Underdogs at a premium - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Underdogs at a premium

Aug 2, 2000

If you thought only TMT (technology, media and telecom) stocks command logic defying valuations on the bourses, think again. equitymaster.com did a small study and found that the markets are also paying hefty premiums to relatively new entrants across different sectors. Take a look at the table below and you will understand what we mean. Henkel Spic (subsidiary of Henkel AG, Germany) was mired in losses until recently. It has shown signs of turning around only from the current year. Even then, its annualised estimated profits in the coming year are miniscule Rs 40 m as compared to a whopping Rs 13.9 bn (estimated) for FMCG major Hindustan Lever Limited (HLL). But ironically, it is Henkel which commands a P/E (price to earnings) multiple of 158 times (comparable or even higher than P/E multiples of Infosys and Satyam). HLL's P/E multiple you can see is far below Henkel Spic's.

Company Price
(Rs)
Net Profit*
(Rs m)
P/E ratio
(X)
Price to Book
value (X)
Henkel Spic 57 40 158.0 9.5
HLL 241 13,900 38.0 2.5
Whirlpool 29 100 37.3 2.6
BPL 139 936 4.1 0.9
Reliance Petro 48 13,000 16.0 1.5
BPCL 180 8,000 3.4 0.9
* Net Profit represents estimated earnings of companies in FY01

This is the story as far as consumer products sector is concerned. Even in the white goods sector, you find similar irony. Here the underdog Whirlpool India commands a hefty premium as compared to giant BPL Limited. By the way, Whirlpool was also mired in losses till its last financial year, only this year it has shown signs of turning around. The story is the same in the refining sector. Here too, the bourses have placed Reliance Petroleum on a premium compared to established player Bharat Petroleum Corporation Limited (BPCL). This is Reliance Petro's first year of operations.

Why is this so? The reasons are many. Firstly, all these so called underdogs are in a growth curve. They have turned around and their growth potential is estimated to be higher than established players. Secondly, if you look closely, all these underdogs are available at less than Rs 50 per share, which means investor's have to lock in lesser funds in these stocks.

In effect, the market is taking a higher risk in underdogs, simply because they expect higher growth rates as compared to established players. Higher risk, higher return (or losses). This is the same logic as applied for TMT stocks also.

These were just a few examples. Look deeper and you will find that the markets are flooded with such cases. Investors want to buy stocks with a potential to become future blue chips. Catch em young! That seems to be the motto.


Equitymaster requests your view! Post a comment on "Underdogs at a premium". Click here!

  

More Views on News

India's Drone Revolution is a 4x Profit Opportunity (Profit Hunter)

Sep 30, 2020

My research on India's leading defence companies brought me to one major player in drone manufacturing.

The Gold and Silver Bull Market is Not Over (Fast Profits Daily)

Sep 29, 2020

The last few days have been nerve-racking for bullion traders. Stay calm. The bull market still has a long way to go.

Earned Short Term Capital Gains on Shares? Here's What You Need to Know While Filing ITR (Outside View)

Sep 29, 2020

PersonalFN explains CBDT's clarification regarding scrip wise disclosure in ITR in case of short term capital gain.

This Smallcap is a Must Have Stock in Your Portfolio (Profit Hunter)

Sep 29, 2020

Investing in this smallcap could open doors of huge, long-lasting wealth.

Why the Market May Rally for a Few Days (Fast Profits Daily)

Sep 28, 2020

Why I think the market can rise for the next few days.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 30, 2020 12:15 PM

COMPARE COMPANY

MARKET STATS