P/BV Ratio Analysis of Nifty in 2015 (Since last 16+ Years)

In continuation of the last post about P/E Ratio Analysis of Nifty since 1999, here is a similar analysis of Price–to-Book-Value Ratio. Like PE Ratio, I have been regularly tracking this 2ndindicator to gauge overall market sentiments at the State of Indian Markets on a monthly basis.

The data once again has been sourced from NSE’s website (link 1 and link 2) and starting from 1st January 1999. Ratio related data prior to this period is not available. So here is the result of the analysis…

The table above clearly shows that if one is investing in markets where P/BV < 3.0, returns over the next 3, 5 and 7 year periods have been in excess of 20%… i.e. 26.3%, 26.9% and 21.4% to be precise. On the other hand if investment is made when index P/BV exceeds 4.5, the returns have been quite unacceptable at 3.3% and 5.7% for 3 and 5 year periods.

Like we saw in previous post, this clearly indicates that when investments are made at high P/B levels, chances of sub-par (and even negative) returns increase substantially.

For your information, currently Nifty is trading at P/B Ratio of 3.8

But here is another interesting thing which can be observed. Even at a costly PB>4.5, if an investor stays invested for more than 7 years, then average returns are still a very decent 9.6%. And this shows that longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels (Caution: I am talking about index investing here and not individual stocks).

Below are three graphs to provide details of the exact Returns against the exact P/B on a daily basis (though arranged with increasing PB numbers).

The left axis shows the P/B levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)

All three graphs clearly show that there is an inversecorrelation between P/B Ratio and returns earned by the average investor. Higher the P/B Ratio when you invest, lower the expected rate of return going forward.

After P/E Ratio Analysis and this post on P/B Ratio Analysis, next I will be sharing my findings on a similar analysis for Dividend Yield of Nifty for last 16 years.


IDFC – A long term investment worthy business

From a high of 185 in January 2013, IDFC has grinded down to 128. That’s a fall of close to 30% for a large cap financial institution.

We like IDFC as a good long term portfolio pick. So this 30% correction has tempted us to do an analysis of the company. And with Banking Licenses being the hot topic, we give our two cents that it is quite possible that IDFC may get one by next year. But what we just said is mere speculation. Don’t believe us. 🙂 This is because there is a high probability that someone on the inside knows something about the licenses and hence the stock has corrected so much(!)

So, for the time being, we keep aside IDFC’s banking foray and look at its existing businesses and valuations compared to historical averages.


IDFC is an infrastructure finance institution providing end to end financing and project implementation services. The company also provides advisory, PE and AMC services to name a few.


Company grew at a fast pace during the last decade. Its sales have increased from 424 crores in 2003 to around 6100 crores in 2012. That’s a CAGR of around 34%. Company came out with its IPO in 2005 at Rs 34 per share. Since then, sales have increased at a similar rate of 35% per annum.

IDFC Net Sales
IDFC – Net Sales (2003-2012)


During the same period, profits have grown from 180 crores to 1600 crores at rate of 27% plus.

IDFC Net Profits
IDFC – Net Profits (2003-2012)

EPS & Dividends

Earnings (per share) have moved up from 1.8 to 10.3 in 2012. In line with EPS, dividends have started increasing in recent past and now (in 2013) stand at Rs 2.6 per share. In last 5 years (barring 2009), company has continuously increased its dividend per share (1.2, 1.2, 1.5, 2.0, 2.3, 2.6).

IDFC EPS Dividend Per Share
Earnings & Dividends Per Share (2003-2012)

The dividend payout ratio has also stabilized in the band of 20-23%, which is decent considering the high growth rate of company’s business. A detailed comparison between EPS, DPS and their respective growth rates can be found in table below-

IDFC EPS Dividend Per Share
Detailed EPS & DPS Data – Growth Rates & Assumptions

IDFC is a financial institution and hence it makes more sense to analyze company’s Price to Book Value to gauge how over- or undervalued the company is.

Price/Book Value & P/E Ratio Analysis

Company has grown its book value from 16 to 81 in last ten years. That’s a CAGR of more than 20%.

