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FINAL REPORT

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IPM- Project
Draft Report on Theme
August 08, 2013
Submitted To:-
Prof. NeerajAmarnani
Submitted by:-
Ashish Agarwal
Secti...
Investment Philosophy - Peter Lynch
About Peter Lynch
Core of Peter Lynch’s philosophy is “only buy what you understand, a...
Peter's Principle #11
The best stock to buy may be the one you already own.
Peter's Principle #12
A sure cure for taking a...
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  1. 1. IPM- Project Draft Report on Theme August 08, 2013 Submitted To:- Prof. NeerajAmarnani Submitted by:- Ashish Agarwal Section B (IPM) – MBA FT 2012-14
  2. 2. Investment Philosophy - Peter Lynch About Peter Lynch Core of Peter Lynch’s philosophy is “only buy what you understand, always do your homework and invest for the long run” Investments Principles suggested in Peter Lynch’s Book “Beating the Street”- Taking only the ones relevant for investing Peter's Principle #2 Gentlemen who prefer bonds don't know what they are missing. Peter's Principle #3 Never invest in any idea you can't illustrate with a crayon Peter's Principle #4 You can't see the future through a rearview mirror. Peter's Principle #5 There's no point paying Yo-Yo Ma to play a radio. Peter's Principle #6 As long as you're picking a fund, you might as well pick a good one. Peter's Principle #7 The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders. Peter's Principle #8 When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds Peter's Principle #9 Not all common stocks are equally common. Born: Newton, Massachusetts, in 1944. Fidelity Investments, Inc. Fidelity Management & Research Company Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion. More importantly, Lynch reportedly beat the S&P 500 Indexbenchmark in 11 of those 13 years, achieving an annual average return of 29%. He is also famous for several books including, "One Up On Wall Street" (1989) and "Beating The Street" (1993), which are widely considered to be mandatory reading for any investor. Affiliations: Most Famous For:
  3. 3. Peter's Principle #11 The best stock to buy may be the one you already own. Peter's Principle #12 A sure cure for taking a stock for granted is a big drop in the price. Peter's Principle #13 Never bet on comeback while they're playing "Taps". Peter's Principle #14 If you like the store, chances are you'll love the stock. Peter's Principle #15 When insiders are buying, it's a good sign - unless they happen to be New England bankers. Peter's Principle #16 In business, competition is never as healthy as total domination. Peter's Principle #17 All else being equal, invest in the company with the fewest colour photographs in the annual report Peter's Principle #18 When even the analysts are bored, it's time to start buying. Peter's Principle #19 Unless you're a short seller or a poet looking for a wealthy spouse, it never pays to be pessimistic Peter's Principle #20 Corporations, like people, change their names for one of two reasons: either they've gotten married, or they've been involved in some fiasco that they hope the public will forget. Peter's Principle #21 Whatever the Queen is selling, buy it.
  4. 4. At the end of the book as well Mr. Lynch mention golden rules for investing. They are as follows 1. Investing is fun, exciting, and dangerous if you don't do any work. 2. Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand. 3. Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd. 4. Behind every stock is a company, find out what it's doing. 5. Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies. 6. You have to know what you own, and why you own it. "This baby is a cinch to go up!" doesn't count. 7. Long shots almost always miss the mark. 8. Owning stocks is like having children - don't get involved with more than you can handle. The part-time stockpicker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don't have to be more than 5 companies in the portfolio at any time. 9. If you can't find any companies that you think are attractive, put your money into the bank until you discover some. 10. Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it. 11. Avoid hot stocks in hot industries. Great companies in cold, nongrowth industries are consistent big winners. 12. With small companies, your better off to wait until they turn a profit before you invest. 13. If you're thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back. 14. If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you're patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile. 15. In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.
  5. 5. 16. A stock-market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic. 17. Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether. 18. There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling. 19. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested. 20. If you study 10 companies, you'll find 1 for which the story is better than expected. If you study 50, you'll find 5. There are always pleasant surprises to be found in the stock market - companies whose achievements are being overlooked on Wall Street. 21. If you don't study any companies, you'll have the same success buying stocks as you do in a poker game if you bet without looking at your cards. 22. Time is on your side when you own shares of superior companies. You can afford to be patient - even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options. 23. If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it's a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large companies, etc. Investing in six of the same kind of fund is not diversification. 24. The capital gains tax penalises investors who do too much switching from one mutual fund to another. If you've invested in one fund or several funds that have done well, don't abandon them capriciously. Stick with them. 25. Among the major markets of the world, the U.S. market ranks eighth in total return over the past decade. You can take advantage of the faster-growing economies by investing some of your assets in an overseas fund with a good record. 26. In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress.
