I have been studying about Intrinsic value and margin of safety from intelligent Investor and I have been building stocktrend margin of safety calculator some kind of screening formula to calculate margin of safety. I have been using Benjamin Graham Intrinsic value formula to calculate Margin of safety. so basically I am tech guy and learning stock market since 2019 and also its my first active thread, so bear with me if any miscalculation or incorrect thesis.
Intrinsic value = [EPS × (8.5 + 2g) × 4.4]/Y
From:https://www.valueresearchonline.com/stories/27759/the-ben-graham-way/
I had changed some of the parameter to include future earning and for Indian market.
Intrinsic Value = (EPS * (AverageNiftyPE + 2 * growthRate)* Gsec)/Bond Yield
So, For 8.5 base PE, I had taken Average PE for Indian market and For 4.4, I had taken gsec rate as risk free rate and bond yield as same above AAA corporate yield.
For simple screening, we can formulate a formula to know MOS over future earning potential whether its worth to know more or study about the company. So by applying the above for Nifty.
As on (21/07/2024) For Base PE, I had taken Average Nifty median PE which is 20.74 (20 year average) and if we consider 0% earning growth and EPS as 1,052.4 Rs. Bond Rate(Risk Free Rate) as 7.01(Government Sec) and Bond Yield as 8.32% (AAA Corporate Yield)
This gives Intrinsic value of Nifty as 18390.11 and margin of safety as -33.39% which is overvalued by 32.09% at 0% growth rate but if we assume 10% eps growth for the next 5-7 years its undervalued by 32%
If My understanding is correct, so assuming 10% eps for the next 5 years, nifty is undervalued by 32%. Which gives better view of valuation over future earnings or am I missing something ?
By applying Same principle in Each sector by giving expected earning growth Rate for each industry and average median PE as industry PE. we can formulate at screening margin of safety for each sector.
Eg: Tanla Platforms Limited
As on (21/07/2024) I had taken Average Nifty IT Index median PE which is 27.46 (5Y avg) because of IT company and if we consider 10% earning growth and EPS as 10.50 Rs. which gives 41.07% margin of safety.
Like wise, Lets take hot sector, defence
Paras Defence
Here we don’t have longterm index data, I would have taken nifty PE but lets us use defense index PE as 56.24 and if we consider 25% earning growth and EPS as 2.56 Rs. which gives -532% margin of safety. which is overvalued by 532% or 5x its future earnings. If we consider Nifty PE as base PE it would be 8 times.
And Also, I had taken the same in google sheet and computed MOS % for each stock.
Stocktrend(Margin of Safety Calculator):StockTrend - Trusted Source for Market Trends and Insights
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Note:The above mentioned stocks are for examples only and Not a Buy/Sell recommendation. I may be wrong as well. Feel free to share your views and analysis of any stocks. Very much interested to discuss further.