IDFC Book Value
Book Value Per Share (2003-2012)

We analyzed historical data to check the P/BV multiples at which IDFC has traded. Average P/BV after listing (in 2005) for IDFC stands at close to 2.3. Also it has oscillated in a P/BV range of 1.0 to 5.0. At present, the stock is available at a P/BV of 1.6. That itself points to a 30% undervaluation from historical averages perspective.

If you look at Price to Earnings multiple too, average PE commanded by IDFC is close to 16. The stock currently trades at a PE of less than 11 (TTM). And if you are enterprising enough to consider future earnings, then stock is available at a forward PE of 9.2 (FY 14) & 7.7 (FY 15)! And a PE of 8 is considered apt for a no-growth company. 🙂

Below graphs show how IDFC is currently positioned on parameters like P/E & P/BV when compared to its historical averages and FY 14 & 15 estimated figures.

IDFC Price to Book Value PBV
P/BV Comparison – Current, Historical Average & Estimated (2014,  2015)
IDFC Price to Earning Per Share PE
P/E Ratio Comparison – Current, Historical Average & Estimated (2014. 2015)

Final Words

The company, though well managed and growing at a decently fast pace, seems to be undervalued. We have not analyzed management, business, etc as this post was more to do with valuations based on simple historical parameters. But being headed by Deepak Parekh and his team, it is assumed that management would be doing a decent job. In case you are interested in understanding more about the business, management and other factors, we suggest a simple Google search. It will throw a plethora of brokerage reports analyzing the same. You can also access company’s latest Annual Report here.

Now with a sustained ROE of close to 15%, a business like IDFC’s should command a multiple higher than what it currently trades at. And though we love dividends, we don’t expect IDFC to dole out generous dividends to its investors due to its fast growth. Even then the stock is currently available at a decent yield of 1.8%. And with dividend growing year on year, this Yield-On-Cost is bound to increase in future.

But remember one thing, IDFC is interested in getting a banking license. And there are high chances that it might get it. But we cannot be sure of this unless we are in RBI’s decision making committee. 😉 So if you do invest in the company, be ready to accept volatility in its share prices due to negative or positive news flow.

Disclosure – No positions in IDFC.


Is it a good time to buy / accumulate shares of SAIL – Part 1

In one of our previous posts, we mentioned that we avoid highly cyclical stocks. The reason being that we are not good at evaluating cyclical businesses and because these businesses have unpredictable earnings and cashflows. Instead we prefer sticking with known great businesses & simple companies.

But, just a few days back, a highly cyclical business caught our attention. The business was Steel. And the company was Steel Authority of India Ltd. (SAIL).
steel authority of india logo sail
Steel Authority of India Ltd.
We found SAIL available at Rs 68 apiece (March 15, 2013). This seemed a little too cheap at first. We then checked the historical price movements and found that it was indeed available close to its multi year lows [see graph below].

sail - stock prices over the years
SAIL – Trading close to its Multi-Year Lows
Now, a price close to multi-year lows can mean few things: Entire economy is in midst of a once-in-a-generation-recession OR Company has everything going against it OR Company is nearing bankruptcy (or similar financial outcomes). But as far as we could make out, neither is India facing a really big crisis, nor is SAIL nearing bankruptcy.

And the graph below clearly shows that though slow, the sales are increasing. Also, the operating and net profits are falling in last few years. That is a red flag. But considering that entire economy is struggling to gain momentum, a cyclical business like steel is bound to pay the price with declining profits.

sail - Net sales profits trends
Increasing Sales & Decreasing Profits
Once we had it confirmed that SAIL is not about to close down, we decided to check simple parameters like Book Value, Price to Book Value Ratio & Dividend Yields. And what we saw only confirmed our initial thoughts. The stock is trading not only close to its multi-year lows, it is also trading at valuations (P/BV) which have almost never been seen before for this company!!

SAIL - Price to book value
SAIL is available at its lowest P/BV ever!!
We also found that in past, book value per share had almost always acted as a very strong support for the stock price. But same has changed recently. The stock has consistently traded below its book value for last 18-20 months. It may be due to negative sentiments attached to commodities and economy in general, but we are not sure.