  6. 6. Some Observations form the Principles  Know what you own.  It's futile to predict the economy and interest rates.  You have plenty of time to identify and recognize exceptional companies.  Avoid long shots.  Good management is very important - buy good businesses.  Be flexible and humble, and learn from mistakes.  Before you make a purchase, you should be able to explain why you're buying.  There's always something to worry about.  He did not focus on what the market reaction was and focused on company fundamentals.  Used Bottom Up Approach  Did not pay much attention to short term market fluctuations All the points stated above could be summarised broadly as the following way 1. Only Buy What You Understand According to Lynch, our greatest stock research tools are our eyes, ears and common sense. Lynch was proud of the fact that many of his great stock ideas were discovered while walking through the grocery store or chatting casually with friends and family. We all have the ability to do first-hand analysis when we are watching TV, reading the newspaper, or listening to the radio. When we're driving down the street or traveling on vacation we can also be sniffing out new investment ideas. After all, consumers represent two-thirds of the gross domestic product of the United States. In other words, most of the stock market is in the business of serving you, the individual consumer - if something attracts you as a consumer, it should also pique your interest as an investment. 2. Always Do Your Homework First-hand observations and anecdotal evidence are a great start, but all great ideas need to be followed up with smart research.Don't be confused by Peter Lynch's homespun simplicity when it comes to doing diligent research – rigorous research was acornerstone of his success. When following up on the initial spark of a great idea, Lynch highlights several fundamental values thathe expected to be met for any stock worth buying: Percentage of Sales: If there is a product or service that initially attracts you to the company, make sure that it comprises ahigh enough percentage of sales to be meaningful; a great product that only makes up 5% of sales isn't going to have morethan a marginal impact on a company's bottom line. PEG Ratio:This ratio of valuation to earnings growth rate should be looked at to see how much expectation is built into thestock. You want to seek out companies with strong earnings growth and reasonable valuations - a strong grower with a PEGratio of two or more has that earnings growth already built into the stock price, leaving little room for error.
  7. 7. Favor companies with a strong cash position and below-average debt-to-equity ratios: Strong cash flows andprudent management of assets give the company options in all types of market environments. 3. Invest for the Long Run Lynch has said that "absent a lot of surprises, stocks are relatively predictable over 10-20 years. As to whether they're going to behigher or lower in two or three years, you might as well flip a coin to decide." It may seem surprising to hear such words from aWall Street legend, but it serves to highlight how fully he believed in his philosophies. He kept up his knowledge of the companies heowned, and as long as the story hadn't changed, he didn't sell. Lynch did not try to market time or predict the direction of theoverall economy. In fact, Lynch once conducted a study to determine whether market timing was an effective strategy. According to the results ofthe study, if an investor had invested $1,000 a year on the absolute high day of the year for 30 years from 1965-1995, thatinvestor would have earned a compounded return of 10.6% for the 30-year period. If another investor also invests $1,000 a yearevery year for the same period on the lowest day of the year, this investor would earn an 11.7% compounded return over the 30-year period. Therefore, after 30 years of the worst possible market timing, the first investor only trailed in his returns by 1.1% per year! As aresult, Lynch believes that trying to predict the short-term fluctuations of the market just isn't worth the effort. If the company isstrong, it will earn more and the stock will appreciate in value. By keeping it simple, Lynch allowed his focus to go to the mostimportant task – finding great companies. Lynch coined the term "tenbagger" to describe a stock that goes up in value ten-fold, or 1000%. These are the stocks that he waslooking for when running the Magellan fund. Rule No.1 to finding a tenbagger is not selling the stock when it has gone up 40% oreven 100%. Many fund managers these days look to trim or sell their winning stocks while adding to their losing positions. PeterLynch felt that this amounted to "pulling the flowers and watering the weeds". Conclusion Even though he ran the risk of over-diversifying his fund (he owned thousands of stocks at certain times), Peter Lynch'sperformance and stock-picking ability stands for itself. He became a master at studying his environment and understanding theworld both as it is and how it might be in the future. By applying his lessons and our own observations we can learn more aboutinvesting while interacting with our world, making the process of investing both more enjoyable and profitable.
