CA Final · Advanced Financial Management · Security Analysis
Anand Steels Ltd has a share price of Rs 240 and earnings per share of Rs 16. A peer group of comparable listed steel companies trades at an average P/E of 12. Anand Steels has similar risk and growth. Based on the relative valuation approach, which statement is correct?
The share is overvalued by Rs 48. Applying the peer P/E of 12 to earnings of Rs 16 gives an implied value of Rs 192, while the market price is Rs 240, which is Rs 48 higher.
- AThe share is undervalued by Rs 48 relative to peers
- BThe share is overvalued by Rs 48 relative to peersCorrect
- CThe share is fairly valued relative to peers
- DThe share is overvalued by Rs 192 relative to peers
Explanation
Peer-implied value = 12 x 16 = Rs 192. Market price Rs 240 exceeds it by Rs 48, so the share is overvalued relative to peers. Its own P/E is 15, above 12.
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