Dear @Mridul, Thanks for the opinion on this.
While P/E is not perceived to be as an effective mechanism for valuing the cyclical stocks, I doubt if normailzed earnings can either be used to understand the right valuations of Graphite India, considering the “special” situation in which it is in currently. Please let me know if my understanding of the “normalized earnings” itself is right.
I can calculate the normalized earnings by taking an average of the earnings of the company for the past say 10 years, assuming that it went through one complete up-down cycle over the past 10 years. However, will the above figure help in the case of Graphite India? The unprecedented rise in the price that we have seen recently cannot be attributed to its regular up/down cyclical trend, but due to a special situation, which is China crackdown on pollution.
As per reports, whatever China has done on pollution is an irreversible process and the crackdown is likely to continue in future also. Also, as per reports, Graphite electrode shortage is likely to continue for the next few years (at least for 5 years) for various reasons.
Graphite India’s average EPS is Rs. 7.26 over the past 9 years, when I believe it has seen one complete up/down cycle. How do we make use of the above figure as a guideline to determine whether the stock is currently undervalued or overvalued with its current TTM EPS of Rs. 26.71? This question becomes even more relevant especially since I have estimated very high EPS’s of Rs. 88.3 for FY19 (if we assume GE price of USD 8,000) and Rs. 285.2 (if we assume GE price of USD 20,000). Also, there is an expectation that, similar earnings may be repeated for the next many years also.
Sorry to ask one theoretical question, but I think it will help in getting my doubt clarified a lot. What if the company did really achieve an EPS of Rs. 285.2 in FY19, which is more than 10 times the current TTM EPS? Don’t you think the stock price would increase significantly, especially since there is an expectation that the same EPS may be reproduced over the next few years also? Or, will the stock price not increase, fearing the very low historical normalized earnings of just Rs. 7.26?
Your valuable thoughts on this will be appreciated.