  8. 8. Applied the following criteria to the stocks to reduce the number. SelectionCriteria Shortlisting form BSE 500 companies 1. Trading history of not less than 5 years. For analysis of the data the company should have min 5 years of trading history. Trading History > 5 Years 2. Year-by-year earnings: Look for stability and consistency, and an upward trend. Earning Growth Rate consistent Y-on-Y 3. P/E relative to historical average: The price-earnings ratio should be in the lower range of its historical average. P/E < (1.3 * Historical Average P/E) 4. P/E relative to industry average: The price-earnings ratio should be below the industry average P/E < Industry P/E . 5. P/E relative to earnings growth rate: A price-earnings ratio of half the level of historical earnings growth is attractive; relative ratios above 2.0 are unattractive. For dividend-paying stocks, use the price-earnings ratio divided by the sum of the earnings growth rate and dividend yield-ratios below 0.5 are attractive, ratios above 1.0 are poor. Dividend Not Paying (Attractive) P/E/Earning Growth<.5 (Attractive) P/E/Earning Growth < 2 Dividend Paying P/E/ (Earning Growth + Dividend Yield)<.5 P/E/ (Earning Growth + Dividend Yield)<1 6. Debt-equity ratio: The company’s balance sheet should be strong, with low levels of debt relative to equity financing, and be particularly wary of high levels of bank debt. Debt/ Equity < Industry Average Debt / Equity < 1
  9. 9. 7. Net cash per share: The net cash per share relative to share price should be high. Cash Per Share / Price > Industry Average 8. Dividends and payout ratio: For investors seeking dividend-paying firms, look for a low payout ratio (earnings per share divided by dividends per share) and long records (20 to 30 years) of regularly raising dividends. EPS/Dividend Per Share < Industry Average 9. Inventories: Particularly important for cyclicals, inventories that are piling up are a warning flag, particularly if growing faster than sales. Inventories Growth < Growth in Sales Filtering from 25 to 7 companies (Subjective Analysis) 1. Companies about which we have heard and seen the products to be selling. 2. Policies of the company 3. Future growth plan of the company 4. Last year balance sheet 5. Latest updates on the company news 6. Announcements and board meetings
  10. 10. The J & K Bank Ltd. Balmer Lawrie & Company Ltd. Core Education & Technologies Ltd. Gateway Distriparks Ltd. KPIT Cummins Infosystems Ltd. OCL India Ltd. Wockhardt Ltd. Ret. 0.20% -0.10% -1.08% 0.08% 0.40% 0.06% 1.01% Std Dev 4.13% 3.08% 8.11% 3.63% 5.14% 4.52% 9.01% Covariance 0.05% 0.03% 0.05% 0.03% 0.02% 0.05% 0.08% Beta, BSE 30 82.98% 46.00% 83.00% 55.82% 38.16% 75.92% 138.22% Correlation:BSE 30 49.99% 37.13% 25.48% 38.31% 18.49% 41.84% 38.19% Mkt Risk Prem 8.58% 8.58% 8.58% 8.58% 8.58% 8.58% 8.58% Risk Free Rate 7.78% 7.78% 7.78% 7.78% 7.78% 7.78% 7.78% Exp. Ret. 14.90% 11.73% 14.90% 12.57% 11.05% 14.29% 19.64% Efficient Frontier Sigma ER Max Sigma 2.24% 14.55% 2.33% 14.71% 4.46% 2.53% 14.87% 4.54% 2.73% 15.03% 4.64% 2.94% 15.19% 4.73% 3.16% 15.34% 4.84% 3.39% 15.50% 4.94% 3.61% 15.66% 5.05% 3.84% 15.82% 5.16% 4.08% 15.98% 5.28% 4.31% 16.14% 5.40% 4.55% 16.29% 5.52% 4.79% 16.45% 5.65% 5.03% 16.61% 5.78% 5.27% 16.77% 5.91% 5.51% 16.93% 6.04% 5.76% 17.09% 6.18% 6.00% 17.24% 6.32% 6.25% 17.40% 6.46% 6.49% 17.56% 6.60% 6.74% 17.72% 13.00% 13.50% 14.00% 14.50% 15.00% 15.50% 16.00% 16.50% 17.00% 17.50% 18.00% 0.00% 5.00% 10.00% ER ER
  11. 11. Gateway Distriparks-Equity Research Report Financial Statement Analysis Common Size Income Statement Analysis Looking at the P/L account for the past 8 years some interesting observations can be made which are elucidated below: Operating Income: Firstly, we see that the most of the income that the company derives is from the processing charges or the service income which is typical for any company which is under logistics. There are no such product that is to be given which will generate revenue and almost 97% income on an average is being generated. Expenditure: In the expenditure section operating expenses are the major costs which accounts for the 56% on