Calibrating Exits from your Big Winners: Necessary? Models exist?


(aware) #21

Hi Vinod ,

There seems to be some problem with SCUF projected price.


(Vinod MS) #22

Hi Nani, SCUF projection is wrong. We need to Book Value. Here is the more optimistic looking table. See the growth required and P/E to be assigned. Again this is just illustration and not my estimates.

Business CMP Trailing PE FY14 PAT Growth FY17-20 Growth FY15E EPS FY16E EPS FY20 EPS Future/ Normalised PE Band Mean Rev FY20 P/E Price CAGR
Mayur 372.45 28.26 30.19% 30% 17.13 22.27 63.6 18-20x 18 1145 21%
Astral 675.6 49.18 29.70% 45% 17.86 23.21 102.6 20-22x 25 2565 25%
Ajanta 1514.9 24.21 118.41% 30% 81.34 105.74 302.0 22-25x 22 6644 28%
Atul Auto 535.5 20.12 15.01% 20% 30.61 36.73 76.2 12-14x 15 1142 13%
PI Ind 329 24.37 90.71% 25% 16.87 21.94 53.6 20-25x 20 1071 22%
Kaveri 722.25 23.6 62.14% 30% 39.79 51.72 147.7 20-25x 20 2954 26%
PolyMed 503.35 25.73 79.07% 30% 24.45 30.56 87.3 20-25x 20 1746 23%
Shilpa 418.55 19.05 75.94% 30% 27.47 38.45 109.8 22-25x 22 2416 34%
Avanti 696.55 9.09 131.04% 20% 99.64 129.54 268.6 8-10x 8 2149 21%
Alembic Ph 269.85 21.35 51.35% 25% 16.43 21.36 52.1 20-25x 20 1043 25%
SCUF 1415.2 2.86 BV 15.91% 25% 600 720 1758 2x-3xBV 3.5 6152 28%


(Kiran) #23

Great model Donald. Thanks for sharing.

I usually do a reverse DCF to figure out what growth the market is attaching to a particular business (I think we'll arrive at similar results as the underlying concept seems to be the same).

As an example, I'll take Astral. It made a profit of 77 cr in FY14.

Below calculations indicate that at current prices, the market is pricing 30% growth in Astral for the next 14 years. For my sell signal, I usually see if the market is pricing 30% growth for more than 10 years (or less, depending on my CAP estimate) and then get out.

Profit in FY14 77 in cr
Growth Rate 30%
Discount Rate 12%
0 77 77
1 100.1 89.375
2 130.13 103.7388
3 169.169 120.4112
4 219.9197 139.7629
5 285.8956 162.2248
6 371.6643 188.2967
7 483.1636 218.5587
8 628.1127 253.6842
9 816.5465 294.4548
10 1061.51 341.7779
11 1379.964 396.7065
12 1793.953 460.4629
13 2332.138 534.4659
14 3031.78 620.3622
Sum 3924.283

P.S: Of course, the subjectivity of discount rate is always up for discussion. Reverse DCF also has one flaw which is often overlooked, that of near-term superior growth at low cost. This model is not bullet-proof because of these two subjective points, but it has served me reasonably well so far.

(Vivek Gautam) #24

AS Raamdeo Agarwal beautifully put across retail investors book profits & professionals book losses.

Rs 1 lac invested in ITC in 1989 is worth 25 crores today N Rs 10,000 INVESTED IN WIRPRO IN 1980 IS worth Rs 500 CR TODAY.

Dont focus on size of fish but focus on size of ponds.Find ponds of big size n cos with big ROCE and stay invested for 5-1015 years till the opp size n roce remains high.

High ROCE imply good moat n excellent promoters with good execution.


(Dhwanil Desai) #25

Excellent discussion on highly relevant topic. Donald has [rovided an excellent framework that is useful in avoiding the optical illusion of “high P/E” is perceived as overvalued (or consequently low P/E perceived as under valuation!). In the past, I have fallen for the proverbial “erosion of margin of safety” argument and missed a few multi baggers. I think it’s a great framework for evaluating it from 2-3 year investment horizon.

