December 13, 2007

Ashok leyland - Private market value

I had written on Ashok leyland earlier.

My valuation was as follows
The company sells at a PE of 12. The current EPS is around 3.3 per share. The company can be expected to grow at 10-12% over the next few years. In addition the company has some competitive advantage such as a known brand name (especially in the south), long operating history and experience in the market, rational management and a decent distrubution/ service network.The company can be valued at around 16-18 times PE and given an intrinsic value of around 60 Rs/ share.

I recently got this email from Vishnu

I have been going through Eicher JV deal with VOLVO. It would be great if you can share your opinions.

Eicher is stepping down its Commercial Vehicle and Component business into a JV with VOLVO which is paying 275 million USD in CASH and 75 million USD in terms of VOLVO's truck distribution business in the JV.

Cash(VOLVO) is paying 1045
VOLVO India Truck distribution 142
TOTAL VOLVO Share (45.6%) 1187
EICHER Share in JV (54.4%) 1416.070175
Eicher Market cap 1314
* All figures are in Crores (INR)

I have already shared my opinion on the above opportunity with him. What struck me was that the deal involved the Commercial vehicle business and the deal was valued at approximately 2000 crs. Eicher motor’s CV business had a PAT of roughly 62 crs (pretax – 82 Crs) and hence the
private market value (the amount that a private investor would be willing to pay for the company, in its entirety, were it not public) seems to be around 25-30 times earnings

So Ashok leyland can be valued at 70-90 Rs/share by the above metric. My own conservative estimate was around 60/share.

Whats the point of this analysis ? well private market valuation is another approach to valuation. It may be more than your own estimate as it may include controlling premium. However if you can find the private market value to a business you are looking at, it helps in calculating the intrinsic value.

In case you are wondering if I really benifited from my research, I did not completely. I have this tendency to do detailed analysis and build my position over a period of a few months especially if the price drops reaches or drops below 50% of my estimate of intrinsic value. Ashok leyland is around 54 now, so basically the price went up before I could go beyond my initial position. That unfortunately has happened several times this year.

Why should a quick price increase be unfortunate? Well that’s another post for this wacky idea.


Nilesh said...

hi, thats the problem with me as well. once i come across a good opportunity, i invest too little in it (compared to my portfolio size and amount at disposal to invest). main reason is my lack of confidence. please share if you have any idea on how to avoid it.

VISHNU said...


You can do 4 things..

1) Buy more..(I have been following a stock at 80..made some little puchases at these level..When the stock went up 120..I was comfortable with company and the price ..again put lot of my money at this level..Stock hit 205 and I was not comfortable with this price and recently made an exit)

2) Sell it. (I was purchasing a stock and went up 20% after 5 months..And the ownsers done a preferntial allotment to themselfes.As I am not comfortable with this policy ..I have made an exit)

3) Always look out for bargains..(Even if you miss can find another bargain..)

4)Sit with cash or handover to experts..(If you cant find bargain sit with cash..or handover to a guy who can find a bargain..Right now I am more impressed with Sandip Sabharwal (JM financial) who made 98% returns with 100-200 Stocks which is very diffcult for anyone..)

Rohit Chauhan said...

i agree with your comments for nilesh's question. but i think that is a more tactical approach.

I have the same concern as nilesh. the concern is this- how to arrive at a position size in the portfolio which maximizes the return, but minimizes risk. too big a position will be risky, but too small which i have been guilty of some times leaves money on the table.

kelly's formulae etc are available to size the portfolio, but they make the assumption that you know the odds of your position well. that always is not true (read lack of confidence issue)


Deepak said...

I tracked Ashok Leyland for quite sometime for my portfolio, using what is called the pyramid approach, kept building positions at 38-45 range... but then the stock stagnated, I agree with the 60 figure for the stock. But the inclusion in the F&O has changed the dynamics slightly.

Rohit Chauhan said...

hi deepak
can u elaborate how the dynamics have changed by inclusion in the F&O segment ?

Ranjit kumar said...

Hi Rohit,

Kelly's formula is too scientific, and more useful in arbitrage opportunities where you need to have a very clear idea on the probability of risk. The probability we calculate in determining the riks involves a bit of hunch. So in normal situations i like Mohnish Pabrai's approach of investing not more than10% of the funds in a stock he likes. He also says that his low confident stocks have given better returns than the stocks which he is more confident on...

Ranjit kumar

Rohit Chauhan said...

i agree , i find mohnish's approach fairly useful. he has discussed it in his book - dhando investor. that said, i would still say that it requires a lot of confidence and courage to invest 10% of your networth (not portfolio) in a single stock


Deepak said...

Hi Rohit,

this is in continuation of the comment on F&O inclusion. I think one of the issues you face when you follow the value investing approach is what is the trigger for unlocking value in a few stocks. On Ash ley, my points were foreign JV, turnaround of interest cycle, stabilization of freight cycle. But inclusion in F&O increased the trading witnessed on the stock and apart from the rumors of a JV, the spurt in trading volume I have noticed, usually brings in traders who then lead to the discovery of the stock faster. In such cases, even though the target of 60 is met, I might still play momentum with strict stop losses to exit my position. Not sure if this works, but has been happening in the last few months with me... still small base to conclude that this works, but will keep watch.

Rohit Chauhan said...

yes , i saw a sudden pop in the price. did not know that it was due to inclusion in F&O. But after the initial rise, the price seems to be have settled. do you think such an inclusion results only in a temporary jump in price ?


Anonymous said...


Re. your question on how to make up your mind on investing a large amount when you see the right opportunity, please see detailed discussion on this specific topic in Mohnish Pabrai's The Dhandho Investor.