Friday, May 16, 2008

How to spot deep value stocks

This article (here) was published in The Economic Times on 4th May 2008. (nah! I didnt write it).

"Manish Sonthalia of Motilal Oswal Securities believes that PSU banks like Oriental Bank of Commerce, which is trading at a PE of 5.6 with book value of Rs 240 for FY09, is a perfect example of a deep value stock." (unfortunately this was the only stock discussed in the entire article)

Recently, OBC declared it's Q4 results and showed a net loss of Rs. 99 crs as against a profit of Rs. 54 crs last year. Additionally, on a full year basis, OBC closed the year on a profit of Rs. 353 crs as against Rs. 580 crs last year. The primary reason for the lowering of profits was the writing-off of the entire unabsorbed losses of Global Trust Bank (GTB) amounting to Rs. 487 crore, including the Rs 242 crore earlier slated for 2008-09, in the financial statements for 2007-08 itself. This means OBC starts of FY08-09 on a clean slate. 

To put some quick numbers around this - OBC will save on about Rs. 242 crores this year (apportioned as GTB write-off) this year. So reconstructing FY2007-08 numbers (without the OBC w/off) comes to -
Operating income : Rs. 5,800 crores
Other income : Rs. 615 crores
Operating expenses : Rs. 5,155 crores
Hence, profit before taxes : Rs. 1,260
Less: Taxes @ 35% : Rs. 441 crores
Net profit : Rs. 819 crores

At the current price of Rs.207 and a market cap of Rs 5,186 crores .. the stock is priced at a price-earning of 6.33. I am not assuming any increase in income here (or being a pessimist - am not apportioning additional provisions in the P&L for dubious asset quality). At 6.33, the stock is a bit undervalued. How deep the value is ... anyones guess !

11 comments:

Mohit Kumra said...

Do find the time to check out my new Value Investment blog kumrainvestmentcompany.blogspot.com. Your critical comments would be most appreciated.

arun said...

I am a bcom 1st yr lad and have been following your blog for last several months.I really appreciate your efforts and i hope that you would come with many quality posts in near future.

Offlate following you i have created my blog and it has been getting 600-700 visits a day.Would love to have your comments on it.

Regards,
ARUN
http://www.arunthestocksguru.com/

Manish Chauhan said...

I am sure that banking stocks are really undervalued currently in India . Even ICIC I banks and HDFC Bank look cheap . Thanks for this post , will try to find out more on this .

Manish Chauhan
Bangalore
http://finance-and-investing.blogspot.com/

Principal Safety said...

Dear Sir,

(Sorry for the double comment but reposting here cause I'm not sure if you still check your old blog)

Is the historical information for Indian companies found on web sites reliable?

Rediff, India Bulls, MoneyCentral etc do not seem to have more than 5 years of EPS data.
Some companies have more data on their annual reports but most don't have that either.

Do you know of any sites which might have around 10 years of EPS data?

Thanks in advance!

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sonika said...

I think Geometric Limited is a wonderful value investment. Rakesh Jhunjhunwala added 8 lac shares in this quarter as well. His holding now has gone upto 53,15,000 shares.


http://rakesh-jhunjhunwala.blogspot.com/2009/10/rakesh-jhunjhunwala-added-8-lac-shares.html

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