12,078,300,000.00 /503,357,000.00 = 24.00


Book value of Prism cements is 24.00 and the Current price is 45.70, which means the investors get more money than their investment which is Book value. So, it is a good stock.

Debt Equity Ratio:

Debt = 11,698,400,000.00 Equity capital = 5,033,600,000.00

Debt Equity Ratio = Debt/Equity = 11,698,400,000.00/ 5,033,600,000.00= 2.32Debt equity ratio shows the ratio of debt to equity. It should always be neither too high nor very low. Very high debt indicates that the company is full of debts and very low value indicates that the company is not using financing opportunities.

Debt equity ratio is 2.32, so the company has more debts and has less scope for financing in the future. So, it is a neutral stock.

Current ratio: Current Assets = 10,364,300,000.00 Current Liabilities = 9,572,900,000.00Current Ratio = 10,364,300,000.00/ 9,572,900,000.00= 1.08


Current Ratio of Prism cements in 1.08 which indicates the company is able to meet its current obligations easily. So, it is a good stock.

EVA Model:

Equity capital (e) = 5,033,600,000.00Cost of equity (as determined in required rate of return) (ke) = 8%Debt (d) = 11,698,400,000.00Interest paid on 31/12/2010(i) 1,057,300,000.00Cost of debt (i/d) = 1,057,300,000.00 /11,698,400,000.00 = 0.09 D/total capital = 0.70 Tax rate (t) = 0.26 E/Total capital = 0.30


Economic Value Added EVA = (Net profit-(WACC*Capital)) = - 168,043,347.61

EVA shows the economic profit generated by the company and it should always be positive.

EVA of Prism cements is positive, which indicates the company generated economic profit. So, it is a good stock.

MVA Model:

CURRENT MARKET PRICE as on 21/6/11 = 45.70No. of shares outstanding = 503,357,000.00MARKET CAPITALIZATION=no. of shares*market price = 503,357,000.00*45.70= 23,003,414,900.00Total capital invested in the firm = 16,732,000,000.00

Market value added MVA = Market capitalization-total capital= 23,003,414,900.00- 16,732,000,000.00= 6,271,414,900.00


MVA of Prism cements is positive, which means a value in excess over the investment is generated. So, it is a good stock.

Price Based Valuation: P/E Ratio:Current Price as on 25/10/2011 P = 45.70Earnings per share E = 1.90

P/E Ratio = 45.70/1.90 = 24.01


Industry average is 14.98. P/E ratio of Prism stock is 24.01 which is greater than the industry average, which means it has more demand than any average stock in the particular industry. So, it is a good stock.


P/B.V Ratio= 45.70/24.00= 1.90


P/B.V of Prism cements is 1.90 which is greater than 1, which indicates excess value over investors stake. So, it is a good stock.

(P/E)/G Ratio:

P/E Ratio = 24.01 Annual growth of Earnings per share = ((e.p.s 2010/e.p.s 2008)^ 1/3)-1 = - 0.16

(P/E)/G Ratio = 24.01/-0.16= -148.82


(P/E)/G ratio of Prism cements is negative, which means the actual growth is more than the demand. So, it is a good stock. Dividend Discount Models:


Fair value of equity = D/r = 0.98/0.08= 12.35


Fair value is 12.35 < current price 45.70, which means that the stock is overpriced. So, it is better to sell the stock.


Required rate of return r1= 8% (as calculated above) Expected dividend one year hence=current div(1+growth)(D1) = .85 Price one year hence=current price(1+growth)(P1)= 49.28

Fair value of equity = (D1+P1)/ (1+r1) = (.85+49.28)/.09 = 46.45


Fair value is 46.45 < current price 45.70, which means that the stock is underpriced. So, it is better to sell the stock.


Fair value of equity = D1/(r-g) = 0.85/ (.08-.79) = 1,159.17


Fair value is 1159.17 > current price 45.70, which means that the stock is overpriced. So, it is better to buy the stock.

