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Fundamental Analysis of Stocks

Fundamental Analysis of Stocks

Fundamental analysis of stocks based on the quarterly and annual reports of the companies.

January 14, 2025

Fundamental Analysis of Stocks, Investing

Return on Equity (ROE) Calculation and What It Means

Introduction:

A company’s financial performance shows how well it uses its assets, earns money, and runs its business. Simply put, it reveals how healthy and financially stable it is. But how do we analyze that? Some important financial ratios and metrics help assess if a business meets industry standards or falls short in profiting. One metric stock market advisory company and investors often rely on is the ROE. What is it, and why is it essential when analyzing companies? Let’s find out.

What Is The Concept Of ROE?

ROE is a primary part of the answer to the question, “What is fundamental analysis?” The return on equity (ROE) ratio measures how well a company generates profits from its shareholders’ investments. Simply, it shows how much profit is earned for every rupee of equity. For instance, an ROE of 1 means that every rupee of equity generates 1 rupee of net income. This is a crucial metric for potential investors, highlighting how efficiently a company uses its money to earn profits.

ROE also reflects how effectively the management utilizes equity financing to run operations and grow the business. Unlike other return-on-investment ratios, ROE focuses on profitability from the investor’s perspective. It calculates the earnings generated based on the shareholders’ investment, not the company’s investment in assets or other areas.

Investors prefer a higher ROE as it shows the company is making the most of its funds. However, ROE should be evaluated within the same industry since industries have varying investment requirements and income levels. Comparing ROE across different industries may thus lead to inaccurate insights.

How Is ROE Different From ROCE and ROA?

Though all three are profitability ratios, the three differ in the following manner-

Aspect	ROA (Return on Assets)	ROE (Return on Equity)	ROCE (Return on Capital Employed)
Focus	Profitability from total assets	Profitability from shareholders’ equity	Profitability from combined capital (debt + equity)
Formula	Net Income / Average Total Assets	Net Income / Average Shareholders’ Equity	EBIT / (Total Assets – Current Liabilities)
Indicates	How effectively do assets generate earnings	How well shareholder investments generate profits	How efficiently capital is used to generate operating profits
Preferred-Value	Higher indicates better asset utilization	Higher indicates greater equity financing efficiency	Higher indicates optimal use of both debt and equity
Usage	Evaluates management’s ability to convert assets into profit	Evaluates profitability from shareholder investments	Evaluates operational efficiency with available capital
Considerations	Independent of capital structure; useful for asset-heavy industries	Impacted by financial leverage, higher equity lowers ROE	Reflects holistic profitability, blending debt and equity
Ideal Application	Comparing asset-heavy companies or assessing operational efficiency	Assessing return for equity investors	Evaluating businesses with significant debt and equity mix

How To Calculate ROE?

The ROE formula used to calculate the return on equity is

ROE = (Net Income / Shareholders’ Equity) x 100

Here,

Net income is a company’s profit after subtracting all expenses, taxes, and interest. It shows the company’s overall financial performance.
Shareholders’ equity is the company’s net worth, the difference between total assets and total liabilities. It represents what shareholders own in the company after debts are paid.

For instance, assume that company A has a net income of Rs.50,00,000 and the shareholder’s equity comes to Rs.2,00,00,000. In that case, the ROE would be

ROE = (5000000/20000000) x 100 = 25%

25% ROE means the company generated Rs.0.25 or 25 paise profit against every Re.1 of the shareholder’s equity.

The ROE can also be calculated using these three different variations of the basic formula-

To find the return on common equity (ROCE), subtract preferred dividends from net income and divide by common equity. The formula is:

ROCE = (Net Income – Preferred Dividends) / Common Equity

For instance, say a company has a net income of Rs.10 lakh, preferred dividends of Rs.2 lakh, and common equity of Rs.50 lakh. The ROCE for this variation will be

ROCE = (1000000 – 200000) / 5000000 = 0.16 or 16%

Another way is to divide net income by the average shareholder equity. To calculate average shareholder equity, add the equity at the start of a period to the equity at the end and divide by two.

So, if a company has a net income of Rs.8 lakh, and the shareholder equity at the start of the year is Rs.40 lakh, and at the end of the year is Rs.60 lakh, the ROCE will be

ROCE = Net Income / Average Shareholders’ Equity = 800000/5000000 = 0.16 or 16%.

You can also track changes in ROE over a specific period. Start by using the shareholders’ equity at the beginning of the period as the denominator to calculate the starting ROE. Then, use the shareholders’ equity at the end of the period to find the ending ROE. For instance, A company starts the year with equity of Rs.30 lakh and ends the year with Rs.40 lakh.

Net income for the first half is Rs.6 lakh. So, starting ROE = 6,00,000 / 30,00,000 = 0.20 or 20%.

Net income for the second half is Rs.4 lakh. Then the ending ROE = 4,00,000 / 40,00,000 = 0.10 or 10%.

The drop in ROE from 20% to 10% shows declining profitability over the year. Comparing these figures shows how profitability has changed during the period.

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Further Breaking Down The ROE With DuPont Formula:

In addition, you can use the DuPont formula to break down the ROE components further and analyze them in detail. ROE shows how efficiently a company uses shareholders’ capital, calculated by dividing net income by shareholders’ equity.

