I would like to highlight following points which have emerged after discussion with my equity adviser-
We all visualise that market is ready to pay a particular high price to a particular stock. But this high price is a result of demand and supply equation. Prices can go high due to excessive demand or short supply…the later may be a case with D-Mart…we need to quantify the availability of its shares in the market…as i know its much less as compared to other stocks as majority is being owned by the promoters…The balance 15% or so which is available in the market may be in the hand of very few who might be creating a artificial short supply…so with the reputation of a great business along with a short supply creates a recipe for high valuation. Those very few might be people with very deep pockets who have the capability to influence the market and if these big bulls do not release the supply, high valuations will continue.
If promoters have recently sold the shares at a PE of 40, this gives us a hint about correct valuation for the stock. A lot of clarity emerges when we compare the stock with the real estate. If a person is selling a land at some particular price and the seller happens to be a savvy investor himself who is well versed with the future prospects of the Indian Market, he will not certainly sell his property at a huge discount. Only in the situation of great financial distress, he will opt so. But this does not seems to be the case with D-Mart promoters. For them, they needed good money which can be utilised for the expansion of the business. So they must have not sold it at a great discount to its intrinsic value.
Promoters of India’s favourite drink frooti have never bothered to launch an IPO because they have ample money…
- I wonder which are those institutes and professional money managers who have purchased at a PE of 100…i think mostly they will be retail investors and as always retail investor will lose money in the game.
With these thoughts, a 1 year past PE below 40 is suitable to enter which in turn means a long drawn patience. Even a 1 year fwd PE of 40 with a visibility of 20% EPS growth currently means a price of 688.
This a hypothesis of mine as i have not really collected any data but just went through the threads of fellow investors on this forum. I request for your views as D Mart present a good learning lesson for us…( not invested but resisting hard to not buy at an overvalued price…)