Saturday, September 6, 2008

Review of a small cap stock being invested under Systematic Investment Plan (SIP):

We had started investing Rs 5000/- approx. in "India Glycols Ltd." under SIP from 7.6.08 onwards on a monthly basis around 6th of every month. Till August'08 we have made three purchases as below:

1) 07.06.08: Let us expand this concept further through a real life example. Let us select a good growth stock first, like India Glycols Ltd. Its closing price as on 6.6.08 is Rs.280/-. Let us invest approx. Rs. 5000/- per month in this stock on 6th of every month. Let us buy 18 shares of India Glycols Ltd. on 6.6.08 @ s.280/- for a total price of Rs.5040. 2) 05.07.08:Let us buy now 22 shares of India Glycols Ltd. on 4.7.08 @ 232.50 for a total sum of Rs. 5115.Now, as on 5.7.08, we will have 18+22=40 shares @ 253.875 per share.3) 6.08.08:Let us buy 23 shares of India Glycols @ Rs. 217/- on 6.8.08 for a total sum of Rs. 4991/-.Now as on 6.8.08, we will have 18+22+23=63 shares @ 240.41.
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4) 6.9.08: Now, let us make our 4th purchase of 25 shares of India Glycols Ltd.@ Rs. 203/- as on 5.9.08 for a total consideration of Rs.5075/-. Our average price for 63+25=88 shares is Rs. 229.78.
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Our first observation of SIP is that ever since we started buying this stock it has been falling, therefore, no of shares that we are able to buy every month for about Rs.5000/- is increasing and our 2nd observation is that the average purchase price has gone down to Rs. 229.78. We, therefor, are able to average out the purchase price from a peak of Rs.280/- to Rs.229.78.
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Our expected price range for this stock for the year 2008-10 is between Rs. 200/- to 550/- to 900/- and for 2017-2018 is Rs. 2500/- to 3500/-. Stock is ruling at yearly lowest price of Rs. 203/- and expected book value of Rs. 234/- and substantially below its intrinsic worth of approx. Rs.750/-. Investment in the stock is likely to give exponential returns to the tune of 15-20 times in next 10 years time. This is one of our most preferred stocks for very long term investment which is likely to give compounded annual return of 30-35% p.a.over the next 10 years.

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