an average (5 year average) of the total costs. This year we see an increase in the operating cost which is 3 % points more than the 5 year average operating expenses. The average total expenditure is 72% of the sales (5 year average) and this year the expenditure has been 2 % points greater than the the average of 72%. Operating Profit: The average operating profit of this company is 27.74% of Sales (5 year average) . The operating profit is low for this year than the 5 year average. PAT: The average PAT of the company is 16% (5 year average) and compared to this the company has a PAT which is lower by 2 % points. We see that the company has degraded in the performance from last year with the decline in the PAT by 2.5% of the sales amount. Also the operating expenses have increased which may also have resulted in this decline of the profitability of the company
  12. 12. Common Size Balance Sheet Analysis The common size balance sheet is made based on YOY growth and we can see the trend as given in the chart for the last 5 years. The net assets are remaining fairly constant with slight fluctuations on a YOY basis. The cash balances initially rises till 2011 and then declines sharply in 2012 and 2013 and also we can see a steady increase in the sundry debtors during the period of 2012 and 2013 which might indicate that the cash collection problem may have cropped up which may have led to the decline of the cash balances. We see that the fixed asset comprises of the major component of the asset and it remains fairly constant throughout 5 years. The sundry debtors compromises of 5% of the total assets and cash holdings have increased from 5.6% to the 11% of total assets and then it is back to the previous 5% of the total assets limit. It says that recently the company has reduced the -50.00 0.00 50.00 100.00 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Year Mar/09 Mar/10 Mar/11 Mar/12 Mar/13 Net Block 21.92 2.90 13.97 3.27 28.15 Sundry Debtors 45.22 6.35 -8.46 28.84 66.71 Cash and Bank -42.07 16.22 73.28 34.00 -38.02 Growth of Assets YOY in % 0.00 50.00 100.00 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Compositionin% Mar/09 Mar/10 Mar/11 Mar/12 Mar/13 Cash and Bank 5.68 11.15 10.41 7.08 5.85 Sundry Debtors 5.90 4.63 4.72 6.07 5.22 Net Block 71.65 66.92 70.52 72.88 78.20 Composition of Assets as % of total assets
  13. 13. cash it maybe because due to the increase in the debtors from 4.6% to 5.2% and increase in net block. Some Financial Ratios Margin Ratios Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 PBIDTM(%) 27.45 32.16 28.93 26.81 35.18 EBITM (%) 20.13 24.51 20.59 18.00 25.34 Pre Tax Margin(%) 18.17 22.70 17.28 14.01 20.66 PATM(%) 14.26 16.51 16.55 15.55 17.14 We see that 2013 has not been a good year for the company as we can see the margins being low than the previous 5 years. It shows that the company has declined in the efficiency. Performance Ratios Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 ROA (%) 8.87 9.84 8.15 7.52 8.38 ROE (%) 17.73 18.92 14.77 12.50 12.23 ROCE (%) 15.58 20.60 14.80 10.93 15.36 AssetTurnover(x) 0.62 0.60 0.49 0.48 0.49 InventoryTurnover(x) 15306.44 DebtorsTurnover(x) 11.72 12.76 9.23 8.53 10.68 FixedAssetTurnover(x) 0.70 0.69 0.56 0.53 0.55 Sales/WorkingCapital(x) 11.75 5.59 4.28 6.11 4.85 We see that the quality of assets have increased based on the fixed asset turnover which has an ever increasing trend. The sales/WC has also increased which tell about how the working capital has been utilized profitability to generate revenues. The ROCE is 15% which is slightly lower than last time but better than previous years. EfficiencyRatios Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 FixedCapital/Sales(x) 1.44 1.44 1.78 1.87 1.83 Receivabledays 31.13 28.61 39.56 42.78 34.18 InventoryDays 0.00 0.02 0.00 0.00 0.00 Payable days 12.61 15.35 46.76 54.79 32.36 The efficiency of the company has reduced from the last two years as the capital is not being used profitability as there has been a decline in Fixed Capital/Sales. The increase in receivable days suggest that cash collection method is not appropriate and a decline has taken place which has caused a reduction in the cash balances of the company coupled with the decrease in the payable days. Growth Ratio Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 NetSalesGrowth(%) 16.14 36.35 16.62 14.29 66.55 Core EBITDA Growth(%) -0.86 51.58 25.84 -12.92 35.15
