Why are MRF’s shares prices so high?

  • Oct-24-2019

MRF is trading at 64,000 rupees. Most new investors think that it’s highly overpriced.

A 1,000 sq feet plot priced at 10 lacs or a 5,000 sq feet house priced at 50 lacs. If you observe properly both of them are worth the same i.e. 1000 rupees per sq feet. It’s just that the second plot is bigger.

Similarly if you consider MRF, it has only 4.2 million outstanding shares.

Infosys has 2.2 billion, that’s right billion with a B outstanding shares. Yes Bank has 2.3 billion outstanding shares.

Here’s what. 4.2 mil looks like 4,200,000. And this is what 2.2 billion looks like 2,200,000,000. Quite a difference, right?

MRF has a market cap of 27,000 crores and it is priced at 64k. Ashok Leyland has a market cap of 24,000 crores and its just priced at 70 rupees.

Both the companies have almost the same m cap yet one stock is worth almost 1000x the other stock. Why?

The answer lies in The number of outstanding shares.

  • More outstanding shares = lower price and less outstanding shares = higher price.

Imagine a cake. If you cut 4 pieces the size of each piece will be bigger. Now if you cut 12 pieces the size of each piece will be much smaller even though the size of the cake remains the same.

That’s exactly the case with MRF. Reliance Industries ltd has a market cap of about 8,00,000 crores yet its stock is trading at a much lower price. The answer is because there are more number of outstanding shares.

Whenever a stock rises to a high level like 5,000 rupees the company splits it. It means that if you own 100 shares worth 5,000 you’ll receive 100 more shares but the price will be halved.

So you’ll now have 200 shares priced at 2500 rupees. You didn’t make any money. Why did the company do this?

To decrease the price to make it affordable for retail investors. If there are very few number of shares, most people cannot afford to buy even a single share. What’s more attractive, buying 1 share of MRF or 1000 shares of Ashok Leyland. A normal person sees 1000 shares of Ashok Leyland as a better deal.

MRF doesn’t split its shares or gives bonuses. This is the main cause why the stock is not coming down.

If Infosys had not split its stock even once, it’d be worth more than MRF. It’d be worth in lakhs. But whenever the stock reaches 2000 lvl Infosys splits it to make it affordable for common investors.

Not splitting keeps speculators away from MRF. Also the people invested in this company stay invested for a longer time. But there’s a major drawback with this strategy, you cannot buy a lot of shares of MRF or Eicher Motors at once. If you want to place a huge order, you cannot do it. There aren’t so many shares available in the market.

Even Warren Buffett believes in this thing. That’s why his company Berkshire Hathaway hasn’t split its stock in the last few decades. That’s why the stock is worth 2.1 crores. That’s right just buying 1 share will cost you about 2 crore rupees. Crazy, right?

Don’t worry there are Berkshire Hathaway Class B shares which are priced at a few hundred dollars (130 if I’m not wrong). They move the same as class A shares.

This explains why MRF share price is higher.

Shared by Vikrant Chaudhari - Investor and an author.

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