VP CHINTAN BAITHAK GOA 2015: Ayush Mittal: IDEA GENERATION

Ayush
Thanks for taking the trouble to reply.

I have been struggling to make sense of valuation. I have a few thoughts on this so please allow me to give my two pennies worth of opinions. I am normally hesitant to comment as I feel this forum is way above my abilities, with a quality of analysis that I only aspire. So I rather read and learn. I have learnt a lot and perhaps replies to this post will help my search for enlightenment.

My experience tells me that a portfolio suffers greatest damage when bought at too high a price. Or more specifically, as someone said, to buy poor quality stocks in a bull market. Those who buy ‘cats and dogs’ that rise in value during bull markets are left with junk when the bears rule.

By definition therefore, value first has to be quantified, with an approximate number, prior to any transaction decision. Margin of Safety, Deep Value investing etc are concepts that reflect this belief. Without quantifying value we are paying ‘lip service’ to the underlying principles.

Whilst reading around the subject I find that everyone talks of value. Switch on the TV here and the gurus refer to it. Often enough I hear that them say that ‘shares are cheap’ or that shares are at ‘mouth watering valuations’. A relatively cheap share is what everyone wants to buy. Rarely do they say what makes it cheap. Maybe these are trade secrets.

Yet if one digs deep enough there are pointers to how value decisions are made. In my recent discovery of the website “manual of ideas” (thanks to valuepickr) I find some, not all, use screeners to identify stocks according to a chosen criteria, and then determine the price/value matrix prior to commitment. I have yet to read the book so can’t comment on their valuation methodologies but there are pointers that they do.

Elsewhere some analysts refer to various relative valuation measures like PE, P/bv P/s multiples etc. In other cases, others like the Relaxo analysis refer to Buffet’s reverse dcf to value implicit growth. Still others refer to Damodaran or Copeland etc try the dividend discount model or dcf or whatever.

But the question is what works and when? (P/b for finance, nbfc etc) Is there a workable methodology? This is an answer I am looking for, from the successful investor, the horse’s mouth so to say. Not the text book or the theory.

In light of the above my point is : at first instance for you is it just low PE or what different measure, as appropriate to each industry, is used?

Ayush, the one takeaway I get from your reply to my query is to first find a metric that suggests cheapness. Eg low PE. Follow this up with identifying, qualitatively or quantitatively, what makes it so. Much like Peter Lynch’s suggestion to use your preference for a brand of doughnuts as a starting point for further reasearch.

Many thanks & regards again from,
Kumar

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Hello ayush sir.we have learnt from grahams book to buy high qualitycompanies at cheap price.His book suggests not to pay more than 1.5 times price to bookvalue to compnies.but many companies which have high roces and roes are trading at high price to book values.sir what is the comfortble price to book value we can give to companies whichi have average 5 year roes of example 1.15percent 2.20 percent and 3.25 percent

Think of Price to BV in ref to the ROE of the company vs the 10 yr bond yield (risk free rate of return in India). For eg if the current bond yield is about 7.5% then for a company having ROE of 20%, the price to BV should be atleast 3 times. However, practically the P/BV is usually way higher as its not easy to have consistently high ROEs. Also, its a function of growth, payout ratios and lots of other things.

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Sir, can we apply above-mentioned 0n Mirza int.for only to develop understanding.where p/e is in early double digit,p/bv 1.5,ROE 14.5,ROCEis 19%.Company is trying hard to in home market and doing every effort to develop a brand.In shoe market comparing with its peer mirza is one of cheapest with one of highest OPM.
It’s product quantity ( like memory foam, light on weight, durability, superb design ), expanding product range & diversifying product and attractive pricing( available in ₹1500-2000,which is approx.half available in market with same quality or in e- commerce plateform).So it seems that long-term opportunity is huge
The speciality of the company is Suja Mirza who is in command.He is like a change-agent for company,and has a capacity to scale-up.
Suja in his last concall promising to address the corporate governance issues with time.Its a risk as of now which can be ignored or not is a individual’s subjective judgement.
Sir am I thinking in right direction or not, please tell.
Disc-invested for watching

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Hi,

Yes, my thoughts have also been on the similar lines. However, there have been concerns on high inventory and margin pressure in recent quarters. So one should keep a tab on that too.

Regards,
Ayush

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@ayushmit hey Ayush … thank u for the wonderful inputs … I wanted ur views on the EV theme … any companies u are following or how to go about the sector … should somebody look into metals Such as copper , lithium , graphite … and the companies which deal with them or automobile companies … I am very bullish about EV for next 10-15 years and want to build up a portfolio accordingly … ur valuable inputs would be highly appreciated … regards
Aadhar

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