"It is pure illusion to
think that an opinion that passes down from century to century, from generation
to generation, may not be entirely false."
—Pierre Bayle (French,
1647-1706)
Word for the day
Macaronic (adj)
Composed of a mixture of
languages.
Malice towards none
Has the government erred in
not marking the birth centenary of former Prime Minister Mrs. Indira Gandhi?
First random thought this morning
LKA build BJP from almost zero to a force to reckon with. NaMo has
strengthened this force materially. But one thing that has confounded many is
why LKA could not achieve what NaMo has.
I think I have solve at least first stage of the puzzle.
LKA mobilized millions in the name of Ram temple, but never tried
to channelize the mob into a positive force working for betterment of life.
Whereas NaMo mobilized millions of youth the name of corruption and has shown
intent to channelize them into a positive force to work for clean India, self
reliant India, self employed India, etc. This positive intent has made all the
difference.
Karni Sena might have a lesson to learn here.
Valuations - Starting from the end
In past bull markets I have seen
many analysts reengineering their valuation arguments. Instead of arriving at
the fair value of a stock through the conventional earnings, cash flows and replacement
value arguments, they would seek to apply innovative and fancy valuation
criteria like foot falls (for retail stores), eye balls (for ecommerce
portals), price to growth or PEG (for IT start ups), NAV per share (for real
estate developers) etc. to justify the current market price (CMP). In this case
CMP becomes the starting point of analysis.
I can see a similar trend emerging
in the current market environment also.
In conventional sense, the return
on the investment in publically traded equity is a function of 3 factors (a)
earnings growth; (b) changes in price earnings (PE) ratio and (c) dividend.
The earnings growth is a function
of multiple factors, e.g., (a) capacity (production capability); (b) demand
environment (market leadership); (c) competitive landscape (pricing power, cost
advantage); (d) innovation and technology advantage; (e) resource availability
(raw material, labor, capital, managerial bandwidth etc.), etc.
The price earnings ratio (PER),
one of the most popular equity valuation criteria, is the ratio between the
earnings of a company and its market value. It broadly signifies that at the
current rate of earnings how many years it will take for the company to add the
value which an investor is paying today. Principally, an acceptable PER for a
company's stock is defined by (a) the return on equity (RoE) a company is able
to generate on sustainable basis and (b) the growth rate of earnings that could
be achieved on sustainable basis. A company that could generate higher RoE consistently
and is likely to grow faster, should be assigned a higher PER as compared to
the ones which generate lower RoE or has low or highly cyclical earnings
growth.
A rise in PER, if not commensurate
with the rise in earnings profile needs deeper scrutiny. Sometime the rise in
PER occurs due to correction in anomalies (undervaluation) of the past. This is
a welcome move. Sometime, PER changes (re-rates) due to relative forces, e.g.,
rise of PER in comparable foreign markets or change in return profile of alternative
assets like bonds, gold, real estate etc. This is usually unsustainable and
therefore a short term phenomenon. Many times, demand-supply mismatch in
publically traded equities also drives re-rating of PER (excess liquidity
chasing few stocks and vice versa). This is again usually a short term
phenomenon.
Sustainable rise in dividend yield
is generally a sign of stable profitability growth (P&L improvement) and
strong financial position (B/S improvement) and stronger cash flows. In some
cases however it could reflect stagnation in growth.....to continue tomorrow
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