Bajaj Auto


PARTICLUARS31/12/201031/12/200931/12/2008

Net Profit33,397,300,000.0017,027,300,000.006,564,800,000.00

Dividend paid for the year (as a % of earnings) 0.35

0.34

0.48

Dividend amount11,574,700,000.005,787,300,000.003,183,000,000.00

No. of shares outstanding at the end of the year 289,367,000.00

144,684,000.00

144,684,000.00




Equity Capital2,893,700,000.001,446,800,000.001,446,800,000.00

Debt3,251,500,000.0013,385,800,000.0015,700,000,000.00

Total Capital6,145,200,000.0014,832,600,000.0017,146,800,000.00



Average Return on Equity for the three years= (.68+.58+.35)/3= .54 Average Retention Ratio= (.65+.66+.52)/3 = .61 Expected Growth Rate of the firm g = Average return on equity*Average retention ratio= (.54)*(.72) = .33 or 33% Current Market Price as on 25/10/11 = 1382.70 Compounded annual growth rate of dividends ((d.p.s 2010/d.p.s 2008) ^1/3)-1) = 0.22 Dividend Expected one Year hence = current dividend *(1+compounded growth rate of dividends) =40 *(1+0.22) = 48.82 Risk free rate of return Rf (return on government bonds) = 9% Expected Return on Market Rm (as anticipated by industry experts) = 15% BETA (Co-variance of the stock with market indices) = -0.03 Required rate of return or Cost of Equity = (RF+BETA *(Rm-Rf)) = 9%

Stock Valuation: Liquidation Value: Total assets as on 31/12/10 = 52,353,700,000.00 Debt as on 31/12/10 = 3,251,500,000.00 Liquidation value = Total assets total liabilities = (52,353,700,000.00)-(3,251,500,000.00)= 49,102,200,000.00

Liquidation Value per share = Liquidation value/no. of shares outstanding= 49,102,200,000.00 / 289,367,000.00= 169.69 The Liquidation value of a stock shows what an equity investor would get per share if the company is liquidated immediately. The price of a stock should always be higher than Liquidation value. If the price is less than liquidation value then it is better to sell the stock which means the investor makes more money by selling in the market than by holding the stock. Liquidation value of Bajaj Auto is 169.69, which mean the investor gets 169.169 INR by selling the stock in the market. The current price of the stock is INR 1382.70. So, it is better to hold the stock. Book value: Equity capital = 2,893,700,000.00 Reserves & surplus = 46,208,500,000.00

Book value = Equity + Reserves & surplus = (2,893,700,000.00+ 46,208,500,000.00)= 49,102,200,000.00Book value per share = Book value/no. of shares out standing Book value per share = 49,102,200,000.00 /289,367,000.00= 169.69


Book value of Bajaj auto is 169.69 and the Current price is 1382.70, which means the investors get more money than their investment which is Book value. So, it is a good stock and should be held.

Debt Equity Ratio:


Debt Equity Ratio = Debt/Equity = 3,251,500,000.00/ 2,893,700,000.00=1.12


Debt equity ratio is 1.12, so the company has fewer debts and has more scope for financing in the future. So, it is a good stock and it is worth investing.

Current ratio: Current Assets = 53,581,900,000.00 Current Liabilities = 65,500,700,000.00

Current Ratio = 53,581,900,000.00/ 65,500,700,000.00= 0.82


Current Ratio of Bajaj Auto in 0.82 which indicates the company is not able to meet its current obligations easily. So, it is a bad stock.

EVA Model:

Equity capital (e) = 2,893,700,000.00 Cost of equity (as determined in required rate of return)(ke) = 9%Debt (d) = 3,251,500,000.00Interest paid on 31/12/2010(i) = 16,900,000.00Cost of debt (i/d) = 486,900,000.00/650,300,000.00 = .01d/total capital = .53Tax rate (t) = .23E/Total capital = .47




EVA of Bajaj Auto is positive, which indicates that the company has generated economic profit. So, it is a good stock.

MVA Model:

CURRENT MARKET PRICE as on 21/6/11 = 1,382.70No. of shares outstanding = 289,367,000.00MARKET CAPITALIZATION=no. of shares*market price = 289,367,000 *1382.70= 400,107,750,900.00 Total capital invested in the firm = 6,145,200,000.00

Market value added MVA = Market capitalization-total capital= 400,107,750,900.00 - 6,145,200,000.00= 393,962,550,900.00


MVA of Bajaj Auto is positive, which indicates that some value is generated in the market over investment or total capital. So, it is a good stock.


