I’m not quite sure about determining the importance of the egg in a French toast based on the importance of the bread. Margins of safety can exist within almost any metric one can imagine including those that can measure some elements of quality. Good views though. I hope to learn more.
It all depends on growth
It Dmart grows at 50% over next 5 years, the pe is then around 15 on same valuations.
If you read Jafferies report on attached link, it looks like a conservative target.
At 40% it is 6 years for a PE of 15. Most mature economies where penetration is almost 100% supermarkets are valued at around a PE of 10
I highly doubt we will have a 100% penetration within 5 years so even at pe of 15 after 6 years this might be cheap
Please read the attached, it looks like 50%+ over next few years is easily achievable
Another way to look at it is a PE of around 20 from year 5 so the growth then needs to be 30pc for next 5 years.
Have you accounted for dilution to achieve such high growth?
The raised 1870 crore in the last IPO
Today their 4 quarter profit after depreciation is roughly half of that
They dont pay dividends
Depreciation is not cash flow negative
They dont have huge debt on their books
Reminds me of the “Flywheel model” from good to great by Jim Collins
Not to mention its headed by Radhakishan Damani whom Rakesh Jhunjunwala says is his guru
Some Excerpts from Quality Investing Book (Cunnigham,Eide,Hargreaves)
In Quality Investing, as in any investment strategy, the risk of over payment exists but far less than one might think.The risk of over payment is also offset by general tendency of stock markets to under price quality companies.Share prices, even when at seemingly high valuation multiple, often fail to fully capture the combination of predictability and value creation such companies offer
When investor perceive valuation multiples of quality companies to be too high,we refer to the companies as tomorrow stocks.Many investors might agree that some of the companies we have been illustrating are great companies . They just want them cheaper and wait until ‘tomorrow’ when the price might decline.The problem is that the day seldom comes;if company keeps delivering operationally its relative valuation multiple rarely contracts.
For investors seeking to profit in the stock market over the short term , the 80% figure underlines the importance to them of determining the right valuation multiple. Consequently every bit of information that might justify a change in stock’s multiple , however scrutinized ,while longer term earning power and predictability is subordinated
Companies that are consistently able to deploy cash at high incremental rates of return often exceed earning expectations over the long term. In such cases (Pattern examples: Low Cost Producer ,Recurring Revenue,Pricing Power,Brand Strength,Toll Roads,Friendly Middleman etc) superior cash flows , margins,return and growth can be sustained and even improved over long periods of time.Focusing on such businesses reduces the chances of error in cash flow forecasting and therefore the risk of permanent loss of capital . So while the valuation premium of such companies may reflect solid expected operational performances, they often underestimate actual performance .Thus stock prices tend to undervalue quality companies.
Apple is at all time high
Samsung and android is eating into their profits
But warren buffet found it cheap and recently invested
Your cited article is spot on
Too much optimism…if it hit 20% lower circuit…I am sure …there will be 180 degree change in comments in this forum
In the evening you come home tired, you keep milk on stove to make some tea and as ask your parents or wife to keep an eye while you change
The milk boils over and spills and everyone gets into blaming
What was your point about 20pc lc, when will it happen ?
You need to keep 1/10th holding in a script
Anything can go wrong
Even big bulls have lost 5 out of 10 bets
The way I look at “exit multiples” is fundamentally.
In the long term, no company can grow faster than the economy itself. Doing so would eventually make the company bigger than the country, which is an absurd picture. A tiny company can grow at 75%-90% of the economy. A medium-sized company at 50%-75%. A large one at lesser than 50%.
In turn, the economy itself cannot grow more than the Risk free Rate (In fact, a little lesser than that), because of the way interest rates work. Currently, we see than the RfR is around 7.5% and the economy is growing at 7% (So, at about 93% of the RfR). The long term RfR is around 8%.
Based on fair knowledge of the Indian Corporates, the average Cost of Capital is somewhere around 13%. However, I’ve seen, during my several Valuation exercises, companies with a Cost of Capital as low as 10%.
An alternative way to arrive at the 13% figure: using the CAPM. In the long term, companies become the market. So, their Cost of Capital as per CAPM would be just the long term returns on the indices, which happens to be 13%.
