This is not the first Bull Market we at DalalStreet.Biz are riding on. After having burnt our fingers in the early 90s we built a model of investing based on Fundamentals and Earnings of the company 🙂 Now, as reader you maybe wondering why are we writing after the show ? Well, whenever we had an opportunity, we have said that in the past [Rolta, SBI] and we just thought of summarizing more events on how Bull Market Analysts justify their Stupid Price Valuation Theories.
In 1991, as Harshad Metha rigged up stocks like ACC, the price was justified by the replacement cost theory. Under this, it was argued that ACC’s value should be at least the same as the cost, time and effort needed to create another ACC”. After Mehta’s game got over this theory has been confined to the dustbins of history, at least as far as Indian stock markets are concerned.
In 99-00, Ketan Parekh and associates formed cartels and strategically painted such a rosy picture for low quality companies like HFCL, Padmini Technologies, etc and began discounting their never realized future earnings higher than Infosys and other IT stocks.
In 2006-2007, desperate Analyst working for Macquarie research justified the valuations for Rolta by comparing it with L&T. Similarly, the bigger scam is in the widespread disease on Dalal Street of Land Bank Valuations. This theory is being used to justify the huge valuations of real estate companies as well as a lot of other companies which own a huge amount of land. The logic being that the price of land and real estate has been rising at a rapid rate and so these companeis are sitting on a potential goldmine. The stock market is just trying to price in the market value of their land holdings into the stock price.
Desperate Analysts started taking into account large amount of property owned by SBI. It was felt that SBI has a lot of assets like property and flats in the posh areas of metropolitan India, whose market value had not been factored into the stock price. This is good in theory but in practice, SBI will never SELL its Chairman’s Bungalow of its officers apartments to boost stock price. Kindly beware of Land bank Valuations if you are a value investor as most of companies who want to push their stock prices to the roof who are barely transparent in operations nor have sound business model for their company.
In 2008, CLSA analyst is factoring in Rs 552 / share for Reliance SEZ [Land is not yet acquired and they valuing the SEZ here LOL ] and has pegged the stock price at Rs 5,207.
Coming back to what Sr. Fund Manager, Prashant Jain said in an interview,
“Asset valuations can be factored into valuations only if companies can generate cash flow from those assets. Discount the cash flows, not assets”
The same holds good for commodities. You know the endless list of companies we can talk about here 🙂