I am illustrating my thought process currently (which, obviously, is an evolving process based on feedback loop and hence may change!)here if it makes any sense. Now considering that you are a long term Investor and consider yourself a part-owner of the business, the decision to sell/buy should be a culmination/optimization of three different perspectives i.e. 100% private owner’s perspective (business), an investor’s perspective (Return) and capital allocation thresholds (Risk). Hence three key question that one would ask before making a decision to sell or not to sell should be

  1. If I had 100% ownership of business, Is the current price attractive enough to sell it off to a private buyer?

  2. Can I say I be reasonably confident to generate 100% return in 3 years or 1000% return in 10 years?

  3. Is the current capital allocation within the threshold/limit set for a single business?

If the answer is 1) No 2) Yes 3) Yes then, it is a hold or else it is a sell

Even though, this may look a very simplistic framework, I think it covers majority of factors relevant for decision making

Question 1: A private owner will have a longer term perspective and ignore whether from 1-2 year perspective, it looks overvalued or not. So for Mr. Engineer, in his reasonable opinion thinks that 1000 crore sales is just the beginning and Astral, for next 8-10 years, can grow at consistently 25% without much difficulty and attain top line equivalent to 6-7 times current size! So, more likely than not, he would not be willing to sell not withstanding the trailing P/E is 50!

Question 2: However, Mr. Engineer’s assessment of excellent growth opportunity for the business may be necessary but sufficient condition for investor to stay invested! It has to past the test of “hurdle rate returns” which in my case 25%. So, I will evaluate whether it can double in 3 years or grow 10 times in 10 years. My judgement of fair value of Astral type business is anywhere between 2-3 times sales. Currently the market cap is around 3800 crore (3.6 times sales). It has to double from here to 7600 crores to meet with 25% CAGR return criteria. Now considering very favourable market conditions, the business will trade in the upper range, say 2.75 times sales. So, in FY 2017,in order to reach Mcap of 7600 crores, it should have achieved sales of 2800 crores, which is 2.6 * FY 14 sales. Hence, Astral has to grow CAGR 38-40% from here on. Is it possible with sufficient tailwinds? May be. Can I accept 38% CAGR as baseline? May be not. So for short term, the odds are stacked against an investor who has return expectation is 25% CAGR.

Now let’s look at the long term perspective say 10 year period. What is the expected top line growth CAGR for Astral? Let’s take base case of 25% (which in my opinion is quite aggressive as such). Thus, topline will be 9X in 10 years. However, as happens in most cases, the reversion to mean is likely to happen eventually! So, Mcap/Sales multiple of 2.5 shall be a reasonable estimate of fair value. If we apply this numbers, market cap is likely to be 25,000 crores in a “open sky” scenario. This means, 6.5 fold return from here on. Is it sufficient? It depends on whom you ask. But doesn’t meet my return criteria. So I will be inclined to sell.

Now, people may argue that margins may improve due to higher value added product etc. However, from what I could gather from management was that it is a volume game and not a margin game. They were forthright in saying that margin are likely to remain in 14-15% range going forward as well (an they have better visibility of product mix and margin profiles for the new products).

Question:3: This question relates to individual’s risk bearing capacity. This is one mechanism which can protect investors from negative black swan events and hence is a must! It has to be adhered to as strictly as one adheres to strict stop losses in technical calls. So, irrespective of answer to the above two questions, if the allocation to a particular business goes beyond 25% of my portfolio, I will trim the exposure to bring it to 25%. This ensures for me peace of mind and protection against any negative black swan event in particular business/industry. The threshold number may be different from different people, nonetheless, it is a “must have” before constructing a portfolio!

Now having illustrated this, I would like to point out to one caveat. One can stick to this framework in its current form, if there are enough opportunities to deploy money in alternative investments in which the investor has same conviction level and investment can generate the expected return (25% CAGR) over medium/long term investment horizon. However, in case of absence of such opportunities, I personally would bring the bar lower for returns from existing investments ( I would be happy to stay invested with Astral/Cera giving 20% CAGR as compared to hurdle rate of 25%) rather than bear the risk of reinvestment!

The only time when it makes sense to sell and remain partially/fully in cash when the overall market is overvalued (as suggested by Donald, if it is 1 or two SD away from mean)

Best Regards

Dhwanil Desai


(Subash Nayak) #26

My 2 cents here.

Recently, I read Basant Maheswari’s book “The Thoughtful Investor”. One good learning from it is that in bull market, stocks can quote in 80-100+ trailing pe range. So one should not chicken out after observing a 50 pe astral.

From behavioral science: People’s irrationality pendulum can swing way more, and hence make no sense in underestimating it :). When we have invested at the peak of people’s pessimism, why not wait for peak of people’s optimism (or near it) for selling.