P/E Ratio = 1382.70/115.42 =11.98


Industry average is 10.99. P/E ratio of Baja auto stock is 11.98, which is greater than the industry average and has more demand. So, it is a good stock.


P/B.V Ratio= 1382.70/169.69 = 8.15


P/B.V of Bajaj Auto is 8.15 which is greater than 1 and indicates excess value over investors stake. So, it is a good stock.

(P/E)/G Ratio:

P/E Ratio = 11.98 Annual growth of Earnings per share = ((e.p.s 2010/e.p.s 2008)^ 1/3)-1 = 0.37

(P/E)/G Ratio = 11.98/0.37= 32.81


(P/E)/G ratio of Bajaj is positive, which means the actual growth is less than the demand. So, it is a risky stock.

Dividend Discount Models:







Fair value of equity = (D1+P1)/ (1+r1) = (48.82+1835.79)/1.09 = 1732.16


Fair value is 1732.16 > current price 1382.70, which indicates that the stock is overpriced. So, it is better to buy the stock.




Result: Fair value is 454.57 < current price 1382.70, which indicates that the stock is overpriced. So, it is better to sell the stock.

Maharashtra Scooters


PARTICLUARS31/3/201031/3/200931/3/2008

Net Profit217,300,000.0084,100,000.00108,700,000.00

Dividend paid for the year (as a % of earnings) 0.47

0.75 0.58

Dividend amount102,900,000.0062,900,000.0062,900,000.00

No. of shares outstanding at the end of the year11,429,000.00 11,429,000.00 11,429,000.00




Equity Capital114,300,000.00114,300,000.00114,300,000.00

Debt - - -

Total Capital114,300,000.00114,300,000.00114,300,000.00



Average Return on Equity for the three years= (.10+.04+.05)/3= .07 Average Retention Ratio= (.53+.25+.42)/3 = .40 Expected Growth Rate of the firm g = Average return on equity*Average retention ratio= (.07*.40) = .30 or 30% Current Market Price as on 25/10/11 = 344.95 Compounded annual growth rate of dividends ((d.p.s 2010/d.p.s 2008) ^1/3)-1) = 0.18 Dividend Expected one Year hence = current dividend *(1+compounded growth rate of dividends) = 9.00 *(1+0.03) = 10.61 Risk free rate of return Rf (return on government bonds) = 9% Expected Return on Market Rm (as anticipated by industry experts) = 15% BETA (Co-variance of ambuja stock with market indices) = 0.16 Required rate of return or Cost of Equity = (RF+BETA *(Rm-Rf)) = 10%

Stock Valuation: Liquidation Value: Total assets as on 31/12/10 = 2,103,100,000.00 Debt as on 31/12/10 = 0 Liquidation value = Total assets total liabilities = (2,103,100,000.00)-(0)= 2,103,100,000.00 Liquidation Value per share = Liquidation value/no. of shares outstanding= 2,103,100,000.00 / 11,429,000.00= 184.01The Liquidation value of a stock shows what an equity investor would get per share if the company is liquidated immediately. The price of a stock should always be higher than Liquidation value. If the price is less than liquidation value then it is better to sell the stock which means the investor makes more money by selling in the market than by holding the stock. Liquidation value of Maharashtra Scooters is 184.01, which mean the investor gets 184.01 INR by selling the stock in the market. The current price of the stock is INR 344.95. Current price > Liquidation value, which means that the investors more value by holding instead of liquidating. So, it is a good stock.

Book value: Equity capital = 114,300,000.00 Reserves & surplus = 1,988,900,000.00Book value = Equity + Reserves & surplus = (114,300,000.00+ 1,988,900,000.00)= 2,103,200,000.00

Book value per share = Book value/no. of shares out standing Book value per share = 2,103,200,000.00 /1,529,859,000 = 184.02


Book value of Maharashtra Scooters is 184.02 and the Current price is 344.95, which means the investors get more money than their investment which is Book value. So, it is a good stock.

