Tuesday, April 17, 2012

Large Disparity across sectors/sizes

Have a look at the following table:
CompanyMarket Cap (INR crore)P/EP/BPrice/Sales
Asian Paints32,00033165
Titan Industries21,00039203
Dabur India19,50035175
Glaxo Consumer11,50035104
TTK Prestige3,90035305

The companies mentioned above are today considered high quality. But look at the figures and see that they are trading at mind-boggling valuations. Price/Book of 30 times for a consumer goods company which was making losses in FY2003 and is trading at more than 35 times TTM earnings with less than 0.4% dividend yield!! All the FMCG companies have discounted more than 5 years of earnings growth in their valuations. Generally, an FMCG company is a reasonable buy if you get it at 2.5-3 times sales. Most of the ones above are trading at 50-100% higher valuations then their reasonable price.

Now look at the table below:
CompanyMarket Cap (INR crore)P/EP/BPrice/Sales
Oil India27,5007.71.72.3
Maharashtra Seamless2,7008.31.51.3
Balmer Lawrie9006.51.70.45
ZF Steering330721.1

There is clearly a big disparity between the valuations of companies in the tables above. On one hand the investors are so enthusiastic about the prospects of the company that they are willing to pay more then 30 times earnings and on the other hand they are not willing to give even a P/E of 10. There is a difference in terms of size in many of the companies in terms of market cap but the gap would narrow down if both the companies are having similar kind of P/E, P/Sales multiples. This is what is called Stock Market!!!!

Image: Dino De Luca / FreeDigitalPhotos.net
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