Question

Managers should be able to appreciate the concept of market efficiency. Often times, managers feel that the market does not appreciate the true value of their firm's stock and feel that it is constantly undervalued. It is rare to hear about a CEO being kept awake at night for their "overvalued" stock.  

In this week's discussion, identify a stock that you feel is either considerably undervalued or overvalued. Support your decision as to why you feel it is either overvalued or undervalued and describe what the firm may be able to do to help manage the current situation.

Answer 1

Hi,

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Question:

Answer:

Market efficiency refers to change in market price of a security reflect all available relevant information in the market. But in the real world it is not more effective and an investor value stocks differently. There are number of factors that affect the valuation of stocks by the investors. Every investor has own investment style and method to value a stock. Some times earn or get return less than the market and some time it is higher than the market instead of a passive investment.

In a real world a stock may be undervalued or over valued and same for the market also. There are number of factors that is taken in use by the investors to know that stock is overvalued or under valued. Factors that are taken in use by the investors are following as: PE ratio, PEG ratio, liquidity ratio, cash flow analysis, profit margin, sales growth, operating profit etc. A stock is overvalued when its price is higher than intrinsic value and undervalued when price is less than intrinsic value of that stock.

There are many factors by which reasons a stock can be undervalued and overvalued. These factors are following as: They may be external or internal factors or both.

a). Market Trend: Some time the fundamentals of a specific company are strong but weak and volatile market undervalued the stock price. Some time a growing and strong market help to increasing the stock price of a company which fundamentals are weak.

b). Industry Trend: Some time a company's stock with strong fundamentals is undervalued or performing weak because of a weak and poor view of the industry and vice-versa.

c). Economy Trend: Some time a company with strong fundaments do not perform in the market and stock is undervalue because of unhealthy economy.

d). Company's related issues: Some time a short-term problem within the organization also affect the stock price negatively.

e). Business strategy: Some time a company's business strategies like, M&A, globalization, JV, dividend policy etc also affect the share price and deviate from its intrinsic value.

Here i will discuss about a stock that is listed at NSE ( Indian stock exchange):

Indicators	Value
PE ratio	9.21
P/B ratio	6.89
EV/EBDTA	-49%
ROE	9.9%
Growth	4%
Profi margin	5%

Coal India is trading at a Discount of -82% based on the Median Intrinsic Value.

Current Price= INR128

Market Capitalization= INR79,283.52 Cr.

Sales Growth (annual) = +3.24%

Last quater change in sales growth = +28%

Operating profit change (last quater) = +35.34%

Net profit grow by 18.20 last quater.

As on 30-Jul-2020, the Intrinsic Value of Cal India is INR733.32 determined based on Median of the 3 historical models.
Intrinsic Value based on Median EV / EBIDTA Model = INR254.56
Median Intrinsic Value of Coal India = INR733.32

Reason of stock price fall:

Coal India share price fall after Narendra Modi government opened the coal mining sector to private players, ending the monopoly of the state run player. Share price of Coal India lost 6.02% intra day to Rs 121.7 compared to the previous close of Rs 129.50 on BSE. Coal India is a public sector undertaking. But all good coal blocks of India is already with Coal India and have strong market penetration and have strong market access. It is strong band and reputed brand with more than 70% of stock holding of the government. But here we can see that company has strong fundamentals and have higher intrinsic value than current price.

What the firm may be able to do to help manage the current situation:

Here company should change its management style because currently have a different management style compare to a private organization. Now government is going to privatize it so, its mandatory to adjust accordingly. Company should focus on technology development promote innovation and creativity within the organization to face the new competition in the corporate world. Company should decrease dividend and invest this money on R&D and expansion of the business. But i think company is in a good shape and a large cap company. This time market is not favorable and the world is facing a COVID-19 crisis so, when the economy will recover and market will improve then the company will grow more fast.

Thank You