Debt Equity Ratio:

Debt = 0 Equity capital = 114,300,000.00

Debt Equity Ratio = Debt/Equity = 0/ 114,300,000.00= 0


Debt equity ratio is 0, so the company has no debts and has more scope for financing in the future. So, it is a good stock.

Current ratio: Current Assets = 259,600,000.00 Current Liabilities = 278,800,000.00

Current Ratio = 259,600,000.00/ 278,800,000.00= 0.93


Current Ratio of Maharashtra Scooters in 0.93 which indicates the company is not able to meet its current obligations easily. So, it is a bad stock.

EVA Model:

Equity capital (e) = 114,300,000.00Cost of equity (as determined in required rate of return)(ke) = 10%Debt (d) = 0Interest paid on 31/12/2010(i) = 0Cost of debt (i/d) = 0D/total capital = 0Tax rate (t) = .10E/Total capital = 1.00


Economic Value Added EVA = (Net profit-(WACC*Capital)) = 205,943,761.66


EVA of Maharashtra Scooters is positive, which means that the company generated economic profit. So, it is a good stock.

MVA Model:

CURRENT MARKET PRICE as on 21/6/11 = 344.95

No. of shares outstanding = 11,429,000.00MARKET CAPITALIZATION=no. of shares*market price = 11,429,000.00*344.95= 3,942,433,550.00Total capital invested in the firm = 114,300,000.00

Market value added MVA = Market capitalization-total capital= 3,942,433,550.00- 114,300,000.00= 3,828,133,550.00


MVA of Maharashtra Scooters is positive, which indicates that some value is generated over the investment. So, it is a good stock.


P/E Ratio = 344.95/19.01 =18.14


Industry average is 10.99. P/E ratio of Maharashtra Scooters stock is 11.98 which is greater than the industry average and indicates that it has more demand. So, it is a good stock.


P/B.V Ratio= 344.95/184.02 = 1.87


P/B.V of Maharashtra Scooters is 1.87 which is greater than 1, which indicates excess value over investors stake. So, it is a good stock.

(P/E)/G Ratio:

P/E Ratio = 18.14 Annual growth of Earnings per share = ((e.p.s 2010/e.p.s 2008)^ 1/3)-1 = 0.26

(P/E)/G Ratio = 18.14/.26= 69.85


(P/E)/G ratio of Maharashtra Scooters is positive, which means that the actual growth is less than the demand. So, it is a risky stock. Dividend Discount Models:


Fair value of equity = D/r = 9.00/0.10 = 900


Fair value is 900 > current price 344.95, which shows that the stock is underpriced. So, it is better to buy the stock.



Fair value of equity = (D1+P1)/ (1+r1) = (379.22+10.61)/.10 = 354.60


Fair value is 354.60 < current price 344.95, which shows that the stock is underpriced. So, it is better to buy the stock.




Fair value is 145.88 < current price 344.95, which shows that the stock is overpriced. So, it is better to sell the stock.

Mphasis Ltd Financial Information:values in rupees

PARTICLUARS31/12/201031/12/200931/12/2008

Net Profit9,968,800,000.008,368,700,000.002,645,100,000.00

Dividend paid (as a % of earnings) 0.08

0.09

0.16

Dividend 839,700,000.00733,500,000.00418,400,000.00

No. of shares outstanding at year end 209,939,000.00

209,585,000.00

208,937,000.00




Equity Capital2,099,300,000.002,095,800,000.002,089,300,000.00

Debt8,600,000.001,265,100,000.0046,100,000.00

Total Capital2,107,900,000.003,360,900,000.002,135,400,000.00


ROE 0.34

0.41

0.23

Average Return on Equity for the three years= (.34+.41+.23)/3= .33 Average Retention Ratio= (.91+.92+.84)/3 = .89 Expected Growth Rate of the firm g = Average return on equity*Average retention ratio= (.33*.89) = 29 or 29% Current Market Price as on 25/10/11 = 437.85 Compounded annual growth rate of dividends ((d.p.s 2010/d.p.s 2008) ^1/3)-1) = 0.26 Dividend Expected one Year hence = current dividend *(1+compounded growth rate of dividends) =4.00 *(1+0.26) = 5.04 Risk free rate of return Rf (return on government bonds) = 9% Expected Return on Market Rm (as anticipated by industry experts) = 15% BETA (Co-variance of ambuja stock with market indices) = -0.01 Required rate of return or Cost of Equity = (RF+BETA *(Rm-Rf)) = 9%

