Nepal’s Safest Stock In a Volatile Share Market

Time and time again people in different settings that are somewhat interested in the stock market keep asking, “Which share would you recommend buying in the Nepalese Stock market right now?”. This article helps answer that very question without confusing

As many successful value stock market investors have quoted time and time again “Never put all your eggs in one basket” this analysis tries to establish that the chosen company Nepal Telecom (NTC) should not be the only company held in a portfolio, however its presence in a portfolio would in most cases boost the portfolio’s strength. NTC being one of the earliest companies in Nepal’s stock market is also the biggest company in Nepal in terms of market capitalization which is basically the combined value of all it’ shares. I have come to my conclusions about this stock with the help of fundamental financial book analyses, the macro environment of the Nepalese Stock market and the historical performance data of the company. This article initially explains the different aspects that indicates NTC as a good share to buy in the current market using different financial methods. However, at the same time explains these methods in Leeman’s terms for the simplicity of the reader.

Cash dividends instead of Stock dividends 
Every company that issues shares mostly provides cash dividends or stock dividends to its shareholders as a share of profits annually or sometimes in a longer time period. Cash dividends are basically a certain amount money given out to the shareholders from the profits earned in a year. Stock dividends are returns given out in the form of the company’s stocks to its existing shareholders. A 25% stock dividend would mean that for every share held by a shareholder an addition 25% of a stock would be given to them. 

NTC for the past decade and more has been known to be a company that doesn’t issue stock dividends/bonus shares to its shareholders and instead always provides cash dividends year in year out as a share of profits. After working at ABC securities for over 6 months I have noticed a trend in the Nepalese investors that they are mostly seeking to invest in companies that distribute bonus shares or conduct right issues. They believe that these companies have the highest potential for profits, however that is only one-sided view, especially when most of the companies in Nepal in the recent years have conducted exponential right and bonus issues simply to meet regulatory capital requirements. A general rule of thumb in finance is that debt is always cheaper than equity. Thus, a company always resorting to equity financing can be perceived a one with less confidence in itself as equity doesn’t need to be paid back unlike debt. NTC doesn’t give bonus shares and instead provides cash dividends to its investors, which can be interpreted as the company valuing the ownership of its shares more than simple profit retaining. Though it can be argued that NTC doesn’t release more shares in the market due to it being a state-owned company, it nonetheless tells us a lot about the financial strength of the company as well as the confidence of its board towards the company, thus showing massive potential. To further back this idea, we can take the examples of most successful companies in the world such as Apple, Berkshire Hathaway, Coca Cola and many others in the S&P 500 or Dow Jones who have not provided stock dividends and only provide cash dividends to its shareholders for decades after a certain period of growth. Obviously, NTC is not anywhere near in the level of these companies, in terms of the Nepalese market it is on the major stocks with the highest market capitalization of Rs 115,950,000,000.

Low price to book value (Undervalued) 
The price to book value of a company is the price of a company’s stock in the share market compared to its actual value as per its financial statements and figures. Generally, the price of a growing company is higher than its book value. The difference between the price and the book value is mostly due to the positive sentiment of the market towards the company, its goodwill value and other expectations. The general rule of thumb is such that a growing company with a low price to book value is an undervalued company in the market, with the potential to evaluate in price in the near future.

The price to book value is relative between industries, a figure can be good for one industry and bad for another. NTC being the only publicly traded telecommunication company in NEPSE does not have other companies in its industry to compare the P/B ratio with. However, a 0. 99 P/B ratio (as of today’s price of RS 700 and Book value of Rs706) for a company with an average return on equity of 11.23%   a year in the past 5 years low and is a sign that it is an undervalued stock. Historically, NTC has not been a company with volatile price rise, thus it is not likely that the price will sky rocket, but on the bright side, it is highly unlikely that the price of the company will fall (which many optimistic investors fail to consider) from the current price unless there is an unforeseen event. Hence making it a safe investment in an unstable Nepali equity market. 

Competition, Micro environment and future prospects 
In terms of competition, NTC only has one direct rival in Ncell. These two companies have the monopoly in the telecommunication industry in Nepal. Though Ncell is a fast-growing company with strong foreign investments from the Swedish company Axiata, it has actually helped NTC become more competitive especially for a majority state owned company. With recent agreements between and Nepal and China for the development of new fibre optic lines between the countries, it only opens up more possibilities for the telecommunication sector. And in terms of regulations NTC would be the more favoured company being state owned over the foreign owned Ncell. Also, for the past few years, news has been circulating around that there might be a partial foreign investment in NTC itself. If this just ends up happening in the future, shareholders in that period would really benefit with massive price growth. Though this is just a rumour with less evidence, it can be one of the many reasons to buy NTC stocks. Even if the probability of foreign investments in the company is low, it is a risk worth taking as there is little to lose with the current price compared to the massive potential growth in the future if it does happen.

Verdict 
NTC with an average return rate of 11.23% will not be the company in a portfolio to bag massive profits for the investors. However; it is a company that is very consistent with returns, a low possibility of price fall from today’s price and a possibility of growth in the future, thus making it an ideal company stock to be held as the backbone of an equity portfolio. This allows the investor to add more bullish Nepali equity market drivers such as micro-finance and insurance companies to their portfolios and still manage to afford the risk.