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| Capitalstars Investment Advisor |
When comparing the performance of any two companies, remember that comparisons have to be between companies that are comparable. If you want to compare a metal container company with a glass container company are you comparing similar companies?
Are Cartier and Titan in the same business?
Or are Tanishq and Kalyan Jewellers in the same business?
For example, looking at a technology company like TCS, whose P/E is way above Tata Steel does not tell you much, does it?
Is Tata Motors comparable to Maruti or Ashok Leyland or Ford or Toyota?
Or is Icici bank (a holding company of Icici Prudential AMC, Icici Lombard, and soon to be listed Icici direct) comparable to a pure banker Hdfc bank?
OMG did you say?
While a lower P/E is generally termed attractive for the Value investor (you are buying MORE profits for a Rupee of investment outlay are you not?) Tata Steel is in the basic materials space, RIL is a confusing conglomerate, and TCS is a clear darling of the tech sector. The PE (or so the market says) are not really comparable. However, given the lower growth rate of the tech sector soon the PE of the tech sector might start catching up with the slow-growing Fmcg or even the metal sector! Remember that PE is a fascinating animal and we all keep learning and evolving. Also when you try to use PE in isolation, you ought to be crazy or very nearly crazy.
So how should you, the budding investment analyst, approach these theories?
Use ratios and comparisons only among comparable companies in comparable industries or sectors. No, you do not need to spend 20k to learn how to start investing, but it is time to invest in some good solid education aka self-learning.
Fundamentals, of say Coromandel International and Hdfc bank, are just not comparable as they are NOT IN comparable fields, so their intrinsic value of each stock is no clearer for your comparative effort.
Funnily the better you get the more you realize that Biocon, Lupin, Sun Pharma, Cadila, Cipla, Dr. Reddy’s Lab are not REALLY COMPARABLE!!! See their income profile and business model and you will realize why. Some companies are in research, some in development, some in maintenance, some in world domination – comparing PE makes no sense.