SAIL - book value per share trends
Consistently increasing Book Value (2002 – 2013)
We analyzed the stock on another parameter which we love a lot dividends. And once again, we were not surprised. Being a PSU, it has been quite generous with its dividend payouts. As of now it is available at mouth watering 4.2% Dividend Yield. Historically, it has had an average dividend (%) of 28%, which seems sustainable in the long term.

SAIL Dividend History
SAIL is a consistent dividend payer : Presently available with a yield of 4% +
So we come back to our original question?

Is it a good time to buy / accumulate shares of SAIL?

We feel that though a lot of indicators point that it may be a good time to start accumulating this stock, a little further analysis might be needed before deciding to start accumulating this stock. 

We take up the second and last part of our analysis in our next post.

Disclaimer – Created positions recently in SAIL.

Disclaimer – Author had a short stint in steel industry.


A Case Study on Balmer Lawrie & Co., its Book Value, Dividends & how to decide when to buy this stock?

After doing case studies on ONGC and IOC, we chose another company from our Dead Monk’s Portfolio for case-based analysis. But before we get down to details, just have a look at the 2 graphs given below. One shows increase in book value per share during the last 10 years. The second shows increase in dividend per share during the last 10 years.

Book Value Per Share (2000-2013)
Dividends paid per share (2002-2012)
The company in discussion is Balmer Lawrie & Co. It has continuously increased its book value from Rs 101 (2003) to Rs 423 (2013) at a CAGR (what is CAGR?) of 15.4%
It has also increased its dividend per share from Rs 1.80 (2002) to Rs 28 (2012) at a compound annual growth rate of an astonishing 32%. Even if you consider the last 5 years, growth rate has been a market beating 16%.
In India, dividend stocks do not get the respect they deserve. A similar stock in US markets would have definitely found a place in USA’s coveted list of great dividend stocks: S&P Dividend Aristocrats.
But this is India. 🙂 So lets move ahead with our case study…
What does this strangely named Indian company, Balmer Lawrie & Co. do?? We haven’t even heard about it…
Almost 8 out of 10 people involved in stock markets have not heard of this name. People don’t even know about the existence of this company. And even if they do, they don’t understand the rationale behind the name, let alone the heterogeneity among its business verticals. So let us first introduce the company to you.

Balmer Lawrie & Company was started by 2 Scotsmen, Stephan Balmer & Alexander Lawrie in 1867. Yes, the company is 146 years old!! As of today, it is a Public Sector enterprise under the control of Ministry of Petroleum & Natural Gas. So here we have a debt-free PSU with turnover of Rs 2100+ crore, which we never knew of. 🙂

The company operates its businesses under 5 heads – Tours &Travels, Industrial packaging, Logistics, Lubricants & Others (engineering products, tea packaging, leather chemicals, etc). You can read more about the company here.
How has Balmer Lawrie increased its book value and how this data can be used to enter this stock?
Stock Price & Book Value Movement (2003-2013)
The red blocks in above graph are book value per share over the last 10 years. As already discussed in earlier graphs too, it has been on a constant uptrend since last 10 years. On the same axis, we plotted the share prices. And it is not very difficult to see that book value has acted as a strong support for the stock price (a similar pattern was found in our analysis for Indian Oil). The stock price has rarely fallen below its book value. And when it has, it has almost always moved up into higher zones.
Can we use Price/Book Value as a parameter to check stock valuations and as a criteria to enter this stock?
Correlation between P/BV & 5 Year Returns
The graph clearly shows that lower the Price/Book Value per share, higher have been the 5 year returns. So you have the answer to the question. 🙂
Assuming Balmer Lawrie maintains its generous dividend payout policy, how can we use Dividend Yield as criteria to enter this stock?

