What Sounds Better???

ADDING TO YOUR WEALTH?

Or
MULTIPLYING IT?
10+3=13
Or
10x3=30

Risk & Returns

ADDING your wealth

Risk of Inflation
MULTIPLYING your wealth
Risk of Market

Various Asset Class Returns

Definition of Equity

Two words Equality & Ownership

Equity means equal ownership of the company
Ownership since you own the shares that
contributed the initial capital.
Owners of Company
Equal since, all equity shareholders are on par - if
you ignore the no. of shares held
Whole divided into Equal Parts

Price

Each share trades at a particular price.

What does it represent?
Todays worth of all the future Profits
Value of all the assets of the company Tangible + Intangible
(incl. Human)
Price can never be Zero or Negative

How equity generates retun

Equity returns depend on its market price and Market price

reflects its Sales and Profit (Earning).
Ultimately sales and profit growth is important for the returns
on equity

Earnings Per Share (EPS)

Accounting measure
Net Profit After Tax (PAT) of the company

Hence, Earnings Per Share or EPS =

PAT / Number of Equity Shares

Example EPS

Reliance Inds.

ACC

Number of Shares (crores)

327.30

18.795

PAT (crores) Trailing 4 qrts

20286

1065.55

Therefore, EPS =

20286 / 327.30

1065.55 / 18.795

EPS in Rs. (unit)

61.98

56.69

Actual Figures. EPS for the Financial 2010-11

Price to Earnings ratio or P/E

Is a relative valuation measure

Indicates how cheap/costly the shares are

P/E Ratio or Multiple =

Price / Earnings Per Share (EPS)
Price current market price
Earnings trailing Four quarters

Example P/E Ratio

Reliance Inds.

ACC

Current Price (6th May 11)

955.40

988.65

EPS

61.98

56.69

955.4 / 61.98

988.65 / 56.69

15.41

17.44

Therefore, P/E =
Price to Earnings Ratio

Actual Figures. P/E as on 6th May 11

Relationship of Price & Earnings

If Earnings Grow prices have to grow WHY ???

EPS of Infosys in 1998 was 18.28 &

Market price 457.00
P/E of Infosys was Price / EPS = 457/18.28 = 25
Earnings Yield of Infosys =18.28*100/457 = 4%

Relationship of Price & Earnings

The EPS of Infosys has grown to 170.30 in 2004.

P/E of Infosys would be

457/ 170 = 2.68 &

Earnings Yield would be 170*100/457 = 37.19%

Such a high earnings yield is so attractive that the price of Infosys

has to increase. HENCE if earnings grow prices have to GROW

Infosys Price Movement

Mar-98
Mar-00

Mar-04
Mar-08

Price

EPS

Period

Growth
in EPS

Growth
in Price

Earnings
Yield

P/E

38.70

1998-00

45.51%

341%

0.43

230

686.00

98-08

43.00%

39.00%

45.05%

48.69%

5.88

17

457

18.28

4938

170.28 2000-04

8902

11354

1998-04

44.83%

-17.83%

4.00

3.45

25

29

Growth in Earnings & Growth in Prices matches in long run

E.g. 2) Bajaj Auto Price Movement

Bajaj Auto Ltd. - PRICE MOVEMENT

Period

Growth
in EPS

Earnings
Yield %

P/E

7.21

14

-35.31%

9.75

10

40.09%

52.40%

7.58

13

9.25%

8.17%

Price

EPS

Mar-99

616

44

Mar-01

258

25

1999-01 -24.76%

Mar-04

912

69

2001-04
1999-04

Growth
in Price

Growth in Earnings & Growth in Prices broadly move together

Eg.3 Reliance industries

Period

Growth
in EPS

Earnings
Yield %

P/E

7.01

14

15.00%

7.43

13

35.00%

43.00%

5.83

17

25.00%

28.00%

Price

EPS

Mar-00

314

22

Mar-04

538

40

2000-04

16.00%

Mar-08

2264

132

2004-08
00-08

Growth
in Price

Returns follow by Earning

Sensex vs EPS growth

25000.00

1200.00

1000.00

20000.00

800.00

Sensex

600.00

EPS

15000.00

10000.00
400.00
5000.00

200.00

0.00
Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

0.00

Investors psychology in stock market

Why People Loose money in Equity ?

