Why are the Stock Prices of a Few Companies so High?

Have you ever wondered why some stocks are trading at very high prices? For instance, MRF is trading at a whopping price of Rs 130,000 +, Honeywell Automation and Page Industries at around Rs. 35,000, and Bosch and Abbott India at Rs. 20,000 +. So, what is the reason behind such a high price? Do these companies have high profits or EPS compared to their peers, or are they trading at very high P/E compared to other peer companies? Let's take a deep dive into it.

Reasons for High Stock Price

To know the reason of high price, we compared the data of a few companies that have high stock price vis a vis their peers:

Source; Screener, as on 1 Mar 2024

Comparing face value

It is observed that companies with high stock prices have a face value of Rs. 10 for their stocks, whereas their peer group companies have a lower face value of Rs. 1. This means that the share price of lower face value shares also reduces in the same proportion. For instance, if the face value of an Apollo Tyres share is also Rs. 10, its share price will be 10*530 = Rs. 5300, which is still significantly lower than the share price of MRF. This holds for other comparable sets of companies as well. It means that face value is one factor that creates the difference in the price of comparable companies but not the sole factor.

Comparing P/E ratio

The market price of a stock is determined by multiplying its EPS and P/E ratio. If a company's P/E ratio is higher, assuming the EPS remains the same, the stock price will also be higher. Looking at the table above, we can see that in the Tyres and Readymade sector, the difference in P/E ratio between peer companies is significant, which justifies a 1.5 to 2 times higher stock price. However, in the case of Bosh and Motherson, the P/E ratio is the same, indicating that a higher P/E ratio is not the only factor contributing to a higher stock price. While it may contribute to some extent, its impact won't be that significant.

Net Profit and EPS

As per the table above, companies in the Tyre and Auto Ancillaries sector have nearly identical profits. However, there is a noticeable difference in their EPS. EPS is directly proportional to net profit but also depends on the number of outstanding shares a company has issued. Let's determine the number of outstanding shares for the companies mentioned above.

There is a significant disparity in the number of shares issued by various companies. Companies with higher stock prices tend to have fewer shares issued, which results in higher earnings per share (EPS) even with comparable profits. This is evident in the case of Bosh/Motherson and MRF/Apollo. However, the situation is different for Page and Rupa, where the price difference is due to face value and profitability variations.

The companies with higher stock prices also command higher P/E ratios because fewer shares are available in the market and demand is high. Because of the high EPS and P/E ratio, the share price is significantly higher.

But why do these companies issue fewer shares and not split their shares? 

When a company is formed, promoters need to define the authorised capital of the company. In the case of MRF, their authorised capital is Rs. 10 crore. It means this is the maximum share capital they can issue. If the face value is Rs. 10, with this authorised capital, they can issue a maximum of 1 crore ( 10 crore/10) shares. On the other hand, Apollo Tyre’s authorised share capital is Rs. 1,575 crore, which increased from 75 crore in 2020.

The other determining factor is the paid-up capital. This is the actual no. of shares issued by a company. MRF's paid-up capital is only 4.2 crore. It means they have issued only 42 lac shares of Rs. 10 face value. If they reduce the face value, the no. of shares can be 10x, i.e., 4.2 cores. In this case, paid-up capital also remains the same. On the other hand, Apollo Tyre's total paid-up capital is INR 63.51 cr. Apollo Tyres issued 63.5 crore shares of face value Rs. 1.

The Authorised Capital limit is specified under the Capital Clause in the Memorandum of Association. If a company want to raise capital further, either promoter can dilute their stake or the company can increase their paid-up capital. However, authorised capital can be increased only by changing its article of association, and change should be passed by the resolution by its shareholders.

Authorised and paid-up capital can be one of the reasons. However, higher stock prices could also be due to better financial performance, higher P/E multiples, or other reasons.

Why high stock price companies don't go for a stock split 

Stok split is the corporate action where a company decides to reduce its market price to increase liquidity by reducing the face value of the share and increasing the number of shares. But why don't a few companies go for splits? The following are the possible reasons:

Exclusivity: Higher stock price gives an impression these companies are performing well and cater to the premium segment, and these companies want to maintain that status. These companies want to concentrate their shareholders with a limited number only so that exclusivity and demand for their shares will remain in the market.

Less intraday volatility: The no. of shares of these companies is limited, and so is the trading volume. Low trading volume helps these companies to avoid intraday speculation in their stock price.

Conclusion

From an investment perspective, you should not focus on the stock price but on the growth and valuation ratios to get a correct picture. High-priced stocks don't signify that stocks' growth potential, but it is the result of the factors discussed above