The DuPont analysis takes this a notch higher, highlighting which financial activities most impact ROE. This information helps compare the efficiency of similar companies and helps managers spot strengths or areas for improvement.

The DuPont formula is-

ROE = (net income / sales) x (sales / total assets) x (total assets / shareholder’s equity)

In this, the ROE is divided into three ratios that denote the different aspects of ROE-

Net Profit Margin (net income/sales): Measures operational efficiency as net income generated per rupee of sales.
Total Asset Turnover (sales/total assets): This shows how well assets are used to generate sales.
Equity Multiplier (total assets/shareholder’s equity): Evaluate the financial leverage used by the company.

How To Interpret ROE?

Compare ROE with Industry Averages

Look at a company’s ROE compared to its industry average. A higher ROE suggests that the company efficiently uses shareholders’ equity to generate profits. Take TCS’s ROE, for instance. The company reported an impressive ROE of 51.04% in FY2024, far exceeding the IT industry’s average of 18%. This highlights TCS’s strong profitability and efficient capital use compared to its peers. On the other hand, a lower ROE could mean the company struggles to stay competitive.

Analyze ROE Trends Over Time

Check how a company’s ROE has changed over the years. A steady rise in ROE is usually a positive sign, showing consistent profit growth for shareholders. But, if ROE fluctuates or declines, it might signal issues that need deeper investigation.

The Ideal ROE

There is no one-size-fits-all number. The ideal ROE depends on the industry and the company’s specific situation. An ROE of 15% or higher is often considered healthy. Comparing it with peers clarifies the assessment.

ROE offers a reliable snapshot of a company’s financial performance, but context matters. A stable ROE suggests that the company effectively uses equity to generate profits. Still, external factors like market dynamics and economic conditions can impact ROE. So, always evaluate ROE alongside other financial ratios and indicators for a clearer picture.

Bottomline:

Think of ROE as a tool to spot industry leaders. A high ROE often indicates strong profit potential. But don’t rely on it alone—constantly evaluate all aspects of a company before investing. ROE, which can be easily calculated using a financial calculator, is one of many metrics used to assess a company’s performance, growth potential, and financial stability. Growth prospects are crucial in judging profitability, so it is important to scrutinize them. The return on equity ratio and other financial ratios can help gauge a company’s potential. Make sure to use them wisely when making investment

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

What does a negative ROE indicate?
A negative ROE signals problems with debt, asset retention, or both within the organization.
What does a company with a high ROE signify?
Companies with high ROE generate significant profit relative to shareholders’ equity, efficiently using investors’ money. They excel in retaining earnings, reinvesting them as working capital, and reducing reliance on debt. High-ROE companies often outperform competitors due to advanced technology, efficient operations, or strong branding, helping them generate more earnings than peers.
How is ROI different from ROE?
ROI measures the overall return on your investment, giving a broader financial perspective. ROE, however, zooms in on the returns shareholders earn based on their equity in a company.

January 14, 2025

Fundamental Analysis of Stocks, Investing

Price to Earnings Ratio | Types, Formula and Limitations

Introduction:

When you buy a piece of gold jewelry, you know the current price and pay according to the same ongoing rate. Even with other purchases, we check whether it is worth buying at that MRP and at what cost. For all such purchases, we know the actual value of the commodity, which is why we readily pay the asked price.

A tool called the PE ratio, one of the important financial ratios, lets us make a similar evaluation when buying shares or stocks. What is it? How does it work? How do you analyze stocks using the P/E ratio? Let’s understand.

What is the P/E Ratio?

The Price-to-Earnings (P/E) Ratio compares a company’s stock price to its earnings per share (EPS). It helps investors understand a company’s value and market expectations. Simply, it shows how much you need to pay for each unit of the company’s current or future earnings.

The P/E is helpful because it compares stocks with different prices and earnings levels. It is often called an earnings multiple and has three types. Let’s look at all three with an example.

Say Company ABC’s current stock price is Rs.120, projected earnings for next year are Rs.12 per share, past one-year earnings are Rs.10 per share, and inflation-adjusted average earnings over the last 10 years are Rs.8 per share.

Forward P/E Ratio

This ratio looks at a company’s expected future performance. It compares the current stock price to projected future earnings, as estimated in earnings guidance. As per the example, the forward P/E ratio for Company ABC will be

Forward P/E = Current Stock Price ÷ Projected Earnings = 120/12 = 10

This says that the investors are paying Rs.10 for every rupee of projected future earnings. While it gives a glimpse into potential growth, these estimates can sometimes be inaccurate.

Trailing P/E Ratio

The trailing P/E focuses on the past. It calculates the ratio using earnings data from the last 12 months. So, continuing the example, the trailing P/E for Company ABC will be

Trailing P/E = Current Stock Price/ Earnings of the Last 12 Months = 12

This says that investors are paying Rs.12 for every rupee of past earnings. While it reflects balanced actual performance, it may not always reflect the company’s future earnings potential.