If we see historical averages, the company has maintained an average dividend yield of 3.2%. The yields hit a historic high of mouth-watering 8.2% when markets crashed in March 2009. But it quickly moved back to more ‘normal’ levels of 3% to 4%. (see graph below)
Dividend Yields – Average, Highest, Lowest (2003-2013)
To check whether there exists some correlation between dividend yields and 5 year returns, we plotted a graph between these 2 parameters. And the result is summarized by one statement and graph below –
Correlation between Dividend Yields & 5 Year Returns
Higher the yields, higher the returns. 🙂
As we have warned in all our previous investment case studies too, please do remember…

…that above approach uses just 2 parameters, P/BV & Dividend Yield to decide about when to buy the stock. You as a reader should remember that there is a considerable difference between real life and case study. One should never invest based on just one or two parameters. This case should not be taken as an investment recommendation. Do your own research before investing your hard-earned money.

A Case Study on IOC (Indian Oil) & why its Book Value can be used as a criteria to buy the stock?

Our last case study on ONGC & analysis of 9 year old investment in its IPOhad us exhausted. 🙂 And with 1600+ words, even our readers were exhausted. 🙂 We even received a mail asking us to reduce the size of our future posts!! So we decided to keep this case study a little shorter.

Indian Oil (IOC) is India’s biggest public sector oil refiner. Unlike ONGC, Oil India & Cairn India which are in business of oil exploration and production, IOC is in business of crude oil refining and marketing of petrol, diesel, kerosene, ATF, etc. You can read more about the company here

Though we haven’t included IOC in our Dead Monk’s Portfolio, we do hold it in our personal portfolio for its high dividend yield. It has been consistently paying dividends for last 14 years.

Indian Oil Logo
In this case study, we try to look at the following issues:

  • We look at how IOC has increased its book value per share over the last 14 years. How this data can be used to make decisions about when to enter this stock for long term?
  • What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?
  • We also look at reasons as to why this approach might fail.

How IOC has increased its book value and how this data can be used to enter this stock?
Indian Oil Book Value
IOC’s Book Value has been a support for its stock price
The red line in above graph is IOC’s book value per share (adjusted). As evident, it has been continuously increasing over the evaluation period (10+ years). It is similar to a series of steps. On the same axis, we plotted the adjusted share price (blue line0.

And it is not difficult to see that in past, book value has acted as a strong resistance for the stock price. Pardon us for borrowing a term (resistance) from the trading community. 🙂 But the trend is actually ‘un’missable. The stock price has rarely fallen below its book value. And when it has, and if an investor went ahead and bought the shares, he has been handsomely rewarded. You may say that in past, we have been against timing the markets. But here we are advocating the same. True. We don’t feel that it is worthwhile to time the market unless and until you have some insider information. But if you are a disciplined investor, who invests regularly, it makes sense to periodically boost your portfolio returns, by buying good stocks when they are available at multiples below historical averages… Isn’t it?

What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?

To check the relation between returns & P/BV Ratio, we plotted two graphs. One between P/BV & rolling 3 year returns and another between P/BV & rolling 5 year returns.
ioc returns and book value 3 year
3 year Rolling Returns & P/BV per share of IOC

ioc returns and book value 5 year
5 year Rolling Returns & P/BV per share of IOC
On X-Axis, P/BV Ratio has been plotted on an increasing scale. On Y-Axis, returns (CAGR %) have been plotted. And as evident from the graphs, an investment at lower P/BV values (towards left part of x-axis) in IOC’s stock has resulted in higher returns. The scatter in the graph is downward slopping. Simply speaking, if one invests in IOC’s stock at low P/BV multiples, then probability of high capital appreciation is very high.
Why this approach might fail?

A few immediate concerns about this approach are as follows:
  • This approach relies solely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
  • The above book value based approach does not give any weightage to company’s management (appointed by government of India in this case). And though oil prices (in particular petrol) have been deregulated, govt. still has a shadow control over the prices. But in last 2-3 months, things have started looking brighter for oil companies like IOC.
  • Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other refiners like HPCL, BPCL. And BPCL itself has profitable interests in oil exploration business too.

Please remember…

The above approach uses just one parameter (P/BV) to evaluate the stock. You as a reader, should remember that this is just a case study. Real life and case studies are generally out of synch. 🙂 One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.

Disclosures: Long term positions in Indian Oil, Cairn India & ONGC. No positions in HPCL, BPCL or OIL.