  14. 14. EBIT Growth(%) -4.63 62.35 33.36 -18.81 29.48 PAT Growth(%) 0.29 36.01 24.16 3.67 7.57 Adj.EPS Growth(%) -4.25 36.12 19.23 -4.95 24.23 The sales growth has reduced from the past year from 36% to 16% but the PAT growth rate has been reduced phenomenally from 36% to 0.29% which is very low. The profitability has taken a serious turn. It needs to reduce costs which would bring it back to previous profitability levels. Du Point Analysis The Du Point analysis expresses the basic ROE ratio into different segments in order to understand the growth drivers which drive the company. ROE= PAT margin * Total assetturnover *Fin. Leverage DESCRIPTION Mar- 13 Mar- 12 Mar- 11 Mar- 10 Mar- 09 PATM(%) 14.26 16.51 16.55 15.55 17.14 Sales/Total Assets(x) 0.62 0.60 0.49 0.48 0.49 AssetstoEquity(x) 2.00 1.92 1.81 1.66 1.46 ROE (%) 17.73 18.92 14.77 12.50 12.23 We see that PAT margin and the asset turnover are the major growth drivers of the company. The PAT margin indicates the profitability of the company. The higher the PAT margin the more profitable the company is. The company should strive to reduce the operating expenses to increase the profitability of the company. Gateway Distriparks need to reduce the operating cost which is the major cost and some standardized process need to be developed to bring down the costs. Secondly, it should improve the quality of the asset. Gateway Distriparks have done that and the asset turnover ratio has increased from 0.49 to .62 which is very encouraging. It needs to just improve its profitability a little more. The financial leverage is also important and Gateway need to find the optimal leverage ratio which can sustain growth. .
  15. 15. Valuation DCF Model (FCFE) Assumptions: 1. Perpetuity: We have assumed that the company is growing at a rate of 10.63%. The rational for this is, the logistics industry is dependent on exports & imports, which, in India’s case is expected to grow for the foreseeable future. 2. Growth rate: The growth has been calculated as the product of current year’s ROE and plough back ratio. 3. Debt-equity ratio would remain constant for the coming years. This assumption has been taken in the absence of any data stating otherwise. 4. Plough back ratio will remain same as of the current year. 5. Beta has been calculated based on weekly return data for past 3 years. The Income Statement over the years DESCRIPTION Mar -2015 E Mar-2014 E Mar- 2013 Mar- 2012 Mar- 2011 Mar- 2010 Mar- 2009 Revenue 1187.57566 1073.4746 970.34 844.51 613.85 532.18 462.86 Total Expenditure 867.063527 783.756943 708.45 580.35 439.59 393.70 303.84 PBIDT 320.512138 289.717657 261.88 264.15 174.26 138.48 159.02 PBIT 235.018569 212.438224 192.03 201.34 124.02 93.00 114.55 PBT 212.158843 191.774837 173.35 186.45 104.12 72.38 93.36 PAT 166.472477 150.47797 136.02 135.62 99.72 80.31 77.47 Growth : 10.63 %
  16. 16. FCFE Calculation (Values in Cr. Except for ratios and Price of Share) PBIT 192.03 Tax 0.22 PBIT(1-T) 150.68 capex 158.91 Dep 69.85 working capital 0 FCFF -8.24 Growth 10.63 valuation of firm -765.42 PAT 136.02 capex funded by equity 131.33 capex funded by debt 27.58 new debt 117.46 new debt remaining after capital expenditure 89.88 FCFE(base year) 94.57 FEFE(first year) 104.62 Valuation of equity 5390.357081 No. of shares 272240619 Target price INR 197.9997364 PAT 136.02 Dividend payout ratio 0.5995 Dividend 81.54410978 Growth 10.63 P/E 34.17 Actual traded As on 25-08-2013 PE Ratio : 23.72 Price : 110.05 (BSE Close )
  17. 17. PE Summary PE 10.71 Target PE 34.17 Industry PE 12.92 Current EPS 7.57 Price to Book 1.72 Wacc 11.81 Recommendation is a strong buy as the company stocks are undervalue as per its intrinsic value. The company is also making heavy investment (high capex). The price has not picked up the pace as yet.

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