The Shiller P/E Ratio

Also known as the cyclically adjusted price-earnings ratio, this method uses a company’s average earnings over a set period. The Shiller P/E calculates the current stock price divided by the company’s inflation-adjusted average earnings over the last ten years. So, for Company ABC,

Shiller P/E = Current Stock Price ÷ Inflation-Adjusted Average Earnings = 120/8 = 15

This means the investors pay Rs.15 for every rupee of long-term, inflation-adjusted earnings. It says the stock price is higher than long-term earnings, possibly due to market optimism or economic cycles.

Apart from these, another classification of the P/E ratio divides it as

Absolute P/E Ratio

The absolute P/E ratio is the traditional method of calculating the Price-to-Earnings ratio. This method divides a company’s current stock price by its past or future earnings.

Relative P/E Ratio

The relative P/E ratio takes things a step further. It compares a company’s absolute P/E ratio with a benchmark or past P/E ratio. Investors use it to gauge a company’s performance over time or against industry standards.

Let’s take HCL Technologies as an example. As of 2nd January 2024, the sector P/E stands at 37.87, while the company’s P/E is 31.23. The relative P/E ratio of 82.47% indicates that the company’s P/E is lower than the benchmark sectoral ratio. If the company’s P/E had been higher than the sector’s, say 40.13, the relative P/E would have been 105.97%, suggesting the company has outperformed the sector.

Generally, a relative P/E ratio below 100% implies that the company’s P/E is lower than the benchmark, potentially indicating the stock is undervalued. Conversely, a relative P/E ratio above 100% suggests that the company has outperformed the benchmark, which may indicate the stock is overvalued or performing exceptionally well relative to its peers.

This comparison helps you understand whether a stock is undervalued or overvalued compared to its peers or historical performance.

How To Calculate The P/E Ratio?

The formula used for computing the P/E ratio is-

P/E = Current Market Price of a Share / Earnings per Share

Suppose a company’s P/E ratio is 37 times. This means that buyers are ready to pay Rs.37 for every rupee of profit earned by the share. The usual scale for measuring the P/E ratio is centered at 1.

Accordingly, a P/E ratio of 1 means the market values the company at its intrinsic value. A ratio above 1 suggests overvaluation, where the stock is priced higher than its earnings potential. In contrast, a ratio below 1 indicates undervaluation, meaning the stock is priced lower than its intrinsic value.

However, the P/E ratio must be compared against the industry ratio as a benchmark. For example, company A’s P/E ratio is 56, and company B’s is 21. The industry P/E is, say, 33. In this case, the P/E is much higher than the standard measure scale, which is 1. However, as per the industry standard, company B is said to have a lower P/E ratio and is thus undervalued compared to its peers.

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How To Do Stock Analysis Using P/E Ratio?

High PE Ratio

A high PE ratio often signals investors expect the company’s earnings to grow. When stocks show strong growth potential, their PE ratios tend to rise. Investors are willing to pay a premium for these stocks, anticipating higher returns.

However, a high PE ratio can also mean the stock is overvalued. If it exceeds the PE ratios of similar companies or its historical average, it might reflect excessive optimism. While this could indicate strong growth prospects, it might also suggest inflated valuations. A rising PE ratio is sometimes driven by declining overall earnings and positive market sentiment.

Low PE Ratio

A low PE ratio might suggest that the stock is undervalued. This happens when the company’s earnings grow, but the stock price doesn’t rise proportionally. Such situations attract value investors, who see an opportunity to buy stocks with strong fundamentals at a discount, betting on future price increases.

Conversely, a low PE ratio might signal declining company earnings. Investors could interpret this as a warning sign, leading to skepticism about the stock’s growth prospects. A modest PE doesn’t always mean a bargain—it might reflect real concerns about the company’s performance.

So, what is a good P/E ratio? It depends on factors like the industry, market conditions, and a company’s growth prospects. Comparing it with industry averages and competitors helps assess it better. The PE ratio can also be paired with other financial metrics for investment strategies.

Bottomline:

P/E is one of the fundamental parameters of stock analysis. It’s handy for comparing companies in the same industry, like comparing one telecom firm to another, and is easy to compute using financial calculators. The P/E ratio gives insights into market sentiment and potential investment opportunities. However, it’s not a standalone tool. It doesn’t factor in future growth, debt, or industry-specific details, so always pair it with other financial metrics for a clearer picture.

Which tools to pair it with? You can approach a registered stock advisory company to help frame an investment strategy using the right mix of parameters.

FAQ

What is the accuracy of the P/E ratio?
The PE ratio doesn’t directly tell you to buy or sell but helps gauge whether a stock or market is pricey or cheap. Take the Indian market, for example. The 12-month trailing PE for the Nifty is around 21.6 times, which is 6% higher than its 15-year average of 20.3. This premium makes some long-term foreign investors hesitant to invest in new funds.
What does a negative P/E signify?
A negative PE ratio means the company faces losses or has negative earnings. Even well-established companies experience this at times. It can happen for various reasons, like environmental factors beyond the company’s control.
How does the P/E ratio determine market sentiment?
The PE ratio often reflects market sentiment. During bull markets, investor optimism drives stock prices up, leading to higher PE ratios. In contrast, bear markets bring lower PE ratios as pessimism pulls stock prices down.

January 13, 2025

Fundamental Analysis of Stocks, Investing

8 Fundamental Indicators for Stocks in 2025

Introduction:

As we enter 2025, many investors are either beginning their journey into the stock market or revisiting their portfolios for rebalancing. Whether you’re just starting or fine-tuning your investments, having a strong base of common investment jargon and a solid analysis template is key to making informed decisions.

