A couple of weeks back we did shared 10 stocks that look good to invest with and Eicher Motors was one of them; and in our opinion it was trading at expensive price to our calculated intrinsic value.

Nobody can calculate exact intrinsic value of any asset. Even if we share you any formula to calculate intrinsic value, the end result will differ person to person as all the variables that we will take to calculate will be different. Even two analysts or brokerage firm’s calculated intrinsic value or target price differ.

Our last post (click here) was talking about this same subject and we calculate the band of estimated intrinsic value on the basis of analysts’ earnings expectations. When we mentioned that Eicher motors is expensive in our earlier post, what we meant was that it is trading at upper band of its expected intrinsic value.

Eicher Motors 2017 intrinsic value band at the moment is in range of Rs 12,321 – Rs 20,415 on the analysts’ earnings expectation for the year in range of Rs 601 – Rs 787 per share. Technically we can say that it is trading at fair value as its price is within the band of its intrinsic value and market is expecting it to report its earnings above Rs 700 per share. We also normally open our position when it is trading within the band. The exposure of money depends where within the band it is trading.

How rational is the market in its earnings expectation? If we find the answer to this question (on the basis of available facts) it makes our job easy and guide us at which level of this band should we look to invest. So far we had seen 40% growth in both, commercial vehicles as well as in the sales of Royal Enfield for the last two months of this financial year.

This growth in volumes so far is very impressive and will take its profits up by almost 30% as of today for the 2017 financial year. So far we are expecting its earnings for the year 2017 in range of Rs 650 – Rs 675 per share. This clearly points us that its intrinsic value should be in the middle of that band.

This band pretty much changes but not as fast as the price of the stock.

From Portfolio point

Stock market is dynamic in nature and we invest our money depending where the price of that stock is trading on a band. For example, we won’t hesitate to buy Eicher Motors today but not more than 15% of the total money we decided to invest within. Which means, if you wanted to invest Rs 100,000 from your portfolio in this stock, you should be okay to invest 15% (Rs 15,000) of that today.

This works like SIP (Systematic investment plan) also you buy more when it is trading at the lower end of your band or even below your lower band. Remember this one formula of making money, “the higher the price you pay, the lower is your return and the lower the price you pay, the higher is your return.”

Always invest more money when sufficient margin of safety is available.

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.