Considering Gordon’s Dividend Discount Model, we could say that an “exit multiple” is simply: 1/(r-g), where r = Terminal Cost of Capital and g = Terminal Growth Rate.
Putting all this together, an “average” medium-sized company would have an exit multiple of 1/(0.13-0.08x0.9x0.75) = 13.15.
You can fill in for the rest.
If someone is invested fully and any one stock is a significant portion say (25%) of the portfolio then a LC can give some jitters. The real jitters will be when the company starts to do badly over a period of time. But if the person has a regular income to invest then he can ride out the storm and increase average at lower costs over a period of time.
I had a very small holding in Bajaj Finance. In Feb '2018 it fell from 1950 to 1582 per share. After some time it started moving up slowly which was when I increased my holdings in Bajaj Finance to close to 6% of my portfolio. But if someone had a leveraged trading position then the story would be different. I had to give back 40% of my yearly gains in the trading portfolio during the steep fall of Early 2018.
Can we identify few Indian companies which meet the criteria?
If we keep aside all complex finacial numbers and calculation and see the other aspects then we can see the trust level preety high in investors for this company.
- Management honesty - We all know the story of Mr. R K Damani. Perfect example of rags to riches without taking any unethical procedures. Still he is a investment Guru to many people.
- They have highest paying CEO in India and that also a fresh buainess mind.
3.They own all their stores and not going into lease contract. We all know the importance and difference between rented house and own house.
- They are aggressively opening 2/3 stores each quarter. They have zero presence in eastern and nort eastern India. Think the possibilities of business expansion in that region.
Excellent Post. Just go through the whole thread and feel the pusle of this thread . 80% post are bearish citing valuations which clearly indicates the majority mindset. Remember it when everybody is saying expensive that means it is not expensive . When everyone saying cheap it is not cheap. Keep it simple.
That’s correct a company cannot grow bigger than the country
But it can grow 2-3pc of its gdp
Wal-Mart USA recenue is around 2 to 3pc of USA gdp
Even if Indian gdp doesn’t grow which is unlikely taking Dmart revenue to 1pc of current gdp is 1.66 lakh crore
Current revenue is 1.5 thousand crore
So their current revenue is at 0.01pc of gdp
There is a lot of room for growth until we assume Dmart revenue might gobble up the entire gdp, gdp itself is growing faster than most economies
Also if the company expands its manufacturing and there is demand the growth is not linear
The models are a rough guide to value established businesses in an established sector
So 13pc multiple for paper industry is great but you and I know that for commodities the exit multiple is much lower !!!
That’s the problem with models
Models try to establish what otherwise would be all smoke and mirrors. Models assign a Value based on an emulation of the real world as much as possible, which would otherwise be guesswork. So, it’s not so much that a Model is useless, it’s the capability of the user to decide the inputs and support them with facts grounded in reality that makes it good or bad (Ex: The difference between saying “A 15 exit multiple is decent” and actually justifying where that number came from, like I’ve attempted to do).
Your number comes from based on “fair knowledge of Indian corporates”
If you have a good knowledge then I am sure you are already rich with money earned from stocks with models
Academics like modes came up with efficient market theory as well
And they are all doing great in stocks
They are raising 1500 crore in debentures as per today’s filing
@edwardlobo - It helps to be open to all ideas, even to ones you don’t personally believe in. Knowledge and intellect aren’t the only things required to make money in the market but having it definitely helps. The academic models by themselves aren’t bad ideas - but knowing their limitation and knowing when to use or when not to, is as much important as knowing them. The important thing is to not be closed and let ideas and knowledge come in from all sides - you never know where the 5-10 best ideas that will define your life will come from.
Don’t ask me if I can this back this up with my riches - I think its a crass way of looking at things - as in judging something based on outcome. I think judgement should be done based on the process because that is what is within our control. With enough work put into the process, everyone will eventually get what they deserve - more or less.
I agree sir but when I said roughly 15x and someone backs it up with formulas which are based on “ones fair knowledge” and says it’s 13x what do you say
It’s not an exact science so 15x or 13x is both within range
I am sorry if I am across crass
Will try to put my thoughts more coherently