A 9-Year Case Study of an investment in ONGC & why it is available close to its historically cheapest valuations?

Some time back, we did a post on ONGC’s dividend history. Since, we hold this stock in our long term personal portfolio as well as Dead Monk’s Portfolio, we thought we could (or rather should) give it a deeper study. We were debating on how to go about it, when we came across a great post by Joshua (link) analyzing an investment in Starbuck’s IPO. We really liked the thoroughness with which the investment was analyzed. This prompted us to take a similar approach to evaluate ONGC.

ongc logo
Caution – This is a long and number intensive post.
ONGC’s IPO came sometime in first half of 2004. The price band was initially set as Rs 680 – Rs 750. And retail investors were offered a discount of 5%, i.e., shares were allotted to them at Rs 712.50 (non-adjusted as of today price). Retail category comprised of those who invested less than Rs 50,000. The proceeds of the share sale were going to Government of India and not ONGC.
This ONGC case study looks at following issues:
  • What a Rs 50,000 investment in company’s IPO would have turned into over a 9 year holding period? We look at all aspects including capital appreciation and dividends.
  • We also try simulating results of another approach where we make regular investment in ONGC’s stock over this 9 year period.
  • We also look at how ONGC has increased its book value per share over these years and how it can be used to make decisions about when to enter this stock for long term.
  • We also evaluated why the above approach might fail.
This is the first time we are trying to evaluate a company in this manner and would like to get your feedback and suggestions. Though this post took several hours, we think its result was worth it, atleast for us. J
What a Rs 50,000 investment in company’s IPO would have turned into over a 9 year holding period?
Suppose you had Rs 50,000 to spare in 2004. You decided to invest in ONGC’s IPO as a retail investor. The shares were sold at Rs 712.50 apiece to retail investors. You received a total of 70 shares (rounded for ease) for your investment.
First of all, after these 9 years, your 70 shares would have grown to 421 shares as a result of 2 bonuses (2:1 and 1:1) and a split (from face value of 10 to 5). At a market price of Rs 320 (at time of writing this post), your stocks would be worth Rs 1,34,737. To top it, you already know that ONGC is a generous dividend payer due to government’s mandate. This means that in past 9 years, you would have received 19 dividend payouts totaling a sum of Rs 30,035.
That means that between capital gains and dividends, your Rs 50,000 investment grew to Rs 1,64,772 in nine years.  That is a compound annual growth rate of 14.17%. Compare this with Sensex journey from 5600s to 19500s, i.e. a compound annual growth rate of 14.87%. Not bad for a dull and boring company like ONGC when compared to glamorous Sensex. J

(Edited to add): The Sensex returns would be higher than 14.87% if we also consider the dividends issued by the constituent companies.

