I will not go into the valuation debate, people on this forum are probably more qualified about it. I am simply putting forward these observations:
A FMCG company having grown its earnings by 10% over the last decade is quoting at 77 P/E on decadal high margins (HUL)
Another FMCG company having grown its earnings by 28% over the last decade is quoting at 26 P/E on decadal high margins (GCPL)
An exchange in a duopoly regulated business trading at a slight premium to its cash on books (BSE)
All these three cannot be right, we can make our own bets.
About shree cements, I am fond of cyclical investing but I haven’t studied cement cycles. Plus, I never said Shree cement is a 2-bhk flat in Mumbai.
What I am trying to say is over extremely long periods of time (>25 years), we make money equivalent to growth in book value of a company i.e. market sentiment indicators (like P/E, P/B) become meaningless. However, there are really few people who will stay in a company for > 25 years and even fewer companies which will hang around for 25 years, so valuations do make a difference. That’s why I said investing is not about identifying great assets, but about identifying mispriced assets. And mispricing is something we only know in hindsight. We all have opinions and we express it in the market. My opinion is here, in case you are interested.
Also the bigger weights that I see in ur portfolio are PI and Larsen amongst others…
So can u explain why PI is not expensive and how Larsen is cheap. (assume its a loaded question, Larsen specially)
Also have u done detailed work on whether GCPL had inorganic growth or organic growth. How much have they gained/lost in Africa. How is their Africa biz shaping up. Or did you just check numbers optically on screener and made a decision
In last 30+ years what has been the book value increase in HUL and Nestle and what has been the price increase.
The biggest flaw in your argument is that u equate PE just with earnings.
Is there no additional points for Corporate Governance, Innovation Culture, Ability to groom leaders and throw new guys who can take company ahead.
Is there no value for attracting best talent, for decades of experience. Is there no extra value for intangibles like relationship with suppliers or brand value
Arithmetical cheapness will keep existing and you can keep cribbing.
If we actually start reading the thread from start, I have not justified HUL valuations and infact given explanations on many stocks where I feel runway is no longer there and valuations are optimum or high.
There instead are other cos , where I feel runway is still left and merely looking at PE Ratio and ignoring the stock is wrong.
Let me put it this way…Am I investing in Nariman Point in 1970s or in 2020s.
For me a Shree Cement is not expensive at 15000, if you want to earn a 15-18% CAGR over a 10+ year period.
Instead of arguing on nittygritties and random stocks, let’s focus our energies on finding reasons for stocks which have remained expensive for multiple years now.
The Shree Cement, HUL, Nestle, Bosch, 3Ms of the world have always been expensive …Do try to seek the answer. Despite being in F&O, these stocks haven’t crashed. Time correction may be…temporary pullback may be. Even when these have corrected with market , they still remained expensive on relative valuations. Are all market participants so wrong and naive …are all FIIs and DIIs so wrong and they remained wrong for decades at a stretch…ponder over this question
This is one of the most debated topics in investing right now - what kind of returns can one expect investing in high quality moated businesses with a long runway for growth at current prices.
While I agree that it is essential to focus on individual businesses, I also feel that exploring this subject deeper is important in today’s context of investing.
Companies like Asian Paints, Nestle, HUL are currently trading at what I can only describe at nosebleed valuations.
Let’s take the case of Asian Paints for instance. Asian paints was trading at a PE ratio of roughly 35 - 50 between 2011 and 2014. No doubt this too was a tough business environment. During that time it’s sales and profits grew at a far faster pace as compared to the last 3 years. It’s return ratios (despite lower margins) were far better than what they are today. What then is the justification for it to trade at about 20-50 percent premium as compared to that time?
There are several reasons because of which I believe has led to this situation arising:
There are cyclical waves in every market and I believe that we are in a quality wave since the last 6-7 years.
The economy has slowed down over the last few years and very few pockets of growth exist and everyone wants to chase companies that continue to grow
There has been relentless printing of money And low yields abroad and FIIs looking to chase yield find a 9-10 percent yield in rupee terms as a very attractive proposition. They have few opportunities to invest given the limited float available in companies below the top 100. Companies like these are a low volatility and lower risk way of generating those returns. They don’t mind bidding up prices of quality assets such as these to levels which suit their opportunity costs.
Here in India, flows into equity funds have increased dramatically in the last 5-6 years and they are playing an increasingly important role in determining market prices. There is fierce competition among these funds to attract capital most of which come from investors who track performance over the short term. There is a tremendous pressure on fund managers to perform quarter to quarter basis and it is a known fact that it is better and easier to be conventionally wrong than unconventionally right (by underperforming in the short term). Were I measured for my performance on a yearly or quarterly basis, there is no incentive for me to hold anything that is not in momentum right now.
The fact that Large market participants such as FIIs and Fund managers, mutual funds, etc. are investing in these companies and making their positions known is also leading to retail investors chasing these companies.
Many of these companies are operating at margins that are cyclical highs. It is possible that these margins sustain but I am not willing to take the chance specially because margins have touched these levels in the past and have also compressed in the past.
Here are my own thoughts with respect to valuations of these companies.
Quality companies deserve a high premium compared to the market. Any moated company with a long runway is likely to surprise on the upside (in terms of performance of earnings). However, I believe that the premium that is being paid today is at a cyclical high as compared to history.
I believe that these companies will continue to grow (Profits not stock prices) at market rates or better than market rates over the foreseeable future. However, I also believe in the theory of mean reversion and feel that over time factors will lead to this premium coming back to mean levels. The fact that quality companies are statistically likely to perform better (earnings not stock prices) is not equivalent to apple falling on Newton’s head in the year that this premium started to increase - it has been known for decades. I don’t believe that the quality of FIIs or DII’s stock picking ability has suddenly become better in the last 5 - 7 years and hence believe that this Premium is cyclical.
Valuations of any companies that fall outside the gambit of “quality” have been beaten to a pulp and I believe that they are closer to cyclical lows hence believe that my portfolio should have an increasing proportion of these kind of companies.
My outlook, risk profile, ability to participate across the spectrum of 4000 BSE stocks, pressure to perform, etc. is vastly vastly different from that of a mutual fund or an FII hence, there is no need to conform to what they are doing. In this environment they will be happy to generate 5-7 percent in dollar terms, I will not.
While in the short run, there is very low risk of loss of capital in these names but in the long term one cannot rule out drawdowns as perceptions change. When you pay 80 times trailing earnings you have no choice but to discount earnings over a long long period of time and take a view that the company is likely to keep growing for longer period of times without disruption. For example, when you pay 130 times trailing earnings for a Dmart, you are basically saying that this company will continue to grow at 20 odd percent (at similar prices better ROE) for 30 odd years. Have a look at Walmart’s financials in 2011 and today’s financials and see the impact amazon has caused. Amazon is a vastly more powerful and innovative Organization as compared to 2011 with far more resources at their disposal and I cannot even begin to imagine in what ways they will change the retail landscape in 10 years from now let alone 30 years. Ofcourse, I am not saying amazon will dent earnings of D Mart in the next 5 years but I also believe that it is unlikely that they will not dent their earnings over the course of the next 30. What happens when the market perception changes?
It is for these reasons that I will be looking for greener pastures elsewhere.
Disclosure: I am not SEBI registered. I do not hold any of the names listed above. These are simply my own personal views that I am expressing with the intention of having a healthy debate and learning from the opposite point of view.