Stock Valuation: Liquidation Value: Total assets as on 31/12/10 = 29,094,400,000.00 Debt as on 31/12/10 = 8,600,000.00 Liquidation value = Total assets total liabilities = (29,094,400,000.00)-( 8,600,000.00) = 29,085,800,000.00Liquidation Value per share = Liquidation value/no. of shares outstanding= 29,085,800,000.00 / 209,939,000.00= 138.54The Liquidation value of a stock shows what an equity investor would get per share if the company is liquidated immediately. The price of a stock should always be higher than Liquidation value. If the price is less than liquidation value then it is better to sell the stock which means the investor makes more money by selling in the market than by holding the stock. Liquidation value of Mphasis Ltd is 138.54 which mean the investor gets 138.54 INR by selling the stock in the market. The current price of the stock is INR 437.85. Current price > Liquidation value, which shows that the investor gets more value by holding the stock instead of liquidating. So, it is a good stock.

Book value: Equity capital = 2,099,300,000.00 Reserves & surplus = 26,986,300,000.00

Book value = Equity + Reserves & surplus = (2,099,300,000.00 + 26,986,300,000.00)= 29,085,600,000.00Book value per share = Book value/no. of shares out standingBook value per share = 29,085,600,000.00 /209,939,000.00 = 138.54


Book value of Mphasis Ltd is 138.54 and the Current price is 437.85, means the investors get more money than their investment which is Book value. So, it is a good stock.

Debt Equity Ratio:

Debt = 8,600,000.00 Equity capital = 2,099,300,000.00

Debt Equity Ratio = Debt/Equity = 8,600,000.00/ 2,099,300,000.00=0.00003


Debt equity ratio is 0, so the company has no debts and has more scope for financing in the future. So, it is a good stock.

Current ratio: Current Assets = 19,254,100,000.00 Current Liabilities = 8,558,200,000.00

Current Ratio = 19,254,100,000.00/ 8,558,200,000.00= 2.25


Current Ratio of Mphasis Ltd in 2.5 which indicates the company is able to meet its current obligations easily. So, it is a good stock.

EVA Model:

Equity capital (e) = 2,099,300,000.00Cost of equity (as determined in required rate of return)(ke) = 9%Debt (d) = 8,600,000.00Interest paid on 31/12/2010(i) = 1,640,000.00Cost of debt (i/d) = 1,640,000.00 /8,600,000.00= .19D/total capital = .00003Tax rate (t) = .09E/Total capital = 1.00




EVA of Mphasis Ltd is positive, which shows that the company has generated economic profit. So, it is a good stock.

MVA Model:

CURRENT MARKET PRICE as on 21/6/11 = 437.85No. of shares outstanding = 209,939,000.00MARKET CAPITALIZATION=no. of shares*market price = 209,939,000.00 *437.85= 91,921,791,150.00Total capital invested in the firm = 2,107,900,000.00

Market value added MVA = Market capitalization-total capital= 91,921,791,150.00- 2,107,900,000.00= 89,813,891,150.00


MVA of Mphasis Ltd is positive, which indicates some value is generated over the investment. So, it is a good stock. Price Based Valuation: P/E Ratio: Current Price as on 25/10/2011 P = 437.85 Earnings per share E = 47.48

P/E Ratio = 437.85/47.48 = 9.22


Industry average is 17.21 P/E ratio of Mphasis stock is 9.22 which is greater than the industry average and has more demand. So, it is a stock which has less demand.


P/B.V Ratio= 437.85/ 138.54 = 3.16


P/B.V of Mphasis is 3.16, which is greater than 1, which indicates excess value over investors stake. So, it is a good stock.