investing in ongc ipo
Investment in ONGC IPO: Calculation of returns (including dividends paid in last 9 years)
This also means that in less than nine years, ONGC has returned more than 60% of the initial investment as dividends (that too pretty regularly: 19 times)!! It is here that one can truly understand John D. Rockefeller’s feeling when he said – ‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’
ongc dividend history
Dividends Paid in last 9 years & comparison with initial investment in ONGC’s IPO
Note – John D. Rockefeller was the richest man ever. More than 10 times richer than the current richest man!! You can read about him and his company Standard Oil’s story here.
What a Rs 10,000 investment every quarter (3 months) in ONGC’s stock would have turned into over these 9 years?
This approach is born out of our interest in disciplined investing. Suppose you decide to invest Rs 10,000 every three months in ONGC’s stocks. This can be considered similar to having a regular SIP (Systematic Investment Plan) in mutual funds. This approach would have resulted in you investing Rs 3,50,000 in last 9 years. Result?
First of all, after these 9 years of quarterly investments, you would own about 1656 shares of the company. At, current market price of 320, these shares would have a value of Rs 5,30,077. Apart from that, these shares would have earned a total of Rs 73,828 as dividend income. That is, your total investment of Rs 3,50,000 has turned into Rs 6,03,906.
regular investment in ongc
Quarterly Investment of Rs 10,000 in ONGC during last 9 years: Analysis of  total returns (including dividends)
What has been the trend in Book Value per share for ONGC in last 9 years and how this data can be used to decide when to invest in the stock?
The company has been growing its book value at a decent 13.6% (CAGR) for last 9 years. The great thing about this growth is that it has been uniform, i.e., all yearly increases have remained in the range 11-15%.
book value history ongc
ONGC’s Adjusted Book Value Per Share (2004-2013) – (Note: 2013 book value is estimated)
book value trend ongc
ONGC Book Value Per Share & Annual Growth Rates
The above trend shows that the company has been successful in increasing its book value over the years. You may question this as the book value can be rigged. Also there are much better parameters available for valuing oil exploration businesses But lets just delay that discussion for a while. So, now what we have at our hand is a company (ONGC), operating in a capital intensive business of oil exploration, which has consistently grown its book value in last nine years.
So, now if we consider a very simple ratio: Price To Book Value Per Share (P/BV), can we find some trend which can actually help us in knowing whether it is a good time to invest in ONGC’s stock or not? Let’s first look at the graph below:
ongc book value
Price/Book Value Ratio: Lowest, Highest, Average – An indicator of when to enter the stock
The blue line is a plot of P/BV ratios of ONGC’s stock over the years. As we can see, the lowest which it has ever reached is P/BV=1.62. The highest it ever went was in late 2007 when it hit 4.14. The average in last nine years has remained at 2.51. So, when the stock was trading in the band 1.6-1.7 in late 2012, it was one of the cheapest multiple (P/BV) at which the stock could have been possibly bought!! Nevertheless, government’s deregulation news pimped up the stock and now you can see the abrupt rise in blue line near the end of graph. The stock is headed towards its mean. And this is a historical pattern. Any stock cannot remain far off from its historical averages for long durations. There is always a regression towards the mean. As far as our personal portfolio is concerned, we bought a few ONGCs near Dec 2012, when it was available at one of its cheapest valuations ever. J So is this the right method to decide whether to buy a stock like ONGC or not?
Because there are many other factors which play an important role in deciding whether to purchase a stock or not. We look at a few which are relevant in this context.
Why the above approach should be taken with a pinch of salt? What are the possible loopholes in this approach?
A few immediate ones are as follows:
  • The above approach relies entirely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
  • Oil exploration companies like ONGC offer a unique problem of valuation due to their large value based on oil reserves. There is also a large uncertainty in many of the assumptions, such as value and quality of their reserves. So, unless and until this data is taken into account, a comprehensive analysis of oil stocks cannot be done.
  • Other oil and gas specific metrics includes valuation based on barrel of oil produced per day, etc.
  • The above book value based approach does not give any weightage to the management team (appointed by Govt. of India in this case). Experience is crucial and ONGC has loads of it. But with ageing oilfields and increasing complexity of newer projects like ones taken up by ONGC Videsh (& its Imperial Energy fiasco), this aspect should be given its due importance.
  • Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other explorers like Oil India Limited and Cairn (India), which sometimes offer higher growth potential due to better reserve quality.
  • Its common knowledge that most of ONGC’s oil fields are ageing and in no position to increase their output. Such questions on future growth potential, in wake of lack of new oil finds, can also be attributed to lower P/BV multiple being assigned to this stock in last year and a half.


Last thoughts…

Oil & Gas companies are generally complex to value because of above mentioned limitations. But they offer solid investment vehicles for safety of principle, long term growth and consistent dividend payments. The above approach uses just one parameter P/BV to evaluate the stock. You as a reader, should remember that this is just a case study. Real life is much different from case studies. One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.
Disclosure: Long term positions in Cairn India & ONGC.