To help you evaluate companies or securities and build a strong portfolio, here are 8 fundamental indicators you can incorporate into your investment strategy in 2025.

Price-to-equity Ratio:

The price-to-equity ratio, or the P/E ratio, is one of the primary fundamental analysis indicators that many investment advisory firms and retail investors widely use. The P/E ratio evaluates whether a stock is overvalued or undervalued. It shows how much investors are willing to pay for each rupee of earnings. The formula to calculate it is:

P/E Ratio = Current Market Price per Share / Earnings per Share (EPS)

For example, if a company’s EPS is Rs.10, and its current market price is Rs.200, the P/E ratio is 20 (200/10). This means investors are ready to pay Rs.20 for every Re.1 the company earns as profit.

The P/E ratio is ideally measured on a scale starting at zero. That means a P/E of 0 indicates fair value, below 0 suggests undervaluation, and above 0 indicates overvaluation. However, in practice, it’s compared to the industry P/E or peers for better insight.

Let’s take an example of Company ABC in the FMCG sector. If its P/E is 27.33 while the industry P/E is 36.25, it’s considered undervalued. However, if ABC’s P/E rises to 37 or 40, it will be overvalued compared to the industry standard. Thus, the P/E ratio gives a basic idea of valuation, but it is insufficient to give the buying or selling signals for a particular stock or security.

To use the P/E ratio’s capacity to the fullest, compare companies in the same industry and combine it with other parameters to get a complete picture of the investment avenue.

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Projected Earnings Growth:

Another fundamental indicator is the PEG ratio, which takes the P/E ratio one step toward precision. The P/E ratio helps determine if a stock is cheap or expensive. It’s the relationship between the current share price and one year’s earnings per share. The PEG ratio takes it further by comparing the P/E ratio with the company’s earnings growth rate.

Imagine a company with a P/E ratio of 10. Its current earnings per share is Rs.10, expected to rise to Rs.12. This gives an expected earnings growth rate of 20% [(2/10)*100]. Using these numbers, the PEG ratio would be

PEG = EPS / EPS Growth rate = 10/20 = 0.5

A PEG ratio below 1 usually signals that a stock is undervalued, encouraging traders to buy. On the other hand, a PEG ratio above 1 suggests the stock might be overvalued, generally leading traders to sell. Here, a PEG of 0.5 means that the company’s shares are trading at a price lower than what its expected growth justifies.

Return on Equity:

ROE shows how efficiently a company generates profit from shareholders’ equity. A high ROE indicates efficient use of capital, while a falling ROE could mean weaker management or higher financial leverage. The formula used to calculate ROE is-

ROE = (Net Income / Shareholders’ Equity) × 100

For example, if a company earns a net income of, say, Rs.15,00,000 and has shareholders’ equity of Rs.60,00,000, its ROE would be

ROE = (15,00,000 / 60,00,000) × 100 = 25%.

This means the company generates 25 paise in profit for every rupee of equity.

What qualifies as a good ROE depends on the following factors:

Capital intensity: Sectors like utilities and manufacturing need large assets and equity to operate, leading to lower ROEs. In contrast, tech companies often require less capital, resulting in higher ROEs.
Profit margins: Tech and pharma firms with higher profit margins tend to have better ROEs. For instance, Infosys, a leading Indian IT company, has an ROE of around 31.8%, while NTPC, operating in the capital-intensive utility sector, has a much lower ROE of 13.5%.
Debt: Companies with high leverage may show inflated ROEs, which come with increased risk.
Growth stage: High-growth companies reinvest earnings, often leading to lower ROEs than mature firms.

So, when comparing ROE, it is important to ensure the companies are similar and operate in the same industry.

Debt-to-Equity Ratio:

The debt-to-equity ratio, another important fundamental indicator, shows the relationship between a company’s borrowed funds and shareholder capital. It shows how a company finances its assets and assesses its financial leverage. This ratio indicates how much shareholder equity can cover creditor obligations if the company faces financial trouble. It is calculated as

Debt to Equity = Total Debt / Shareholder’s Equity

Let’s say Company XYZ has borrowings of Rs.5,000 crore and shareholder equity of Rs.20,000 crore. Using the formula:

Debt to Equity Ratio = 5,000/20,000 = 0.25.

This means the company has Rs.0.25 in debt for every Re.1 of shareholder equity.

The debt-to-equity (D/E) ratio is typically compared to industry averages, competitor ratios, or a company’s historical ratios. A high ratio might indicate the company relies heavily on debt, which could affect its profitability and ability to pay dividends. It also signals higher financial risk if profits decline. Creditors often use this ratio to assess loan approval, as a high ratio may hint at potential bankruptcy.

In contrast, a low ratio shows the company depends more on equity financing, reducing the debt burden. A ratio of 1.0 to 2.0 is usually seen as healthy, but the ideal range varies across industries.