Another gems from Sanjay Bakshi sir, where he has shown how investing in Nestle at its highest peak pe, still gives good return in 10yr down the line (that too market beating return). See no reason why Astral/Cera combo cant be next nestle. We should not under-estimate indian middle class, and their appetite for real estate.

From guru buffett, whose simple teaching are hardest to implement: One should think stocks investing, as ownership of business. If you think in this way (which I do), there is no option but to load stocks with honest/capable management, with proven track record, low pe, and high return ratio, good sales/np growth at decent valuation, and forget. No see market price (or pe) on daily/monthly/quaterly make no sense. One just need to track business development for determining exit price.

Macro-economically speaking, we are far far from peak of a bull market. Be it national growth rate, retail participation, market pe. So no need to be fearful for high pe stocks.

However, make sense to book some profit, trim position, if someone feel uncomfortable with such high pe stock. But to sell the winner just because of high pe seems not a smart decision to me (I know few friends repenting their sell decision of astral at 35-40 pe range)


(ashaggarwal) #27

First of all, kudos to Donald and Vinod for trying to map range of scenarios - its much better than plain saying great secular growth company so its a buy at any price.

one of the main reasons that valuepickr portfolio has outperformed ALL paid subscription services is the focus on undervalued quality businesses - if VP also focuses on greater fool theory, returns will be lower and risks higher.

another way to look is how many of us will buy these stocks at current prices?


(manish) #28

When we talk about investing , after business and mgmt analysis, we have to do valuation of the business to ascertain if we can invest in the stock. So same way we have to do the valuation again for selling decisions. I think it is important to sell or reduce holdings when stock seems over valued otherwise why talk so much about valuation in the beginning , just find a great business and invest at whatever price it is quoting. ( growth is part of value as per Buffet ). The selling decision has to be based on other opportunities available in the stock market and elsewhere.

Also, i feel the example of investing in Nestle during its peak is not fair. This is just one standalone case , we have to compare a scenario of investing in a basket of high quality stocks ( 5 - 10 ) during their peak and then compare returns NOT with market returns but with returns generated from investing in other stocks which were available at cheaper valuations.


(Administrator) #29

Think the first round of opinions have been exchanged.

There’s not much to be gained by way of opinions exercised or anecdotes shared from Guruspeak - unless they are backed up by solid data. No insights gained - when it’s one opinion vs another.

The objective of this exercise - should not get drowned in the cacophony of opinion-bazi!Request all to focus on sharing evidence through personal examples in previous bull-markets and/or data from hand-picked examples.

That will make for objective discussions - something that ValuePickr prides itself on.


(Ashwini Damani) #30

Question we also need to ask is, do we want to take advantage of Mr. Markets’s irrational exuberance. In a bull market fair value of a stock makes little sense (we have always seen that in the past). So we might loose out on a lot of gains, if we stick to fundamentals alone.

Why wouldnt you want to take advantage of Market’s irrationality.

If we look at all past bubbles, the stock has always gone up far beyond fundamentals. Thoughtful Investor summarises that the last upmove has always been the most astonishing. Well known examples beingInfosys in Year 2000, Bhel/DLF/Unitech in last bull run.

A stock price can always be simplified as Price = EPS * PE.So the price goes up, either due to earning expansion or PE Expansion.PE Expansion would obviously happen in two ways, one is the re-rating for strong fundamentals (predictability of earnings, corporate governance, balance sheet strength etc etc). The other part of PE expansion is when crowd catches fancy for a stock. They are willing to pay any price for the stock, and start factoring irrational growth rates.

So if market is willing to pay, we should be ready to grab it

How to protect downsides

Catching the top is not easy.

1). One must either be ready to leave a lot of money on the table (May suit some investors), or

2). One may plan to ride the stock, and sell when one sees the breaking of a trend. Lets take the hypothetical example of Astral. Say it hits irrational price of Rs. 1000 by Dec’14, someone selling today at stretched valuations of 700 loses out on 40% gains.

2a)Way out could be, sell part of your stake now (make balance free cost). This way you are safe and at the same time, ride the train.

2b) More professional traders/experts would ride the full quantity as long as possible. They will sell only if the stock falls 10-20% from a new high. (In this case consider selling only if stock after making a high of 1000, falls down to 800-900 (You may have the heart burn of not selling out at 1000, but no one can time the entry/exit. So just take a consolation and move on)


(Ashwini Damani) #31

Another important price barometer (which I posted wrongly on the scorecard page) is the price consolidation trend. I have been doing it with Repco and Page. They move up suddenly, and then stay within 10-15% band of the new high, undergo time correction and then resume the next upmove. If we observe the price history of Astral also, it has always suddenly risen fast,peaked and then consolidated within 10% band.

