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

I am sure if this has been a question with me, it must be with a lot of readers at ValuePickr too.

What to do with stocks like Mayur quoting at 28x trailing or Astral (49x trailing) or even an Atul Auto (20x trailing)?
While a Hitesh Patel would advise - you must keep rising your winners - the rational mind has to question for how long? Who ever (amongst us holding Mayur or Astral) had ever thought that these businesses will quote at ~30x or ~50x respectively?? and this - Not at the peak of a raging Bull Market, but at the nascent starting phase of a Positive Phase in our markets??

Statistically-Informed Model for Exiting Markets?
In 2009 we worked out a Model for Exiting the Market at crazy highs (didn't have one in 2008 and remained hopelessly fully-invested; got saved because I was primarily in large caps, but paid huge Opportunity Costs; please read original article for detailed insights)
(Jan 1999-Sep 2009
P/E P/B Indication Action
Mean 17.72 3.71
Median 17.58 3.69
Mode 14.31 2.38
Std. Dev. 3.64 1.05
> Mean +1 Std. Dev. 21.36 4.76 Outside 68.27% of Values: Unusual Valuation Time to get Cautious
> Mean +2 Std. Dev. 25.00 5.81 Extraordinary points - Outside of 95.4% of Sample: Extraordinary Valuation Time to Sell
> Mean+3 Std Dev. 28.64 6.86 Outlier, Extreme points - Outside of 99.73% of Sample Time to Exit fully
The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+. In the last 15 years in study, market has always crashed badly while crossing NIFTY PE 26.
Those interested can keep track of NIFTY P/E, P/B and Yields at NSE India Indices data. Nifty P/E is trading at between 20-21 currently, so it is time to put your "cautious specs" on, but is probably still far from crazy valuations - at which time anecdotally we will have many other indicators :). A Times of India front-paging stock markets, Lakhs of Demat accounts being opened daily, and every idle conversation relating to the state of the stock market!

But what about a model for existing Individual Stocks? Don't we need one?
So coming back to my main quest for over last 2 months. As mentioned before, markets haven't reached crazy valuations, but maybe some of our stocks will, even before the markets go real crazy ??
As Astral climbed from 30x to 40x and now almost 50x trailing earnings, my belief is stronger we desperately need a model here too. We booked 20% profits at 30x in Astral, but kept asking every senior we knew on clues how to handle this situation - not with rigid academically-set thresholds or set on holding perennially (surely an Astral doesn't belong there), but something more pragmatic?? While still having the discipline to leave some on the table??
Some of the commonly held thoughts from a number of senior investors polled by us may provide us some clues. Shared below for provoking more investigation and experience sharing among us.
Why is Astral priced where it is, today?
Supposing you are a Fund Manager looking at India and just raised 200 Crs.
Your mandate is to invest in small and medium emerging businesses with Sustainable Growth for 5-10 years as your investing cornerstone. You are ready to hold through some amount of over-valuation since its too difficult to get back in, in current state of markets. What will you be doing? You will probably come up with a list of 20-25 quality names, and then you size up each on Size of Opportunity, Quality of Management, Quality of Business, and the like....
You get the point. Its the same set of quality names that are getting chased around. There is probably some merit in this thinking - much more than lazily ascribing "Astral is the new Page Industries for this market" - far from it !! (But that's another topic for another day).
Re-Investment Risk?
A pretty commonly heard refrain these days (in these markets) is Re-Investment Risk. As mentioned before as a Fund Manager or serious individual investor you are pretty okay to hold through some amount of over-valuation, especially as the cost of getting back in is steep?
Besides a more important consideration should be Risk Mitigation? You may not care so much what happens to the rewards (say ;-)), but you probably must make sure that you are NOT ADDING to the Risks by switching to something else? (You sure are not going to sit out on the sidelines from these levels, right?). Some statistics were flung at us saying its statistically proven your odds are 55:45 in making the right switch. That 45 times out of 100 you go wrong in these situations. If the ODDS are that close, why take the Risk, why not stay invested and ride the winnings?
Especially as we are NOT talking about XYZ businesses, but quality businesses that we have followed closely over last 3-4 years, have seen them walking the talk, are comfortable/happy with the Management and most importantly see sustainable growths ahead for not just 2-3 years, but probably more than 5-10 years on. There are fewer variables in these businesses, extremely difficult for a new player to emerge and challenge the niche dominance, and Management has just got to keep executing - in an economy that is probably set to grow stronger in the days ahead? So, why quit??

