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Value Stock vs Growth Stock

Investment Management Group Assignment


Group 6 Bishal Sarraf Omkar Pandey Suresh Kandel

Identification of Value and/or Growth Stock In our investment simulation project, we have invested Rs. 1 million in different Nepalese (80%) and Indian (20%) stocks. For identifying if these stocks are value or growth stock, we have taken Price to Earning (P/E) ratio, Price to Book (P/B) ratio, and Return on Equity (ROE). P/E ratio and ROE of a company is compared with its related industry average. Closing price for all the stocks is taken as of 20th November, 2012. Most of the data for Nepalese stocks of commercial bank has been extracted from unaudited financial report of fourth quarter as on 31/03/2069 of the fiscal year 2068/69. Similarly, the data for the stocks of hydropower has been taken from unaudited financial report of first quarter of the fiscal year 2069/70. However, recent information of Chilime Hydropower was not available. So, the data from unaudited financial report of fourth quarter of the fiscal year 2068/69 is considered. In the case of Indian stocks, all the data are taken from websites of Reuters. The industry average P/E ratio and ROE for commercial banks are taken as average of 23 and 29 commercial banks respectively. For hydropower, the industry average has been taken from three major players of the market namely, Arun Valley Hydropower, Butwal Power, and Chilime Hydropower. Nepalese Stocks 1. Arun Valley Hydropower Dev. Co. Ltd. Closing Price = Rs. 348 per share Net Worth per Share = Rs 148.59 Price to Earning (P/E) Ratio = 17.49 times Industry Average P/E Ratio = 24.33 times P/B ratio is greater than 1, but P/E ratio is less than industry average. We consider this as a growth stock because, it is undertaking project like Kabeli which has huge growth prospect.

Price to Book (P/B) Ratio = Market price/Net worth = 348/148.59 = 2.34 times

2. Bank of Kathmandu Closing Price = Rs. 657 per share P/E Ratio = 16.58 times Industry Average P/E Ratio = 18.66 times Net Worth per Share = 189.68 P/B Ratio = 3.31 times Return on Equity (ROE) = 19.97% Industry Average ROE = 11.54% 3. Butwal Power Co. Ltd. Closing Price = Rs. 835 per share P/E Ratio = 42.43 times Industry Average P/E Ratio = 24.33 Net Worth per Share = Rs. 300 P/B Ratio = 2.7833 times 4. Chilime Hydropower Co. Closing Price = Rs. 1172 per share EPS = Rs. 69.39 P/E Ratio = 13.11 times Industry Average P/E Ratio = 24.33 times Net Worth per Share = 393.59 Since P/B ratio is greater than 1 and company has been retaining significant amount of money for the future expense of project, we can consider this as a growth investment. In addition, it is undertaking some good hydro project in upcoming days. Since P/B ratio is greater than 1 and ROE is higher than industry average, it is growth stock.

Since P/E ratio is higher than industry average and P/B ratio is greater than 1, it is growth stock.

P/B Ratio = 2.98 times 5. Himalayan Bank Ltd. Closing Price = Rs. 900 per share P/E Ratio = 14.89 times Industry Average P/E Ratio = 18.66 times Net Worth per Share = Rs. 210.33 P/B Ratio = 4.29 times Return on Equity (ROE) = 20.85% Industry Average ROE = 11.54% 6. Nabil Bank Ltd. Closing Price = Rs. 1,550 per share P/E Ratio = 15.97 times Industry Average P/E Ratio = 18.66 times Net Worth per Share = Rs. 310.09 P/B Ratio = 4.37 times Return on Equity (ROE) = 27.36% Industry Average ROE = 11.54% 7. Prime Commercial Bank Ltd. Closing Price = Rs. 286 per share P/E Ratio = 15.72 times Since P/B ratio is greater than 1 and ROE is higher than industry average, it is growth stock.

Since P/B ratio is greater than 1 and ROE is higher than industry average, it is growth stock.

Industry Average P/E Ratio = 18.66 times Net Worth per Share = Rs. 125.86 P/B Ratio = 2.27 times Return on Equity (ROE) = 11.98% Industry Average ROE = 11.54% 8. Prime Life Insurance Company Ltd. Closing Price = Rs. 300 per share Net Worth per Share = Rs. 162.18 P/B Ratio = 1.85 times 9. Sanima Bank Ltd. Closing Price = Rs. 231 per share P/E Ratio = 37.49 times Industry Average P/E Ratio = 18.66 times Net Worth per Share = Rs. 111.10 P/B Ratio = 2.08 times Return on Equity (ROE) = 5.40% Industry Average ROE = 11.54% 10. Standard Chartered Bank Ltd. Closing Price = Rs. 2,040 per share P/E Ratio = 24.78 times Since P/B ratio is greater than 1 and P/E ratio is higher than industry average, it is growth stock. Since P/B ratio is greater than 1 and ROE is higher than industry average, it is growth stock.

Since P/B ratio is greater than 1, it is growth stock.

Industry Average P/E Ratio = 18.66 times Net Worth per Share = Rs. 301.01 P/B Ratio = 5.98 times Return on Equity (ROE) = 24.12% Industry Average ROE = 11.54% Indian Stocks 1. Reliance Industries Ltd. Closing Price = Rs. 766.5 per share (INR) Dividend per share = Rs. 8.50 Growth rate of dividend = 9.10% Required rate of return (Industry average of return on investment) = 10.52% Intrinsic Value of Stock (assuming same growth will be maintained till perpetuity) = D1/ (Ke - g) (D1 = dividend of next year, Ke = required rate of return, and G = growth rate of Dividend) = 8.50* 1.0910 / (0.1052 - 0. 0910) = 653.063 INR P/E Ratio = 18.43 times P/E Ration (Industry Average) = 18.80 times Although P/E ratio is lower than industry average, its market value is higher than its intrinsic value. Therefore, it is growth stock. Since P/B ratio is greater than 1 and ROE is higher than industry average, it is growth stock. Moreover, P/E ratio is also higher than industry average.

2. State Bank of India Closing Price = Rs. 2,071 (INR) P/E ratio industry average = 26.77 time P/E Ratio = 7.19 times P/B Ratio = Market Capitalization/ Net Worth = 1386,715 /839512 = 1.65 times 3. Tata Steel Ltd. Closing Price = Rs. 362.7 (INR) P/B ratio = 350,171.41/ 522,164.6 = 0.67 times Since P/B ratio is lesser than 1, it is value stock. Although P/E ratio is lower than industry average, its P/B ratio is greater than 1.Therefore, it is growth stock.