1). We just need to keep checking overall valuations vis-a-vis market size , and

2). Whether the growth is chugging along.

Gruh is a classic example. Everyone called it too expensive at 7 times Book value last year, but look at the price movement in past 1 year. It underwent time correction, consolidated (never going down more than 20% of its highs) and continues its ascent even now.


(Anas) #32

Model i read somewhere in falling markets 20% drop from peak is a full sell signal for a stock. It seems a layman’s approach, however kind of minds at work here target would be not to let go off that 20% also. To detect a peak is difficult but atleast maximum juice can be obtained.


(Donald Francis) #33

Thanks a lot for the diverse range of inputs pouring in.

As requested, let's inject some life and objectivity into the discussion by bringing in some fresh inputs, followed up with hard data points.

1. It doesn't make for an objective discussion when we paint everything with the same brush!

2. We shouldn't start equating our biggest winners with Perennials like Nestle - and therefore make the case for staying put in our winners all through - because it may make sense to stay invested in Nestle through the frenzy/crash

3. As a first Perennials - have Pricing Power. Perennials also seem to belong to "low-ticket" staples and habit-forming (can't/won't use discretion) kind of buys.

Logically this should lead to Mr Market treating the Perennials differently - a lot more softly than other well-discovered businesses (without the Pricing Power) right?

Lets checkout if this hypothesis is borne out by actual data from the last bull market and subsequent crash in 2008-09.

Fall from Peak & Recovery: Some well-known businesses in 2008-09

MarketCap 31st Mar 2009

Peak Price

Peak Date

Low Price

Low Date

Fall from Peak

Needed Recovery from low

Peak Recovery Date

Peak +25% Date

Colgate

~6120

487.8

07/01/2008

347.9

17/07/2008

28.68%

40.21%

Nestle

19087.9

1875.95

14/05/2008

1253.1

17/11/2008

33.20%

49.70%

GSK Consumer

4020.84

752

03/06/2008

490.5

21/11/2008

34.77%

53.31%

ITC

70808.83

231.25

07/01/2008

149

27/10/2008

35.57%

55.20%

Sun Pharma

25966.63

7717.5

03/09/2008

4625

22/01/2008

40.07%

66.86%

Marico

3546.49

79.7

04/01/2008

47.4

17/11/2008

40.53%

68.14%

Page Industries

449.02

530

02/05/2008

302

13/01/2009

43.02%

75.50%

Asian Paints

10042.09

1290.8

05/05/2008

706

12/03/2009

45.31%

82.83%

Titan

4543.91

167.5

07/01/2008

70.04

12/03/2009

58.19%

139.15%

Pidilite

2967.21

193.6

03/01/2008

79.1

24/10/2008

59.14%

144.75%


(Donald Francis) #34

I think the case is made that Perennials are a different breed.

I think the case is also made that a Marico or an Asian Paints also do not belong to the “Perennials” club.

I had always wanted to know from Seniors - if you were to say decide to stay invested with 30-40% of your Portfolio through a frenzy/crash - where does it make the most sense??

Let’s try to get more finer-grained insights from data points and personal examples from last bull-market and crash. [There isn’t much point citing examples from what happened to different businesses in the last couple of years, is there?]

Let’s focus on comparing apples to apples.

Just what are the right examples)- for some of our biggest winners - from the last bull market/crash?


(Sagar Saxena) #35

I would pretty much concur with Hitesh bhai.There are two things that drive gains for an investor:

  1. P/E re-rating
  2. Earnings growth.

Now,a lot of factors affect P/E re-rating.Most have been well discussed here.One sure sign is improving liquidity & rising instl. interest.A few months back,Alembic Pharma was looking the best Pharma story in India…so many brokerage reports,high volumes,high delivery & a rising stock price.The multiple reached as high as 25x around Q4,before falling to 20x kind of levels.In all these months,APL is still at the same price while Ajanta has risen 50-60%.So,the question to ask is: 'How much is left for me on the table?'
In the case of Astral,can we expect 40-50% earnings growth & the current P/E going forward too? On the other hand,we have a stock like HUL,which,inspite of a 10-15% earnings growth,commands a multiple of 35x! This proves that quality can command a hefty premium in the ‘vanilla’ cases.So,even if growth moderates to 30%,the multiple can continue to be 35-40x.Now,the gains from here should be very moderated in Astral,because: Liquidity is higher,multiples are very high,growth/quality/moat kind of things too seem factored in.Again,can the stock re-rate to 60-70x? Won’t those valuations be crazy? I have read that in the Dot com bubble era,IT stocks like Infy traded at 100x+! This was irrational for sure,but went on for many years.So,the point is,once a stock has given phenomenal returns & doesn’t offer too much from CMP,shouldn’t we look at other stock ideas? Greed won’t pay off in the long run,as history tells us.

