OVERVALUED STOCKS

Peg ratio is analysed for selection among overvalued stocks.

PEG Ratio- price to earnings growth ratio is a valuation technique which is used to
calculate the relative trade-off between the price of the stock, Earning per share and
company’s expected growth.
PEG ratio above 1 is considered unfavourable because in this case stock will be
considered overvalued and if PEG ratio is between 0 to 1 then that stock is considered
favourable.

Table 1 PEG Ratio

PEG Ratio

Companies EPS Growth P/E Ratio PEG Ratio Selected

TVS Motor 19.15% 42.7 2.18862122 No

Endurance Tech. 18.31% 65.86 3.596941562 No

Maruti Suzuki 36.67% 34.39 0.937823834 Yes

Eicher Motors 17.31% 47.39 2.737723859 No

 RANKING OF STOCKS

After selection of stocks from undervalued and overvalued stocks next step is to rank
the stocks so that further allocation of funds can be done. Ranking is done on the basis
of some important ratios of automobile sector that are debt equity ratio, return on equity
ratio and inventory turnover ratio.

Top stocks selected that are to be included in the mutual fund are Bajaj Auto, Hero
Motocorp, Ashok Leyland, Escorts, Mahindra & Mahindra and Maruti Suzuki.

Table 2 Inventory Turnover Ratio

Inventory Turnover Ratio

Stocks Ratio Ranking
Hero Motocorp 47 1
Bajaj Auto 31.7 2
M&M 17.34 4
Ashok Leyland 8.53 6
Escorts 9.7 5
Maruti Suzuki 23.69 3

Inventory Turnover Ratio- It shows how many times a company has replaced its
inventory into sales during a period. It is calculated by dividing cost of goods sold by
average inventory. This ratio is important for automobile sector because it is considered
a warning sign for the sales if auto dealerships begin to carry inventory for more than 60
days. It is good measure for the efficiency of a company in ordering and managing its
inventory.