Earnings Per Share:

One of the primary parameters that comes up when answering ‘What is fundamental analysis indicator?’ is the EPS. It shows how much profit a company makes for each share of its stock. The following formula calculates EPS-

EPS = Net Profit / Number of Outstanding Shares

For example, consider ABC Ltd., which reported a net profit of Rs.8,00,000 for FY23 and has 80,000 outstanding shares of common stock. So,

EPS = Rs.8,00,000 / 80,000 = Rs.10

An EPS of 10 means the company earns Rs. 10 in profit for each outstanding share of stock. So, for every share you own, the company made Rs. 10 in profit during that period.

A single EPS number means little on its own. It becomes meaningful when compared to companies in the same industry or the company’s share price (P/E ratio). A higher EPS indicates better profitability between two companies with the same number of shares. EPS is often used alongside the share price to decide if a stock is “cheap” (low P/E ratio) or “expensive” (high P/E ratio).

Dividend Yield Ratio:

The Dividend Yield Ratio (DYR) shows how much dividend you earn per share for the company’s share price. It’s calculated using this formula:

DYR = Total dividend paid per year / Price per share

For example, if a company’s share costs Rs.200 and the dividend is Rs.5, the Dividend Yield Ratio is 2.5%. This means that for every Rs.100 invested in a company’s shares, you would earn Rs. 2.5 annually as a dividend. Different industries and companies will have varying yields.

A comparatively high dividend yield means the company pays investors a larger share of its profits. This might appeal to value investors, but it could also suggest the company isn’t reinvesting enough or its stock price has dropped. On the other hand, a comparatively low yield could indicate the company is reinvesting profits, facing losses, or has high debt. It may also prioritize growth over immediate returns.

Price-to-book Ratio:

The Price-to-Book (P/B) ratio compares a company’s market valuation to its book value. It helps you judge if a stock is undervalued, overvalued, or fairly valued. The formula to compute the P/B ratio is

P/B Ratio = Market Price Per Share / Book Value Per Share

So, say a stock trades at Rs.120 per share, and its book value per share is Rs.40; the P/B Ratio will be 3 (120/40). This means the stock is priced at thrice its book value.

As per the theory measures, a P/B ratio below 1 indicates the stock is undervalued, while a higher ratio suggests overvaluation or expectations of future growth. However, the ideal ratio varies by industry, so comparing a company’s P/B ratio with its industry standard is crucial for accurate evaluation. Always consider the business sector or industry as the general level of PB ratio in one may differ from another.

Revenue Growth Rate:

Revenue growth is a company’s income increase over time, measured quarterly or annually. It highlights market share and competitiveness. Consistent growth often points to a healthy, expanding business. However, you must analyze revenue and profit margins to understand financial health better.

Ideal or preferable growth rates differ by industry and company stage. Startups may see high percentage growth due to smaller revenue bases, while mature companies often have stable but moderate growth. These firms focus more on retaining customers and improving operations, as they’ve already captured a significant part of their market.

Bottomline:

Fundamental analysis remains a powerful tool for understanding a company’s financial health, especially when combined with a reliable stock screener. These indicators provide valuable insights, but evaluating them within the context of industry trends, economic conditions, and the company’s strategy is crucial.

A well-rounded approach, blending fundamental analysis with other methods, will equip you to make informed decisions and confidently navigate the dynamic stock markets of 2025.

FAQ

What is free cash flow?
Free cash flow is the cash a company earns from operations after covering capital expenses. This fundamental analysis indicator shows how well the company can invest in growth, pay dividends, or reduce debt.
What does ROCE indicate?
Return on Capital Employed helps you understand a company’s profitability and how efficiently it uses capital. It shows the profit generated for every rupee of capital employed, giving a clear picture of long-term performance.
What does a P/S ratio indicate?
The P/S ratio shows how much investors are paying for every rupee of a company’s sales. A low ratio might mean the stock is undervalued, while a high one could point to overvaluation.

December 23, 2024

Fundamental Analysis of Stocks

Reliance Power Fundamental Analysis: All You Need to Know

Want to understand the fundamental analysis for Reliance Power? In 2008, Reliance Power made history by launching the largest IPO in the Indian market. The issue size was ₹11,500 crores and was oversubscribed approximately 70 times.

Despite high optimism, the stock debuted at 17% discount.

At the time, the company had no significant business operations and just recorded a mere ₹2.2 crores revenue in FY07. The plan was to utilize the IPO proceeds for the construction and development of the new power projects and build the business.

However, onset of global financial crisis in 2008, regulatory hurdles, and market manipulation concerns resulted in the company’s share price to nosedive.

Now, fast forward to 2024, the company is again making headlines. Reliance Power share price has given returns of up to 100% in the last one year. So, what’s happening in Reliance Power share price?

So, in this article, we will do a deep dive on the company’s fundamentals and check out its future growth potential. Let’s start.

What Does Reliance Power Do?

Reliance Power is an energy generation company involved in the development, construction, and operation of power projects. The company has close to 6000 MW of operational power generation assets with diverse energy projects including coal-fired power plants and hydroelectricity projects located in Arunachal Pradesh and Himachal Pradesh. One of their significant projects is the 3,960 MW Sasan Ultra Mega Power Project in Madhya Pradesh

Recently, the company diversified into solar and wind energy projects. Reliance Power has a portfolio of 45 MW of wind energy and 140 MW of solar energy projects.

Reliance Power Management Team

Shri Anil Dhirubhai Ambani is the Chairman of Reliance Power and the Reliance ADA Group.