The cycle of f ear,

Fear

greed and

Gr eed

hope
H ope

Zu ri ch In d ia M u tu a l Fu nd

Investors gets trapped in the Cycle of fear , greed and hope

What is the secret of consistent success in equity

investing?

Investing Regularly
Low Churn
The ability to understand that companies grow over a long
period of time. However all companies face tough time,
squeezed margins, lower profits and cries
Resisting greed and overcoming fear

BASIC BEHIND MOST OF THE TIP YOU GET IN

MARKET

Cycle of Market Emotions

21.00
EUPHORIA
20.00
EXCITEMENT
19.00

"Seems to be a temporary
correction"

18.00
OPTIMISM
17.00

"I've finally recovered my

principal. But should I exit
now?"

"I can withstand this, I'm a

long term investor"
"How long will this
correction last?"

ANXIETY

16.00
FEAR
15.00

14.00

"Once I recover my
principal I'll exit"

"I should have exited when

I was making money"

HOPE

PANIC
DEPRESSION

13.00

RELIEF

WHY EQUITY??
Forbes top 20 richest list
Rank Name
Rank Name
1Warren Buffett
11Li Ka-shing
2Carlos Slim Helu
12Sheldon Adelson
3William Gates III
13Bernard Arnault
4Lakshmi Mittal
14Lawrence Ellison
5Mukesh Ambani
15Roman Abramovich
6Anil Ambani
16Theo Albrecht
7Ingvar Kamprad
17Liliane Bettencourt
8K P Singh
18Alexei Mordashov
9Oleg Deripaska
19Prince Alsaleed
10Karl Albrecht
20Michael Fridman
Source: www.forbes.com as on 21st July 2008

Save in the Right Asset Class

Year

Sensex

Investment Rs.

1979

100

10 Lacs

2011

19,000*

19 Crores

In past 31 years BSE Sensex has given approx. 18.44% returns

*As on 31st July, 2010
This is in spite of
At least 4 recessionary periods
Two wars
AtRiskleast
three major financial scandals Twin Tower 9/11 Attack
factors: Mutual Fund investments are subject to market risks. Past performance may or may not be repeated in future. Please read the
offer document carefully before investing.
10 different governments and
US Sub Prime and Recession
An unfair share of natural disasters
Assassination of 2 prime ministers
Sub Prime in USA Lehmen crisis

Equities not risky in long-run (Performance of BSE Sensex)

Years

YEAR END

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32

31-Mar-79
31-Mar-80
31-Mar-81
31-Mar-82
31-Mar-83
31-Mar-84
31-Mar-85
31-Mar-86
31-Mar-87
31-Mar-88
31-Mar-89
31-Mar-90
31-Mar-91
31-Mar-92
31-Mar-93
31-Mar-94
31-Mar-95
31-Mar-96
31-Mar-97
31-Mar-98
31-Mar-99
31-Mar-00
31-Mar-01
31-Mar-02
31-Mar-03
31-Mar-04
31-Mar-05
31-Mar-06
31-Mar-07
31-Mar-08
31-Mar-09
31-Mar-10
31-Mar-11
Probability of Loss

SENSEX
level
100.00
128.57
173.44
217.71
211.51
245.33
353.86
574.11
510.36
398.37
713.60
781.05
1167.97
4285.00
2280.52
3778.99
3260.96
3366.61
3360.89
3892.75
3739.96
5001.28
3604.38
3469.35
3048.72
5590.60
6492.82
11279
13072
15644
9708
17528
19445.2

1 year
28.57%
34.90%
25.52%
-2.85%
15.99%
44.24%
62.24%
-11.10%
-21.94%
79.13%
9.45%
49.54%
266.88%
-46.78%
65.71%
-13.71%
3.24%
-0.17%
15.82%
-3.92%
33.73%
-27.93%
-3.75%
-12.12%
83.38%
16.14%
73.71%
15.90%
19.68%
-37.94%
80.55%
10.94%
11/32

3 years

29.61%
18.05%
12.25%
17.58%
39.49%
27.66%
4.03%
7.52%
15.24%
43.12%
81.76%
42.93%
47.90%
-8.70%
13.86%
-3.83%
6.08%
3.57%
14.17%
-2.53%
-2.47%
-15.21%
15.76%
23.23%
54.66%
32.73%
34.06%
-4.88%
10.27%
7.52%
6/30

