X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 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.
The Art of Conservatism, Exorbitant Valuations, and More... - Views on News from Equitymaster
  • MyStocks

MEMBER'S LOGINX

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

The Art of Conservatism, Exorbitant Valuations, and More...
Dec 11, 2015

Is it possible to value a company the way a housing loan company checks out a borrower's eligibility? This thought crossed my mind as I sat in the office of a home loan firm last week. I had accompanied a friend who wanted to get his loan eligibility figured out. And as he got busy with one of the sales reps, I this idea that struck me out of the blue, and I decided to explore it further.

So going back to the question, can the process that determines the eligibility of a borrower for a housing loan also help determine the value of a company?

The way home loan assessment is done, especially in India, has conservatism written all over it. The standard process works something like this. The annual income a person earns is verified, his capacity to pay EMI is determined, and lastly, he loaned a maximum of 80-85% of the total value of the house he intends to buy.

Here's an example to illustrate: A person whose net income is Rs 50,000 per month is believed to be able to afford an EMI of roughly 60% of their income (i.e. Rs 30,000). Therefore, if the EMI per lakh comes to Rs 1,000 per month for a 20-year loan, the borrower can take out a loan worth Rs 30 lakh. With this, he can buy a property with a value of at least Rs 35.3 lakh.

The Math Behind the Process

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS