Recently both of the above names have been in talks owing to the price one has to pay for acquiring a unit of it (one has to spend more than ` 50,000).
As many of you might have read on front page of the majority of the financial daily last week, that MRF has become the “most expensive” stock of Indian Stock Market. However, reading this titles across many newspapers, brings us to a very important topic from a retail investors’ perspective i.e.
Is it the value per share which decides whether it is expensive?
While most of the fans of Cricket, Car or Capital Market knows the name of MRF, but it will be very important to understand why MRF has become the most expensive stock and is it really expensive?
- India’s largest tyre manufacturer & largest OEM Supplier from 2-wheeler to Aircraft
- Favourable Natural rubber prices and Crude prices
- Wide Network & Brand dominance
- Consistent growth, healthy financials & return ratios
The growth prospects attached to the company took the price from ` 10,000/- 4 years back to `50,000/- at this point in time. 4 years back also, people used to find it expensive stating 1 share for ` 10,000 is too much.
What has changed from 2012 to 2016?
MRF is trading at a PE multiple of 14, considering FY16 EPS of `3707 per share which is comparable to peers like CEAT, Apollo Tyres etc. Now whether MRF is expensive or cheaper is to be determined by its growth forecast for next few years.
If we were to believe that the higher price of the stocks are expensive and will be difficult to grow from this levels then the below chart should clear your doubt and the myth about growth of an expensive stock.
What is important; Price or Value?
“Price is what you pay and value is what you get” – Warren Buffett
Price should not be the focus for any investor when investing in stock market. What should be seen is that the price is at which is available is it valued properly or not. Whether it is undervalued, overvalued or fairly valued.
We have often heard people saying that the stock is too expensive, asking for tips for stock which are around `20 – `30. Had that been the case, we would have missed out on opportunities like Vardhman Textiles which we bought at ` 330 and has been a 3-bagger in 3 years and Atul Limited which initially was bought at ` 400 and has given 5 times returns over the last 2-3 years.
Also, whether an investor buys 10,000 shares of ` 30 or 100 shares of ` 300; it should be of least botheration so far as the investor is ready to invest ` 3,00,000/- in a particular stock.
A similar misconception that stocks whose price is in single or double digit are considered as penny stocks. To explain that we will have to make one more separate communique. But hope the principle was communicated.
A common saying says “Don’t judge a book by its cover.” Same is equally valid for investors i.e. “Don’t judge a stock by its stock price.”
So think about it every time you invest.
Happy Investing !!
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