Graham’s Number for Indian stocks

They say that profits are made at time of buying and not selling. Now suppose you have shortlisted companies, whose shares you want to buy, i.e. you have a Ready-2-Buy-List with you. (Check our favorite ones here). So would you buy these stocks at any given price or would wait to buy at prices, which are low, atleast by some standards? We assume you belong to the small minority (fortunately) which believes that it is wiser to adhere to some set valuation standards. Though not widely used in Indian markets and having its own sets of shortcomings, we decided to use Graham’s Number as the standard to evaluate our favorite stocks.
Graham’s Number (GN)
Graham’s Number measures a stock’s fundamental value by taking into account the company’s earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in. The formula is as follows:
But before we share details of Graham’s Number for chosen Indian companies, we would request you to read this article. The article highlights the dangers of using just one parameter like GN for stock buying decisions. For those who don’t want to read the entire article, it would be suffice to say that GN is based on just 2 of the total 7 criterions suggested by Graham. So, just using this number means that you are missing out on other 5 equally important criterions.
So without any further delay, here are the GN’s for some of our chosen stocks-
  • We have calculated two values for Graham’s Number. One is named G (Column 8)and takes into account EPS of last twelve months (TTM) alongwith current book value per share. Second is G* (column 10) and takes into account the 3 year average EPS values and current book value. Taking 3 year average smoothens out any extraordinary earnings of one year and helps in arriving at a more normalized EPS value. Though we would have preferred a 5 year average EPS, we could not find sufficient data for all the stocks.
  • Stocks like Sterlite Industries, BOB, Balmer Lawrie, Graphite India are trading almost 40% lower than their respective GNs. Please be reminded that a price below GN is considered to be a sign of undervaluation.
  • But we, being a lot more risk averse, decided to add a margin of safety of 25%. We found that even if we reduce the values of GN by 25% (in column 12), these stocks are still available 25-30% below their GNs. This is a clear sign that any investment made at current levels, may not be a bad idea at all.
  • You won’t be wrong if you believe that our previous statement (in particular, underlined part) is speculative in nature. All we can say is that with investments, no matter how careful we are, no matter how large the margin of safety we keep, we can never eliminate the risk of being wrong. 🙁
  • On the redder end of spectrum is Clariant Chemicals (India) Ltd. Though we ‘love’ this stock for its simplicity, robustness and dividends (obviously), our calculations show that it is trading 65-120% above its GN. Add to this the fact that it is currently available at a PE > 18, it can be safely deduced that shares of Clariant Chemicals are currently overvalued. (Historically, it has an average PE of 15).
  • We also observed that Banks, as a whole, seemed to be trading at levels much below their GNs (including margins of safety conditions!). To see if this was an exception or a trend, we calculated GNs for all major large cap banks.
  • The above table clearly shows that Public Sector Banks are trading at significant (40-50%) discounts to their GNs. Whereas their private sector counterparts are trading much above the GNs. We are not sure about the real reason for the same. (It may be due to PSU tag or higher growth associated with Private banks).
  • Our favorites BOB and SBI (part of DMP) are almost 48% and 23% below their GNs. But be cautioned that this should not be taken as a buy signal. There are a lot many issues like NPAs, etc which need to be looked into, before taking a call of buying into banking stocks.
  • But considering the growth possibilities (here we go again: read forecasting and speculation) that Indian banking sector has; and the role that large cap banks are about / supposed to play, wouldn’t it be an interesting idea to start accumulating units of a thematic (Banking Sector) mutual fund? We think it can be a good idea if one is ready to take the risk of taking a focused bet.
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P/E Ratio, P/BV Ratio & Dividend Yield Analysis of Nifty50 : And how we can benefit from it

In last post, we detailed how we plan to change Stable Investor’s approach in future. This post is first step in that new direction. In this post, we analyze how a little effort on one’s part can help ensure that one does not enter Indian markets when they are irrationally over-optimistic and chances of a major fall are quite high.
For this, one needs to know the current value of P/E Ratio, P/B Ratio & Dividend Yield (DY) of any of the benchmark indices. Though we have chosen Nifty50, you can also go for Sensex or broader NSE500, BSE500 indices. The latest values of P/E, P/B & DY can be found here

But the current data needs to be compared with past trends. We did some analysis of available historical data (Since Jan 1999) and found some interesting insights.

P/E Ratio (What is PE Ratio?)

