We have seen a massive magnitude of price movements in the stocks that we like most. Axis Bank is down by 24% from its high, Kitex Garment is down by 17% from its highs of Rs 516 last month and TCS is down by 5% from its highs of Rs 2,427 last month.

Now, it is true that we do not give two hoots about short term movements. But two of the three companies that I mentioned above had reported bad quarterly results as per our opinion.

Axis Banks gross NPA’s had doubled and they had to keep aside big chunk of their profits as provisions. Good news was that its watchlist of bad loans had come down and the management do not expect any big uptick in its NPA’s from here on. Which means the long term story is still intact. Kitex Garments revenues and earnings for second quarter declined because its clients did not want to hold too much of stock with them. This resulted in to holding of almost Rs 34 crore worth of stocks as inventory in the Kitex Garments book, resulting in lower revenues and earnings for the quarter. But those clients had not rejected that stock. Kitex Garment also managed to add few more new clients in their list and business deals from them will reflect in third and fourth quarter. Still the long term story for Kitex is intact, is what our opinion, looking at overall situation.

So far quarter 2 or half yearly results have disappointed and the above examples have been rapid. As an investor, couple of questions come in our mind and maybe they might had also come into your attention.

  1. Given the examples above where shares were ‘priced to perfection’, and the propensity for businesses to inevitably stumble or naturally endure weaker periods as part of the normal cycle, do these moves indicate a much deeper issue about market valuations overall, and
  2. Should the volatility be seen as ‘risk’ or as ‘opportunity’?

If you ask any finance professional or commentator about ‘volatility’, they consider it as a form of risk while constructing any portfolio. Not to blame them, because they have been taught in school that way and this is how market thinks about it. However, our practical understanding of volatility has moved on from the days of Bachelier applying probability theory to French bonds, and the subsequent and elegant – but – flawed work of Eugene Fama’s Efficient Market Theory. Bachelier assumption that price changes are statistically independent and normally distributed does not work in the real world. The tail of the normal distribution curve fail to even remotely predict the frequency with which large price move occurs. Enter Benoit Mandlebrot, who observed that volatility tends to cluster around points in time, and after longer periods of lower volatility.

It is important to understand roulette wheels spin by chance, overtime share prices of Axis Bank, Kitex Garment or TCS don’t move by chance. But because prices can be described as if they move by chance, that has been how they have been described. As the popular saying goes, to a man with a hammer all problems look like nail. And so odds and risks are miscalculated.

Benjamin Graham, who without the benefit of computer, observed that in short run the market is a voting machine, but in the long run it is a weighing machine. We completely believe in his observation.

In the short run, price movements are largely random and will always be far more volatile than valuations. Prices can move on the back of sentiment and other factors that have little or nothing to do with the underlying business. A company’s valuations will change much more slowly, roughly in line with the growth in the equity, from the retention of profits and redeployment of those profits at rates of return exceeding its cost of capital.

Here are the top 10 ideas of investments that we are investigating and to consider to add in our portfolio.

dr reddys logo
Axis bank logo
cadila logo
shree cement logo
kitex garment logo
yes bank logo


The above list was built looking at valuations and expected earnings growth from the businesses. Both are given equal weightage. After a long time we had seen none of the IT companies listed in this list. However, there are still 4 IT businesses which are still trading at cheaper price to our calculated intrinsic values.

Dr. Reddys Lab

Dr. Reddy’s is mainly in the list because most of the analysts expect a turnaround in its business next financial year and all the issues with regulators to be resolved. The stock price of this business is now trading within its 2018 valuation spectrum. It is worth to investigate.

Axis Bank

Axis bank long term story looks still intact. Quarter 2 results were bad and they expect to control their NPA’s in the coming quarters. However, Q2 results had changed its 2018 valuation spectrum (especially the higher band), it now looks expensive around Rs 475 – Rs 500 levels.

Cadila Healthcare

Cadila Healthcare is not first time to enter our top 10 list. We covered and had shared our views on its Q1 – 2017 results. Quarter 2 results were not looking that impressive to us and its share price looks fair on the analyst’s 2018 earnings expectations.

Eros International Media

Eros stock prices had plunged from its Rs 220 to Rs 180 in recent times. We like this stock and will be looking closely its Q2 results which they will report on 10th of November. As per our calculations, it is trading within its 2018 valuation spectrum.

Indiabulls Housing Finance

We own Indiabulls Housing in our portfolio and have written about it extensively on this blog. We covered its Q2 – 2017 financial results recently on our blog and believe it is one of the cheapest stock to invest with. As all investments come with risk, do understand the risk involved before buying this business.

Shree Cement

Shree cement had come many times before in our top 10 list. We did not got chance to look into this stock is mostly because we do not like commodity stocks; and if we do then we only invest with the leaders in that segment. But on growth and valuations, this stock looks pretty good to invest with.

Eicher Motors

Eicher Motors is in our portfolio and recently when it crossed Rs 26,000 we raised our concerns on its valuations. However, its share price had taken ‘U’ turn and are back trading in our 2018 expected valuation spectrum. We do not like share prices moving out of valuation spectrum of high quality businesses.

Kitex Garments

We also own this stock in our portfolio and have written extensively on this business on our blog. Recently just shared our views on its Q2 – 2017 financial results.

Yes Bank

There was once an era (almost 15 years back) when investors were talking about how HDFC Bank and ICICI bank poses potential to grow fast and are one of the finest gems in the banking sector of India. Today if you ask us then we think Yes Bank and Axis Bank with Indiabulls Housing Finance do poses that same potential, and are best to invest in financial sector.

Jubilant Foodworks

We are not sure how successful this business will be in coming years looking at rigid competition in the restaurant market in India. However, on analyst’s earnings expectations, it is trading within the 2018 valuation spectrum today.

If you are interested to know the latest 2018 valuation spectrum of any of the above businesses then please leave your comment below.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.