Disc.: Even though I don’t own Astral,apart from an emotional attachment,I wouldn’t have found it too hard to sell atleast 50% of my holdings.


(Aveek Mitra) #36

I am not sure why I was unable to copy and paste from a word file I just written a reply on this post…Administrator may please advice…

Attaching it as a file…

Views are entirely my personal and may not match many of you but a reasoned analysis would be good… Some may argue that I have learned wrong lessons and that view is perfectly welcome!

Calibrating-Exits.docx (14.9 KB)


(Donald Francis) #37

A new thread Assessing Value: To a 100% acquirer of the business.

This is an attempt again to bring everyone on the same page - “Size of opportunity” isn’t THE defining factor of Business Value…as many seem to be confusing it with…while being unable to differentiate that from the Business Value of Perennials.

That’s really a separate discussion…and best continued in that thread.

Just pointing fellow-learners to that thread …in an effort to again bring everyone on the same page, so we can do justice to the objectives of this thread…where would you draw the line? and How?


(Ankit Gupta) #38

Since I don’t have any personal experience of participating in the bull market, I had read in TheThoughtfulInvestor that Infy during the peak of Dotcom bubble went to a valuation of as high as 360 times P/E. So the author of the book was giving an example that even if one had entered Infy at a P/E of 30 times he would have still made a 12 bagger only from P/E expansion (I am not taking into account the earning growth that happened in Infy which was growing its earnings at 100% during those times). Also, one example I can recall from the book is of United Spirits. It went from a low single digit P/Es to high 40 P/E or even more than that during the bull run of 2008. What the author was indicating that the stock gave stupendous returns (some 30 - 40 times) despite being run by a not so ethical management and unimpressive earnings growth. We never know what valuations Mr Market can assign to a stock during bull run.


(JatinK) #39

I think we all should agree with Donald when he says we can't compare our Astral, Mayur with the Nestle & the Colgate.

So we should compare our stocks with some of the best businesses- but not the best.

So what happened to the 2nd best stocks in the 2008-09 crash?

I have picked 7 stocks for this comparison- some of the most respected stocks today (assumption is that these stocks 5 years ago were similar to what our stocks are today, so our stocks should fall similar in case of 2008-09 kinda crash). Here is the result-

Peak Price Peak Date Low Price Low Date Fall from Peak Needed Recovery from Low
Lupin 751 07-May-07 473 17-Mar-08 37.0% 58.8%
Bosch 5500 05-Dec-07 2700 01-Dec-08 50.9% 103.7%
Dr Reddy 830 05-Jan-07 372 06-Mar-09 55.2% 123.1%
Pidilite 194 03-Jan-08 79 24-Oct-08 59.1% 144.8%
Gruh 226 24-Dec-07 82 04-Mar-09 63.7% 175.6%
Eicher Motors 570 10-Dec-07 153 27-Oct-08 73.2% 272.5%
Indus Ind 134 11-Dec-07 26.55 06-Mar-09 80.2% 404.7%

So, clearly these fell much more than the Perennials.


(Donald Francis) #40

Thanks Jatin for the effort and sharing the data.

We can try with another 5-6 names maybe, but the trend is pretty clear to everyone. If you want to use a complete buy-and-hold strategy you are better off staying with the Perennials like Nestle, ITC, Colgate, GSK. Probably even an HDFC or HDFC Bank.

Trying to do the same with other well-discovered names is fraught with higher risks.

And if you cant execute buy-and-hold - that implies you have a very good chance to catch these well-discovered names after the crash, at lower than the crazy valuations they can start trading at the peak of the bull market.

No one is making the case that Astral is quoting at extreme valuations now. But there is no telling that it may not anytime soon - in next one or two years. If it does (and maybe some others too), why wouldn’t you have a calibrated exit-model and be ready to act on that??

Jatin - perhaps you will like to nail this down completely - with more solid examples. include HDFC, HDFC Bank and tryan Exide and a few others as good comparables against our quality small caps.

cheers