The table below shows that on investing in a market with PE multiple of less than 12, returns over 3 & 5 year periods have been close to 40% per annum!! Even Warren Buffett has achieved 28% CAGR 😉 An investment in markets with PE in range 12-16 also gives a handsome return of close to 28% pa over a 3 year period. And our analysis reinforces expert’s opinion that investing in markets with high multiples (PE>24) is foolish and returns have been found to be in negative (-7%).

Caution – Five year returns do not follow the same pattern as 3-Year returns. Even on investing at foolishly high PE of more than 24, data shows that one can earn close to 26% pa for the next 5 years. Though data is correct and calculations have been thoroughly checked, we think that this should not be taken as a general rule. This is more of an outlier (due to high returns in Dot com boom and great Indian Bull run of 2003-2008). The fact is that investing in high PE markets increases the chances of low (and negative) returns. A graph below shows that PE Ratio and returns earned over 3-5 years period are inversely proportional.

PE Ratio & Returns (Click to enlarge)

P/B Ratio (What is P/B Ratio?)

The table below shows that on investing in a market with PB Ratio of less than 3, returns over 3 year periods have been close to 27% pa. But on the other hand, if one takes the risk of investing in markets which are trading at P/B of more than 4 (According to us, a market that is running ahead of its asset based fundamentals), one should be ready to accept very low returns of 4-5% pa.

Caution – Like in case of P/E Ratio, it is found that five year returns do not follow the same pattern as 3-Year returns. On investing at high P/B of more than 4, data shows that one can earn close to 23% pa for the next 5 years. This is foolish! Though data is correct and calculations have been thoroughly checked, we are not convinced with this result. Investing in markets trading at high PB levels increases the chances of low (and negative) returns. A graph below shows that P/B Ratio and returns earned over 3 year periods are inversely proportional.

P/B Ratio & Returns (Click to enlarge)

Dividend Yield (What is Dividend Yield?)

First things first. Dividend Yield (DY) of more than 2.5% for an index (Nifty50 in this case) is rare. Very rare! In last 13 years i.e about 3400 trading days, DY has stayed above 2.5 for just 130 days! And returns on investments made during those period have been an eye popping 41 & 45% for three and five years respectively!! So when can one find these days of high DYs? These are the days when markets are over pessimistic and everyone else is selling everything. There is blood on the street. And, if one has the knowledge of historical data like detailed above, one can take a call and invest in an index and be quite sure that he stands to gain handsomely in years to come. Similarly, an investment below an index DY of less than 1.5 does not make sense and returns are close to zero (6% to be precise).

Caution – Like in previous two cases, five year returns do not follow the same pattern as 3-Year returns. But rest assured, investing in markets trading at high dividend yields increases the chance of (very) high returns. A graph below shows that Dividend Yield of index and returns earned over 3 year periods are directly proportional to each other.

Dividend Yield & Returns (Click to enlarge)

So how can one benefit from these historical trends at present? As already said, we first need to get the current values of the 3 parameters. These are taken from NSE’s website.

So what does the historical data tell about the current market levels?
  • An investment at PE = 17 will give returns of 13% pa for next 3 years. (We are intentionally omitting 5 year returns data as we are not sure of its relevance – Read Caution Statement in part pertaining to PE Ratio above).
  • An investment at P/BV = 2.9 will give returns of 27% & 37% pa for next 3 & 5 years respectively.
  • An investment at Dividend Yield = 1.62 will give returns of anywhere between 6% to 26% (We are giving a range because thought the DY=1.62 lies in bracket for 26% returns, the fact remains that it is also very close to lower bracket of Below 1.5, which has a return of close to 6%)

*By investment, we mean investment in an index (via Index Fund or ETF) and not any particular stock in the index.

Though readers are free to draw their own conclusions, we thought that we would put down a few of ours –

  • If you invest in markets trading at lower multiples (PE<16) OR PBV2.5, you are bound to make some serious money in a few years time.
  • If you have some money which you want to park (at one go) in some index fund or ETF which tracks the index, we suggest that you should wait for levels when most of the markets health indicators discussed in this post are in your favor.
  • But if you are one of those disciplined investors who avoid timing the markets, then you should continue investing on a regular basis without any regard to bull or the bear markets. But you need to pray that when you need your money, it should be during the reign of bulls 😉