CA Final · Advanced Financial Management · Security Analysis
Sundaram Textiles Ltd. has a current market price of ₹180 per share. Its EPS is ₹12 and it retains 40% of earnings. Its peer group trades at an average P/E of 16 times. Using the peer P/E multiple, the intrinsic value per share and the investment view are:
Intrinsic value equals EPS of ₹12 multiplied by the peer P/E of 16, giving ₹192. Since the market price of ₹180 is lower, the share is undervalued and a buy is indicated. The retention ratio does not enter a simple P/E valuation.
- A₹192; share is undervalued, so buyCorrect
- B₹180; share is fairly valued
- C₹115.20; share is overvalued, so sell
- D₹192; share is overvalued, so sell
Explanation
Intrinsic value = EPS × peer P/E = 12 × 16 = ₹192. Market price ₹180 is below ₹192, so the share is undervalued. Retention ratio is irrelevant here; using 12 × 16 × 0.6 = ₹115.20 wrongly applies the payout ratio.
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