Shri Ashok Kumar Pal is the Chief Financial Officer and was also appointed as the manager of the company. He is a qualified chartered accountant with more than 23 years of experience in handling accounts, finance, taxation, and other statutory compliance requirements.

Smt. Ramandeep Kaur is the Company Secretary and Compliance Officer. She is also appointed as a key management personnel having more than 23 years of experience in secretarial matters with expertise in business strategy, business and corporate structuring, corporate actions.

Reliance Power Shareholding Pattern

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In the domestic institution segment, LIC holds 2.56% stake in the company, and retail shareholders holding almost half of the company with 49.85% stake.

Reliance Power Financial Performance

Revenue From Operations

The revenue growth has been flat in the last five years, as you can see in the table below. In FY24, the revenue from operations of the company rose 5% to ₹7,893 crores from ₹7,514 crores in FY23.

And, in the first half of FY25, revenue from operations declined by 5% to ₹3,752 crores from ₹3,952 crores reported in the same period last year.

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Net Loss

Reliance Power is consistently reporting losses in its operations and in FY24, the losses increased by over 5 times to ₹2,068 crores from ₹403 crores in FY23.

However, in the first half of FY25, the company reported a net profit of ₹2,780 crores crores against a loss of ₹534 crores reported in the same period the previous year. The profit during the period is due to an one-time exceptional gains of ₹3,230 crores on account of a deconsolidation of a subsidiary.

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Key Financial Ratios

Current Ratio: The current ratio of the company in FY24 was steady at 0.3 times. It indicates that the company’s current assets are insufficient to cover the short term liabilities.

Debt-to-equity Ratio: The company’s debt to equity ratio improved marginally to 1.6 times in FY24, compared to 1.8 times in FY23.

The net debt of the company reduced from ₹5,391.7 crores in FY23 to ₹4,200 crores in FY24.

Debt Service Coverage ratio: The company’s debt service coverage ratio improved to 0.32 times in FY24 from 0.15 times in FY23.

Operating Margin: Operationally, Reliance Power is making profits and in FY24, its operating profit margin was 15%. However, it declined from 25% in FY23.

Reliance Power Share Price Analysis

In the last 5 years, Reliance Power share price has shed the tag of being a penny stock and rose by more than 1300%, from ₹3.3 to ₹46.60. Its 52-week high level is ₹54.25.

Reliance Power paid zero dividend to its shareholders since it is listed in the stock market.

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The rise in Reliance Power share price due to multiple factors that will aid in improving its operational efficiency. Some of the key factors include:

Raised ₹1,525 crore in October 2024 through a preferential allotment of equity shares from qualified investors to support business expansion and reduce debt.

Settled debt-related disputes worth Rs 3,872.04 crore with CFM Asset Reconstruction related to Vidarbha Industries Power Ltd, thus improving the company’s financial stability.
Signed a strategic deal to transfer the development rights of its proposed 1,200 MW Kalai-II hydro-electric project in Arunachal Pradesh to THDC for Rs 128.39 crore, which attracted significant investor attention.
General bullish sentiment in the market towards power stocks, driven by tariff hikes in the power sector.

The normal valuation metrics will not apply to Reliance Power, since it is a loss-making enterprise. For investors, the key is to look at the growth in earnings in the next few quarters.

Reliance Power Share Price Future Growth Outlook

Debt restructuring, diversifying into renewable energy projects, and general bullish sentiment in power stocks has led to rise in the Reliance Power share price. But, the management is still facing significant challenges in improving the fundamentals of the company.

The failure of Reliance Power to emerge as a top power company in India is due to many factors like unrealistic expectations and expensive valuation of the company at the time of IPO, overambitious projects, underplayed fuel supply challenges resulted in power plants going idle, high debt levels, regulatory hurdles, and erosion of credibility in the market.

In recent months, the management of the company has shown strong intent to turnaround the company, but it needs to improve its operational efficiency and improve its earnings. The company’s ability to navigate the challenges and capitalize on growth opportunities will be crucial for its long-term success.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

How has Reliance Power share price performed in the last 5 years?
As of 18th December 2024, in the last three, Reliance share price has given returns of 71% annually, rising from ₹3.3 to ₹46.60 per share.
Is Reliance Power a profitable company?
No, Reliance Power is a loss making company, however, it is operationally profitable, reporting operating profit margin of 15% in FY24.
What type of projects does Reliance Power develop?
Reliance Power develops and operates a diverse portfolio of power generation projects, including coal-fired, gas-fired, solar, wind, and hydroelectric plants.

December 14, 2024

Fundamental Analysis of Stocks

ONGC Fundamental Analysis: All You Need to Know

Want to understand the fundamental analysis of ONGC? Read on. ONGC is a leading oil exploration company in India but is struggling in the stock market. In the last 10 years, its share price has returned 1% annually to investors, but it is currently trading below its book value. So, can ONGC’s share price turn around and grow multi-fold? What is its future growth potential?

This article looks into the fundamentals of ONGC’s share price.

What Does ONGC Do?

Oil and Natural Gas Corporation (ONGC) is India’s largest oil & gas exploration and production company with Maharatna status. The company is responsible for over 70% of India’s crude oil and 84% of natural gas production.

