Not too long ago Lupin was trading at Rs 1,900 per share and many investors who bought at that price or anything in the range of Rs 1,700 – Rs 1,900 they were of the hope that it will soon breach Rs 2,000 levels and if it does so then it will keep trending up!

Buying on hope is not investing, it is speculating and many investors who had bought at those levels are sitting on big capital losses. Looking at the fundamentals and recent financial report it tells us completely different story. Net Income from operations for 2016 stand at Rs 14,208.47 crore up by 11% from the past year. EBIDTA for 2016 is Rs 3,753.45 or its operating margins are sitting at healthy 26%. The operating margins for the past year were sitting at 28%. The top level is growing marginally and same time margins are falling, a good sign of tough competition in the market. The question comes to my mind is how will they grow earnings at high levels.

Looking at such healthy operating margins definitely market was impressed and was throwing a price in range of 28X – 30X to its earnings. The consensus reports suggest that its earnings will grow in range of 35% – 40% for the 2017 financial year. However, they have reported their 2016 earnings down by 7% to Rs 2,279.45 crore compare to last year. Your resources should be spend to find out how and from where these forecast earnings will materialise.

But we do not value businesses on P/E ratio and we calculated its intrinsic value for 2016 to be only Rs 616. If we go with analysts forecast for the 2017 and 2018 earnings, then even today’s market price is trading at premium price by 38% and 8% to its expected future intrinsic values calculated by us.

Generally market has its own brain and price of the stock sometimes trade at crazy levels and can elevate up to three years ahead of its future intrinsic values. These crazy levels normally are our selling point (rational thinking) instead of accumulating or buying them.

A note of caution, intrinsic values do change with the change in earnings expectations or any new information of the company is released. It is always advisable to buy any good quality stocks with big margin of safety so that if anything goes against your expectations or findings then your capital impairment is at minimum level.

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 advise you to take professional advice before going ahead with our views.