Where to invest now?

Well, a number of people are saying it's overvalued and it should fall around 10% at least and all that jazz. I think that's a load of bull. It may fall, but the underlying value in the market is still untapped.

Want to know what I mean? How can I be so insolent that I refute the analysis of Top Fund Managers?

Let me be frank. I'm not a fund manager. I'm a regular guy that's investing for value. To me, it's straightforward, if a company is doing well, and going to do even BETTER, it's a good buy. An intelligent investor knows what to buy. But a smart investor knows when to buy. The "when" part of things is all about timing - this is something fund managers are good at. But they aren't necessarily intelligent - they will sacrifice a good stock today because of the "herd mentality". The concept is: just because everyone else is dumping a certain stock or sector, they will continue to do so.

Take a look at some top line stocks, and tell me if they are overvalued:

Reliance Industries (RIL)

This is the biggest of the lot. The second highest market cap, and the largest private company. It's being valued at Rs. 850 per share. Everyone's thinking - too high!

They made a net profit of Rs. 52 per share last year. They made Rs. 34 in the first half of this year, and are most likely going to make another Rs. 34 in the last half. That's 68 Rs. per share for 2005-06, which means they are being given a valuation of P/E = 12.5. (Price to Earnings Ratio, or P/E is the market price divided by the earnings per share) This is less than the growth rate of 30% that they will achieve!

Markets usually value a company by a P/E of the value as it's growth rate. And RIL is India's largest private company! So let's say that being a developing nation, Reliance is only given HALF it's growth rate - 15. A P/E of 15 means the share must be valued ABOVE Rs. 1000 per share. From 850 today, that's nearly 20% potential!

This does not include the fact that they hold a BIG investment in Reliance Infocomm, Reliance Energy and IPCL. The recent demerger news means that each shareholder of RIL will get a share of the demerged entities - the holding companies for these sub-investments. That means, APART from Reliance itself, a person that buys the share today and upto the demerger date (not yet announced) will get the demerged entities shares. That's another benefit that could push returns to even higher levels.

I've been advocating RIL since the "big fight" days when the brothers got into their tussle. I bought at the 500 levels, and even the 480 levels late 2004. In one year, I've made more than 50% on this one stock itself!

State Bank of India (SBI)

Who hasn't seen the ads? SBI is India's largest banks, but makes only 5,500 crores in profits. That's nothing compared to it's real size, and it's making real efforts to change things. What's the financial figures? SBI has earning Rs. 102 per share in the past year (2004-05) and in the first half of 2005-06, has earned Rs. 55 per share. (Consolidated). My guess is that in 2005-06 it will earn around Rs. 115 per share totally. (with the recent growth in visibility)

This means SBI has a P/E of 8. SBI is HUGE, and yet, gets a valuation of only 8 P/E, which HDFC Bank and ICICI Bank have P/E of over 20! This is obviously incongruent and is a remnant of the past. Going ahead I think SBI should get a valuation of at least 12 - which is a price of around 1380. That's a good 50% jump from today! When? Perhaps a year from now - and in my opinion 50% a year is a good deal.

I haven't yet bought SBI, because I'm short of cash. But come January I will buy it!

There are more such companies - Tata Steel, Sintex, Tata Metaliks etc. If you know any, write a comment!

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This entry was posted on Friday, December 16th, 2005 at 7:06 AM and is filed under Commentary. You can subscribe to any comments to this entry via RSS 2.0. You can leave a response, or trackback from your own site.