ONGC also has a strong international presence through its subsidiary, ONGC Videsh, which has projects in multiple countries. Through its subsidiaries, ONGC is present across all the value chains of hydrocarbons, including marketing, refinery, LNG, fuel transportation, etc. ONGC holds a 54.9% stake in Hindustan Petroleum.

ONGC Management Team

Mr. Arun Kumar Singh is the Chairman and CEO of ONGC and the ONGC group of companies. He assumed his role on 7 December 2022 and has a three-year tenure. Mr. Singh has over 37 years of experience in the oil and gas sector and was previously the CMD of Bharat Petroleum.

Mr. Om Prakash Singh is the Director (Technology & Field Services) and a mechanical engineer. He has over 36 years of experience in Indian oil and gas exploration and is an expert in deepwater drilling projects in India and abroad. Mr. Singh also chairs various Boards of ONGC subsidiaries.

Mr. Pankaj Kumar is the Director (Production) and has over 36 years of experience across ONGC’s business functions. He holds a B.Tech in Chemical Engineering from IIT Roorkee and a Master’s in Process Engineering & Plant Design from IIT Delhi.

Ms. Susma Rawat is the Director (Exploration), an industry veteran with over 34 years of experience. She heads the ONGC Carbon Management and Sustainability Group and is also a member of various inter-ministerial committees of NITI Aayog.

Mr. Vivek Chandrakant Tongaonkar is the Director of Finance and CFO. He has 37 years of expertise in various roles within the energy industry. He joined ONGC in March 1987 as an Assistant Executive Engineer (Electrical) after graduating from the College of Engineering in Pune. After completing an MBA (Finance) program at Symbiosis Institute of Business Management in Pune, he switched to ONGC’s Finance department.

Shareholding Pattern

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In the Domestic Institution segment, mutual funds hold a 7.94% stake in the company, and LIC holds a 9.29% stake.

Financials Performance

Total Revenue

In FY24, ONGC group posted a total revenue of ₹6,55,259 crores, lower by 5.4% compared to the previous financial year at ₹6,92,903 crores.

And, in the first half of FY25, total income increased by 4.63% to ₹333,359 crores from ₹318,584 crores reported in the same period last year.

EBITDA

In FY24, EBITDA rose by nearly 35% to ₹1,15,057 crore from ₹85,320.8 crore in FY23.

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Profit After Tax

In FY24, ONGC’s net profit increased by 67.7% to ₹57,101 crores from ₹34,047 crores in FY23.

In the first half of FY25, net profit declined by 41.5% to ₹19,688.6 crores from ₹33,665.89 crores reported in the same period the previous year.

The company’s operational and net profit margins were 41.25% and 29.28%, respectively, in FY24.

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Key Financial Ratios

Current Ratio: The company’s current ratio improved to 1.58 times in FY24 from 1.29 times in FY23.
Debt-to-equity Ratio: The company has no debt in its books, so its debt-to-equity ratio is close to zero.
Return on Equity (ROE): The company’s ROE declined by 12.5% to 14% in FY24 from 16% in FY23.
Return on Capital Employed (ROCE): The company’s ROCE declined to 30.60% in FY24 from 39.82% in FY23.

ONGC Fundamental Analysis

In the last five years, ONGC’s share price has traded sideways with occasional price spikes, failing to deliver meaningful returns to its investors.

ONGC share price reached an all-time high of ₹345 in July 2024, from roughly ₹126 on December 13, 2019. Since then, it has traded with a downward bias.

AD 4nXcOSKXOZXtht7Qmey BnxQp5OJ9Or17o9UK49 M11eQFWhJVYJhw3FXWc340jXM5ZzsSHfYjeuAEC Lt9HU9jycooi6pPEq9WMpIYkwv87Lce7O rwiUxuFz8pkM8PNl W0mCnpNw?key=bG8h7h4OVNEjJvut0wZUK6iK — *Source: Tradingview*

Being a state-owned and profitable company, ONGC consistently pays dividends to its shareholders, sometimes paying more than 50% of its net profits as dividends.

In the last three financial years, the company has paid ₹10.5 in FY22, ₹11.25 in FY23, and ₹12.25 in FY24 as dividends to shareholders. At a current market price of ₹260 per share, the dividend yield is 4.71%.

ONGC Share Price Valuation Score

Earning Per Share (EPS)

The following is the last five years Earnings Per Share of ONGC:

FY20	₹8.59
FY21	₹12.96
FY22	₹36.19
FY23	₹29.18
FY24	₹39.13

The company’s EPS growth has been inconsistent, and in recent financial years, it has moderated. It is important to note that a company’s share price rise is driven by its earnings growth.

Price-to-Book VS Median Price-to-Book

ONGC’s share price is currently 0.9, trading below its book value. The 5-year median price-to-book value is 0.7, which indicates that the stock has historically traded below its book value.

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Price-to-Equity VS Median PE

The current PE ratio is 7.85, meaning investors are paying 7.85 times for every ₹1 of earnings. Looking at the historical averages, ONGC 5 year median PE is 5.7. It indicates that the company shares trade at a lower valuation than its long-term averages.