(P/E)/G Ratio:

P/E Ratio = 9.22 Annual growth of Earnings per share = ((e.p.s 2010/e.p.s 2008)^ 1/3)-1 = .55

(P/E)/G Ratio = 9.22/.55= 16.65

P/E ratio shows the demand for the stock and the growth indicates prospects for development. (P/E)/G ratio should be negative, which means the actual growth is more than the demand.

(P/E)/G ratio of Mphasis Ltd is positive, which means the actual growth is less than the demand. So, it is a risky stock. Dividend Discount Models:




Fair value is 44.80 > current price 437.85, which shows that the stock is overpriced. So, it is better to sell the stock.



Fair value of equity = (D1+P1)/ (1+r1) = (5.04+ 565.44)/.09 = 523.72


Fair value is 523.72 > current price 437.85, which shows that the stock is underpriced. So, it is better to buy the stock.


Fair value of equity = D1/(r-g) = 5.04/ (.09-.29) = -24.92 Fair Value should be less than Current price in order to sell the stock and should be more than the current price to buy the stock.

Fair value is -24.92 > current price 437.85, which shows that the stock is overpriced. So, it is better to sell the stock.

HCL Technologies


PARTICLUARS31/12/201031/12/200931/12/2008

Net Profit10,565,800,000.009,973,100,000.007,806,500,000.00


Dividend amount2,702,000,000.004,696,100,000.005,985,800,000.00

No. of shares outstanding at the end of the year678,784,000.00 670,257,000.00 666,340,000.00




Equity Capital1,357,600,000.001,340,500,000.001,332,700,000.00

Debt13,973,900,000.005,137,300,000.00253,300,000.00

Total Capital15,331,500,000.006,477,800,000.001,586,000,000.00


Return on Equity=net profit/(equity+reserves)0.210.290.24

Average Return on Equity for the three years= (.21+.29+.24)/3= .25 Average Retention Ratio= (.74+.53+.23)/3 = .50 Expected Growth Rate of the firm g = Average return on equity*Average retention ratio= (.25*.50) = .12 or 12% Current Market Price as on 25/10/11 = 490.35 Compounded annual growth rate of dividends ((d.p.s 2010/d.p.s 2008) ^1/3)-1) = -0.24 Dividend Expected one Year hence = current dividend *(1+compounded growth rate of dividends) =3.98 *(1-0.24) = 3.03 Risk free rate of return Rf (return on government bonds) = 9% Expected Return on Market Rm (as anticipated by industry experts) = 15% BETA (Co-variance of ambuja stock with market indices) = 0 Required rate of return or Cost of Equity = (RF+BETA *(Rm-Rf)) = 9%

Stock Valuation:Liquidation Value: Total assets as on 31/12/10 = 63,332,500,000.00 Debt as on 31/12/10 = 13,973,900,000.00 Liquidation value = Total assets total liabilities = (63,332,500,000.00)-( 13,973,900,000.00) = 49,358,600,000.00Liquidation Value per share = Liquidation value/no. of shares outstanding= 49,358,600,000.00/ 678,784,000.00= 72.72The Liquidation value of a stock shows what an equity investor would get per share if the company is liquidated immediately. The price of a stock should always be higher than Liquidation value. If the price is less than liquidation value then it is better to sell the stock which means the investor makes more money by selling in the market than by holding the stock. Liquidation value of HCL Tech is 47.91 which mean the investor gets 47.91 INR by selling the stock in the market. The current price of the stock is INR 153.85. Current price > Liquidation value, which tells us that it is better to hold the stock instead of liquidating because the investors make more money by holding rather than selling the share.

Book value: Equity capital = 1,357,600,000.00 Reserves & surplus = 47,980,900,000.00

Book value = Equity + Reserves & surplus = (1,357,600,000.00+ 47,980,900,000.00)= 49,338,500,000.00

Book value per share = Book value/no. of shares out standingBook value per share = 49,338,500,000.00 /678,784,000.00 = 72.272


Book value of HCL Tech is 72.272 and the Current price is 437.85, which means the investors get more money than their investment which is Book value. So, it is a good stock and should be held.

Debt Equity Ratio:


Debt Equity Ratio = Debt/Equity = 13,973,900,000.00 /1,357,600,000.00=10.29

Debt equity ratio shows the ratio of debt to equity. It should alway

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