Wednesday, September 9, 2009

How wrong financial analysts can be?

I would bring to your notice one of the worst financial analysis, in my humble opinion, done by an analyst while comparing two companies. Read the report here. The report compares performance of Bharat Forge with that of Infosys at the peak of auto demand in June 2005. The share price of Bharat Forge at that time (adjusted for 5:1 split) was INR 286.78 and that of Infosys (adjusted for 1:1 bonus) was INR 1106.39. Today the share price of Bharat Forge is at INR 217.2 while that of Infosys is INR 2192.2. Thus during the last four years and three months since this article was written, Bharat Forge has given -24.27% returns while Infosys has generated 98.14% returns. Simply put, the analysts at that time was comparing apples with oranges. Although this seems easy in hindsight, the comparison itself was wrong in the first place. One is a manufacturing business while the other was a services business. As many great investors know, services can command higher EBITDA margin and have big entry barriers. Manufacturing has lower margins, higher competition and low entry barriers. The only conclusion is : take everything that is being said on Dalal Street with a pinch of salt.
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