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Edelweiss : Vagaries of the market

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Edelweiss Financial Services listed on the stock markets at around Rs. 1400   in 2007, which was at 75% premium to its offer price of Rs. 825. It subsequently made a high of Rs. 1608 on NSE. The chart below presents a snapshot of price performance and important fundamental parameters in 2007 and 2015. The stock underwent a stock split and a bonus issue so stock prices are adjusted accordingly.

Edelweiss Performance

After adjusting for corporate actions, the IPO offer price would be around Rs. 83 and post listing price high would be around Rs. 161. The company has gone from strength to strength over last 8 years and has moved from being a diversified group on paper to a profitable diversified group for real.

Sales over the period registered an annualized growth of over 30% and net profits posted an annualized growth of around 15%, but the stock was so hopelessly overvalued at the time of the IPO that the stock prices have not been able to recover to those levels since. The fact is that the performance of the company has only just matched what could have justified its IPO price in 2007. But, the market saw it fit in 2007 to list this stock at a premium of over 75%, a price that it sees no longer fit to be paid for the same company which today is much more profitable and diversified. The stock today trades around Rs.60 with a trailing PE close to 15.

There is a common saying in trading parlance: “Market is always right”, but when we see price behavior of companies like Edelweiss (and believe us when we say it there are quite a few similar examples), we do feel like asking Is the Market ever right?

PS: We are only illustrating how fickle can markets be with stock price of a company relative to its underlying fundamentals. The charts of this stock are indicating some very interesting developments that might have significant impact on the price performance of the stock in the near future. This is not a trading or investing recommendation.

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