*Note: While stocks with a lower PE may look attractive initially, they indicate that investors are not ready to value the company higher because of its limited growth potential. If you look at all high-growth companies, such as Trent and Zomato, the valuation of them is expensive as they grow at a higher rate than the market, and investors expect to make more money in such stocks.

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ONGC Share Price What’s Next

The company’s primary business activity is crude oil exploration and production, and its ability to expand depends on the successful discovery of oil and gas basins. For a very long time, the company has been unable to make major oil and gas discoveries, which has impacted its crude oil production capacity. Supply is depleting from its existing wells.

AD 4nXfcWmZzsXca5soTl4gGu8sqDyxrnL6RTX CzgLicVskZfrm5J2DBWioT1o0B3N4qcYWpBfVxbPP A7D9H98VPF0I509M3NLMHzugErwx3 88a2d AY7plBKnxTUL8d2GgK6qjN tw?key=bG8h7h4OVNEjJvut0wZUK6iK — *Source: FY24 Annual Report*

The table above shows that the company’s crude oil and natural gas production has consistently declined in the last five years.

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In addition, the company’s proven oil reserves have also declined. In its FY24 annual report, the company stated that there is a natural decline in western offshore oil fields. It will focus on production enhancement by aiming to develop the Eastern Offshore Asset (EOA) early and gradually open wells by FY25.

Until new game-changing discoveries are made, the company plans to sustain current supply levels by effectively and efficiently managing existing oil fields.

As part of its diversification strategy and to improve its financials, ONGC is focusing on developing its petrochemical business, converting crude oil directly to high-value chemical products.

This Maharatna is also diversifying into renewable energy. By 2030, it will invest close to ₹10,000 crores in establishing 5GW of renewable energy capacity, including solar, wind, biogas, and pump storage projects. On the capex front, ONGC expects to invest between ₹ 33,000 crores and 35,000 crores in FY25, focusing on developing and redeveloping oil and gas fields.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

FAQ

How has the ONGC share price performed in the last 3 years?
As of 9th December 2024, the ONGC share price has given returns of 21% annually in the last three.
Does ONGC pay dividends to its shareholders?
ONGC has a consistent track record of paying dividends to its shareholders and has one of the highest dividend yields in the Nifty 50 companies. The company has paid ₹10.5 in FY22, ₹11.25 in FY23, and ₹12.25 in FY24 as dividends to shareholders.
Is ONGC a government company?
Yes, ONGC is a government company and a Manharatna company. It accounts for nearly 70% of India’s domestic crude oil production and 84% of natural gas production.

December 14, 2024

Fundamental Analysis of Stocks

JP Power Fundamental Analysis: Key Insights About This Small-Cap Stock

Want to know about the fundamental analysis of JP Power? Read on. Jaiprakash Power Ventures Ltd, additionally referred to as JP Power Ventures, is part of the Jaypee Group. Following several years of repeated losses, the company has returned to profitability, with strong earnings growth. JP Power share price has also shed the image of being a penny stock, and investors are showing more interest in the company. In this article, we will do a fundamental analysis of JP Power’s share price and evaluate its long-term growth prospects.

Let’s start.

What Does JP Power Ventures Do?

JP Power Ventures was incorporated on December 21, 1994 and is a part of the Jaypee Group, a diversified infrastructure conglomerate with interests in civil engineering, construction, cement, power, and real estate.

JP Power Ventures operates both thermal and hydropower plants and has aggregate power generation capacity of 2,200 MW.

Some of the notable projects of the company include 400 MW Vishnuprayag hydroelectric project, 500MW Bina thermal power plant, 2×660 MW Nigrie super thermal power project in Madhya Pradesh.

It has also implemented 1091 MW Karcham Wangtoo hydroelectric project, which is now owned and operated by JSW Energy, 1980 MW Bara Thermal Power Plant, which is now owned and operated by Tata Power, and many others.

The company is also involved in the business of setting up of transmission lines, coal mining and cement grinding plants to set up power projects and to carry on the business of generating electricity.

JP Power Management Team

Shri Manoj Gaur serves as the Chairman (Non-Executive) of the company’s Board. He is an established name in the Indian real estate business, serving as Chairman and Managing Director of Gaurs Group as well as Chairman of CREDAI’s Affordable Housing Committee (National).

Shri Suren Jain is the Managing Director and CEO of JP Power. He has been with the JP Group since 1993 and has held several high management positions in the group’s company. He has served as the Managing Director of JP Power Ventures since 2007. Shri Suren Jain received his BE degree in Production Engineering from Jawaharlal Nehru Engineering College.

Shri Madan Gopal Gupta is the Chief Operating Officer of JP Power Ventures and has joined the company in April 2019. He has over three decades of experience in India’s power sector and prior to joining JP Power, he was the CEO of Essar Power. Shri Madan Gupta has received his BE in Mechanical Engineering from NIT, Srinagar.

Shri M.K.V. Rama Rao is the Chief Technical Officer of JP Power Ventures and has vast experience in India’s power sector. He has held various positions in NTPC from 1978 to 2013 and has completed his M.Tech in Production Technology from IIT-Kharagpur.

Shareholding Pattern

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Jaiprakash Associates is the company’s sole promoter entity, holding a full 24% ownership, with 79.20% of the shares pledged.

In the domestic institution segment, banks own 16.54% stake of the company, while LIC owns 1.38%.