relative valuation techniques & the current scenario of karachi stock market presented by : arif...
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Relative Valuation techniques & the current scenario of Karachi Stock Market
Presented by : Arif Mustafa Ali fayaz Mir Murtaza
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Introduction
• To understand the valuation techniques it is important to understand the theory of valuation.
• Every risk averse investor will first analyze the firm/stock it wants to invest in.
• So, its necessary to know the important characteristics of that stock/firm
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Theory of valuation
• The value of an asset is the present value of its expected cash flows
• You expect an asset to provide a stream of cash flows while you own it
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Valuation techniques
Equity Valuation
Discounted Cash Flow Techniques Relative Valuation Techniques
Present value of Dividends (DDM) PV of Operating cash flow PV of Free cash flow
Price/Earnings Ratio (P/E) Price/Cash flow Ratio (P/CF) Price/Book value Ratio (P/BV) Price/Sales Ratio (P/S)
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Relative Valuation Techniques
PRICE – EARNINGS RATIO (P/E) • Value can be determined by comparing to similar stocks
based on relative ratios
• Relevant variables include earnings, cash flow, book value, and sales
• The most popular relative valuation technique is based on price to earnings(the earning multiplier)
Contd..
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Relative Valuation Techniques (P/E ratio Contd..)
• This values the stock based on expected annual earnings
The price earnings (P/E) ratio, or
Earnings Multiplier EarningsMonth -Twelve Expected
PriceMarket Current
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KSE past & current Scenario/trends
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KSE Performance 2004-2008
2004 2005 2006 2007 20080
2000
4000
6000
8000
10000
12000
14000
16000
KSE performance 2004-2008
KSE performance 2004-2008
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Reasons for Hike in KSE 100
• State bank reduced rate of borrowing from 5% to 4 %.
• More money was available for borrowing.
• But the money didn’t regulated in trade and industry instead it was invested in the
risky stock market.
• hence, stock market raised to record making index levels.
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Bearish trend – an aftermath to may 08 decline
Source: KSE annual report 2009
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Scenarios lead to May 08 crash
• Depleting foreign Exchange reserve; Moody’s and S&P cut Pakistan ratings to record low( brought very near to the verge of default)
• Rising international prices
• Deteriorating macro economic situation
• Rupee falling against dollar resulting into capital flight.
• Political crisis.
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Resulted into
• Foreign portfolio investors (FPIs) withdrew Rs 3.3 billion from equity markets in the week ending at May 9th , 08.
• FPIs executed investing and disinvesting in the same week for Rs 4.5 Billion and 7.8 Billion respectively.
• FPIs normally look for long term investments rather focusing on such short term transactions.
• Even stocks of the oil companies declined despite an increase in the crude oil prices.
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Other factors contributing to the menace
• Deposed judges restoration in the same month darkened the KSE scenario.
• Proposition of CGT on KSE stocks further discouraged the investors.
• This also resulted into declined market capitalization by Rs 220 billion ( 5.5 % decline in comparison to a week ago level of stocks).
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SBP Regulations and impacts
• SBP regulated banks to give 5% fixed deposit return effected the income of the banking sector.
• Brought down the earning to price ratio for investors Hurt badly the financial services sector at KSE.
• higher discount rate attracted the investors towards government instruments. ( an high of 1.5% to 12%)
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May 08 – start of bearish trend
• 1st week of May ended up being known as the worst nightmare of KSE’s history.
• Rating agencies declared a growth rate of 5.5% for the coming years amid shying away of foreign investors from KSE.
• Insurance sector, commercial banks and cement sector marked by tremendous growth and stability loses 14.4% , 6.6% & 6.4 % respectively.
• KSE – 30 fell by 9.2 %.
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Current market scenarioJanuary-March 2010
The market scenario of the past four months can be described in the four terms
1- Positive start
2- Slump
3- Mixed February
4- March Madness
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Positive start
• Index gained 567 points and closed at 9954 on January 19.
• Reason being foreign buying interest in OGDCL, PPL and PTCL.
• Local investors usually trading in low tier stocks.
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Slump
• KSE shed 374 points to 9579.
• Reasons being dull market environment, trading usually in lower tier stocks.
• Releasing of NRO causing political instability.
• No change in monetary policy also reduced investor confidence.
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Mixed February
• Market remained stagnant mostly with no noticeable change. Market gained only 43 points during February to close at 9657.
• Trading in lower tier stocks, no reduction in policy rate by SBP, resulting in dull and low interest of investors.
• Market crawling towards 10000 points, due to payout announced by HBL and PSO. Again momentum lost due to resignation of Finance minister.
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March Madness
• Sluggish start again due to circular debt issue of OGDCL, PPL and PSO.
• Market snapped out of sluggishness due to US-Pakistan strategic dialogue.
• Road show in New York by KSE managing director of KSE highlighting Pakistani equity markets resulting in speculation.
• KSE closed at 10137 , gaining 137 points.
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April 2010.
• Market reached at 10416 points, highest level reached since last 19 months.
• Reasons:• Foreign investment in Oil , Gas and Chemical sector.
• 18th amendment to be presented.
• Withdrawal of decision of increasing power tariffs.
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Factors that may effect future:
• Political turmoil regarding NRO and other issues.
• Uncertainty in implementation of CGT.
• Lack of electricity, water and gas are adversely and continuously affecting country’s economy and various industries e.g. Textile , Agriculture etc.
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Thank You