1. Equity Valuation

2. Valuation of shares - EPS Why does one invest in shares? The shareholder can earn money only if the company makes profits as he is a part owner. Earnings of the company are widely tracked through a measure called Earnings Per Share.

3. Valuation of shares - EPS Current Earnings are widely tracked through a measure called Earnings Per Share(E.P.S) Example: Suppose a Company has issued 100 shares and it makes a profit after paying taxes of Rs 1,000.Then E.P.S of the company is Profit after Taxes Number of shares Does this mean that a shareholder will receive Rs. 10 per share??? In this case it is 1000 = 10 100

4. Valuation of shares - EPS Dividend(Rs. 2) Suppose in this example if the company declares a dividend of Rs. 2 per share, The shareholder would receive Rs. 2 per share in cash. Remaining Rs. 8 per share is re-invested back to the business. This re-investment contributes to future growth. Re-investment(Rs. 8) EPS-Rs 10

5. Valuation of shares - EPS Logically higher the earnings higher should be the value of shares. But does this happen in reality??

6. Valuation of shares- EPS Consider these….. Aftech Ltd’s EPS for 06-07 is Rs. 13 HCL Tech’s EPS for 06-07 is Rs. 10.2 Which company’s share price is higher? Canara Bank’s EPS for the year 06-07 is Rs. 35 HDFC Bank’s EPS for the same year is Rs. 33 Which company's share price should be higher ?

7. Valuation of shares - EPS Consider these….. ACC’s EPS for the year 06-07 is Rs. 56. It is quoting between Rs. 800 to 810 Ultra Tech’s EPS for 06-07 is also Rs. 56. It is also quoting between Rs. 800 to 810. Here the Company’s with similar earnings are quoting at similar prices. Why?

8. Valuation of shares - EPS It is not only the earnings that matter…. What is equally important is the expectations of the market about the future prospects of the company.

9. Valuation of shares Earnings can be tracked through E.P.S. How to measure expectations? Current Earnings of the Company Market expectations about its earnings Market Value of a Share

10. Valuation of shares - P/E Future Expectations about the performance of the company is measured through a ratio called price to earnings ratio, popularly known as P/E ratio. Example: XYZ Ltd has an EPS of Rs. 10. The market value of the Companies share is Rs. 150. Then P/E ratio is Market Price of a share Earnings per share In this case it is 150 = 15 10

11. Valuation of shares - P/E In terms of P/E market is almost at the same level in which it was 5 years back. Is the market overvalued with the Sensex crossing 15000 levels?

12. Valuation of shares - P/E Market Price = EPS x P/E  15 P/E means that investors are ready to pay Rs. 15 for each rupee of earnings in the company.  This ratio reflects expectations about the future performance of the company.  Higher the expectations higher will be the P/E and vice versa.

13. Is direct equity investing advisable ? Our brains are designed to perceive trends even when there do not exist any. After an event occurs two or three times part of the brain called anterior cingulate and nucleas accumbens automatically anticipate that the event happens again.

14. If the event does repeat a chemical called dopamine is released flooding the brain with soft euphoria. Thus if a stock goes up a few times in a row, one reflexively expects it to keep going and the brain chemistry changes as the stock rises, giving a natural high. One becomes addicted to ones own predictions. Is direct equity investing advisable ?

15. When the stock falls, the financial loss flares up ones amygdala - the part of the brain that processes fear and anxiety. This generates the fight response and after sometime flight response which is natural to cornered animals. Is direct equity investing advisable ?

16. Thus the retail investor buys after the market has risen and sells when the market has fallen. Thus an ideal investment system should not allow investors to withdraw money at will. This can save investors from huge losses. Is direct equity investing advisable ?

17. Large, Mid & Small Caps How do small, mid and large caps differ from each other?

18. Small Caps are the stocks which are in their infancy. Mid caps are stocks which are in Growth phase. Large caps are the stocks which are in maturity phase with stable growth. Large,Mid and Small caps

19. Large, Mid and Small Caps- Risks 1.Low liquidity: One will not be able to sell the stocks as easily as large caps as there may not be buyers in times of trouble. 2. Business risk: Since the mid caps and small caps are not established businesses, they find it tough to weather difficult conditions compared to large caps. Example: Small and Mid cap IT companies are hit harder by the rise in the rupee as against large companies like Infosys, TCS and Wipro.

20. Why one can make maximum money out of mid caps? Large, Mid and Small caps  Typically mid caps pass through an inflection point.  Inflection point can be introduction of a new product, new government policy, new management. etc. Example: Valuation of mobile service providers went through the roof when incoming was made free as more people started using them.  Inflection points transform the small companies in to large ones and at these points they deliver maximum returns.

21. Key to Mid cap investing Valuation of shares - Mid Caps - Risks a. Should be able to identify inflection points b. Worry about business risk and not liquidity c. Stay long enough to reap benefits of transformation from a mid cap to a large cap