5 years

19.66%
22.44%
27.05%
18.58%
13.50%
23.81%
17.16%
15.26%
53.04%
41.76%
39.57%
33.09%
23.58%
-4.74%
11.29%
-0.21%
8.93%
1.37%
0.64%
-4.77%
8.37%
5.36%
25.63%
30.38%
38.69%
11.67%
21.97%
11.51%
3/28

7 years

10 years

12 years

15 years

As Time Increases
Volatility Decreases
Range Decreases
Probability Increases
28.36%
21.77%
12.61%
18.48%
20.52%
24.97%
42.80%
21.78%
33.11%
35.03%
24.81%
23.18%
18.77%
-1.92%
11.87%
-0.67%
0.89%
-1.41%
7.54%
7.58%
17.08%
14.71%
23.33%
15.84%
28.39%
19.49%
3/26

21.72%
19.77%
21.01%
34.71%
26.84%
31.45%
24.87%
19.35%
20.74%
25.60%
18.02%
20.40%
11.93%
-2.09%
2.95%
3.99%
7.13%
12.85%
14.55%
14.92%
10.01%
13.36%
18.36%
1/23

22.73%
33.94%
23.95%
26.85%
25.60%
24.39%
20.63%
17.29%
18.05%
23.47%
14.45%
13.23%
8.32%
2.24%
9.11%
9.54%
12.27%
13.66%
9.24%
13.36%
14.73%
0/21

27.40%
24.05%
21.86%
20.02%
21.43%
19.92%
19.31%
13.03%
13.63%
14.53%
14.71%
15.16%
16.32%
7.72%
13.70%
6.49%
11.86%
12.40%
0/18

Time Matters not Timing

Scheme

Date

NAV

Date

NAV

CAGR(In
%)

Franklin India Bluechip

5/31/1996

15.65

7/30/2003

30.39

10.12

Franklin India Prima Fund

5/31/1996

13.21

7/30/2003

45.75

19.47

HDFC Equity Fund

5/31/1996

7.19

7/30/2003

32.214

23.9

Reliance Growth

5/31/1996

11.14

7/31/2003

43.75

22.1

Reliacne Vision

5/31/1996

11.23

7/31/2003

37.58

19.03

HDFC Top 200

5/31/1996

7/30/2003

24.433

Sensex

5/31/1996

3724

7/30/2003

3780

0.01

S & P Nifty

5/31/1996

1089

7/30/2003

1183

0.02

CNX Midcap

5/31/1996 N.A.

7/30/2003

1402

Time Matters not Timing

No.

Particulars

Value
Investment on
as on
14-Feb-2000
21-Sep-2001

Value
Absolute
as on
Growth
23-Nov-2004

SENSEX

5924.32

2600.12

6009.86

1.44%

HDFC Equity Fund

1,00,000

51,179

2,12,360

112 %

Franklin Blue Chip

1,00,000

66,222

2,02,540

102 %

Reliance Vision Fund

1,00,000

41,240

2,55,610

155 %

HDFC Prudence Fund

1,00,000

71,651

2,35,370

135 %

Tata Pure Equity

1,00,000

43,927

1,82,630

82 %

Franklin India Prima

1,00,000

45,550

2,56,670

156 %

HDFC Top 200

1,00,000

46,002

1,69,780

69 %

Pru ICICI Power

1,00,000

45,433

2,21,220

121 %

Reliance Growth

1,00,000

26,818

2,21,750

121 %

The Empirical Evidence on Timing

Prof. William Sharpe* recipient of the 1990 Nobel Prize of

Economics conducted a study in 1975 using market data
from 1934 to 1972 and using model framework came to
the following conclusion.
g

In order to perform better than simply staying invested in

stocks, one must be able to predict teh market with
at least 83% accuracy
"

Year 2000 vs. Year 2020 predictions KPMG Jan 06

US
Japan
Germany
UK
France
Italy
Canada
China
Brazil
Mexico
India
Russia
0

5,000

10,000

15,000

20,000

GDP (US$bn)

India emerging as one of the top global economies

25,000

Moral of the Story

1.

You dont have to be wealthy to be an investor. . But you

have to be an investor to be wealthy

2.

Stock Market is a place where in the long run, money

flows from Traders to Investors

Investment in Equity is Risky.. but not invest in Equity is

Risky too

To Avoid Equity risk invest regularly and Invest for long

term

THANK YOU

www.prudentcorporate.com