Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Savings account? Go to the stock markets... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jul 13, 2004

    Savings account? Go to the stock markets...

    Usually, the equity markets carry a bad omen of being a gambler's haven, with high returns equally complementing high risks. This to a large extent drives away an average risk averse investor, who prefers safe returns on investments and stays away from equity markets. This article is targeted towards drawing these investors to the so-called risky stock markets.

    A typical risk averse investor would prefer to invest a chunk of his money in risk free government bonds, fixed deposits and other statutory investments such as PPF, etc, thereby earning sub-optimal returns. Now, how about you investing in the stock market in securities that promise the same security and at the same time super normal returns? Sounds utopian, read on...

    Let us now take an example that you invest in a stock with the worst-case scenario purpose. The fact that you invest in the stock is proof enough that you believe the stock prices to move further up with positive growth indicators for the industry in general and the company in particular.

    Now, suppose you had purchased shares of Gas Authority of India (GAIL) at Rs 75 as on 31st March 2003. At this price, as a risk averse investor, your primary concern is the safety of your investment. Therefore, let us now analyze the main aspects, viz., the worst-case scenario and as to how much do you stand to lose if the company goes into liquidation.

    If the company goes into liquidation, it would have to pay off its creditors who have a first right on the fixed assets as a collateral (security) and then to the preference shareholders following which the residual amount shall be paid off to the equity shareholders. It is therefore important to calculate this residual amount that shall be paid to you. Let us have a snapshot of the main contents of the balance sheet of the company:

    Assets Liabilities
    (Rs m) FY03 (Rs m) FY03
    Current assets 46,437 Current Liabilities 19,933
    Investments 6,879 Prov. 7,828
    Fixed assets 69,502 Total Debt 20,471
    Total 122,818 Total 48,232

    From the above table, it is clear that the company would be left with around Rs 74.6 bn after paying off all the debts including current liabilities and provisions. Now the total market cap at Rs 75 per share stands at Rs 63.4 bn as on 31st March 2003. The difference between the amount that the company has been left with and the market cap is a healthy Rs 11.2 bn.

    At a residual balance of Rs 74.6 bn (excluding reserves), the price that shall be paid back to the investor would be approximately Rs 88 per share. Remember, the amount you had invested was only Rs 75. The above example may be a rare scenario where your money enjoys safety and gives you decent returns. So could we say that you missed the bus!!! Well not necessarily, as there is always next time in the stock markets.

    Companies P/BV (x) RONW (%) (FY05E)
    Escorts 0.5 7.5%
    Indo-Gulf Fert. 0.8 15.1%
    VSNL 0.8 6.1%
    MTNL 0.9 7.4%
    Essel Propack 0.9 11.4%
    Tata Power 1.0 9.9%
    NIIT 1.0 2.3%
    Kochi Refineries 1.2 21.6%
    Indian Rayon 1.2 12.5%
    Arvind Mills 1.2 12.5%
    HPCL 1.3 17.7%

    * From our research-reports

    The below mentioned chart gives you a perspective as to how much you would have made had you invested Rs 100 in GAIL as against the amount invested in the BSE Sensex as on 31st March 2003.

    The main idea is not to spell out the stocks with such rare opportunities but to highlight the fact that investors need to study the target company first with the main focus being on the how much do you stand to lose in the event of the company shutting shop. Many investors invest based on so-called hot tips but what makes an investor reap rich benefits are the fundamentals of the company.



    Equitymaster requests your view! Post a comment on "Savings account? Go to the stock markets...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    This Company Beat the Business World's 'Three Killer Cs' (The 5 Minute Wrapup)

    Aug 16, 2017

    And what it has in common with beating the stock market too.

    5 Steps To Become Financially Independent (Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 17, 2017 01:32 PM