Then the logical question will be - where and how do you draw the line?
There are some wonderful companies in VP Universe like Ajanta Pharma (~47% PAT CAGR over last 3 years) and Kaveri Seeds one better (~75% PAT CAGR over last 3 years) that that kind of growth ensures these companies play an Overvaluation-Undervaluation catch-up game - all the time!
And obviously there is NO DEBATE about what to do with these companies :-).
However it becomes more complicated - when the growths hover around ~30%, the market chases that kind of quality sustainable growth (when discovered) like it is in Astral or Mayur? And the undervaluation catch-up might not get the chance to play out over extended timeframes?
I am not that easily satisfied by above. Then I have only one weapon to throw - So where would you draw the line for an Astral or a Mayur? Will you still be comfortable (with the above hold-perennially kind of line) if these run up to say Astral 70x and Mayur 50x trailing? It's possible isn't it, and would you still say ride your winners, or??

Hmm! The question to ASK is how many years earnings are being captured today in the Price?

And Voila! I think there we have the Model we needed?



Trailing PE

FY14 PAT Growth

FY15E Growth

FY16E Growth





Future/ Normalised PE Band

Price Capturing xyrs ahead





































Atul Auto












PI Ind




























































Alembic Ph














2.86 BV








































































This if one of the most important challenges many of us including me are facing today. When should one draw the lines and say its too much overvalued?

Just to give you an example, I thought that Astral at 400 - 450 (trailing 30x PE multiple was too expensive). I sold out of it and am still feeling guilty of not riding the company (I knew that it has large opportunity ahead of it and how capable the management). There are other examples like Cera (not a VP stock but followed by many of the VPs) for which FY14 wasnt that a great year but it still more than double over the past one year. You really feel bad when you sell your winners too early. But till what valuation should one ride a good stock?

So, what’s the Verdict?

Now you may disagree here and there over the Future/Normalised PE ranges assigned by us (depending on where you stand on the Optimist-Skeptical continuum. But If we look at the table above carefully, some broad trends are immediately clear, and should not be ignored:

1). Stocks like Astral and Atul Auto are clearly running much ahead of their earnings - more than 2 years of earnings are being captured in their price today. However it is also very clear that something like Mayur isn’t and is only marginally over-valued if you will. And were you to tweak the valuation range to say 22-25x for Mayur (who knows?) well its close to being fairly priced.

2). However there are quite a few other Stocks in the VP Portfolio like a Shilpa Medicare, an Alembic Pharma or a Ajanta Pharma which are not even capturing earnings 1 year forward. same holds true for an Avantif Feeds.

3). So, if you were to book partial profits in an Astral today, you DO HAVE candidates where you can re-invest without adding additional risks to your portfolio.

4). However are these extreme valuations for an Astral or an Atul Auto to merit a total exit??

The unanimous verdict from all the market veterans/seniors we have polled is - these surely aren’t extreme valuations.

So, What are Extreme Valuations according to you?

I can’t help but throw that final poser. And fortunately there is near-unanimity in the verdict -once a stock starts capturing more than 3 years of earnings (3-5 years is the usual refrain I got), its time to calibrate your exits - even contemplate full-exits?

Reversal to the Mean

That’s really the answer! There is no reason to believe that Astral or an Atul Auto or Mayur Uni for that matter will continue to trade at the exalted valuations it does today. Is it reasonable to assume that in all probability within 2-3 years there can be a reversal to the mean for these companies - for a variety of reasons - and you might well be able to buy back into these companies at lower than extreme valuation prices!!


Phew! Am I glad that finally I have been able to put on paper - something pretty complicated - and as Ankit says, something that merits our close attention.

Sooner than later, we will have to face these questions - in some of our biggest winners.

It helps to be prepared - rather than play blind. Lat time round in 2006-2008, I was a complete greenhorn and remained perplexed throughout - not knowing which way to move. I got saved somewhat (didnt suffer any loss of capital) since I was buying the large caps like Reliance, Bharti, BHEL, SBI etc since 2005 crah - a beginners luck. However I did pay a huge opportunity cost of not being able to exit substaintially in time.

This time round however, we have a great community of fellow-learners, well-meaning seniors to guide us and (increasingly) access to some of the investment legends in our markets - to try and make some sense of the madness around us.

So, its over to you guys - especially those with experience in the markets - how do you react to the above - from your own personal experience - in the few bull-markets that you may have participated in and had your wits around :-).

Looking for some really useful experience-sharing and insights!

I think we are being a bit myopic in our views about astral and it’s possible growth in the next few years. One thing we need to consider is that given the newly launched products like column pipes, agri pipes, fire sprinkler, solvent cement etc, we could see astral growing at higher than 30%+ car. We should not forget that it grew at 40% cage when economy was growing at less than potential growth. Even last year it grew at 30%. If economy picks up, astral could have a tailwind. Also, astral’s earnings have seen hit from the forex losses. With rupee now stabilising and lubrizol’s plant coming up close to astral’s plant, astral could see a big change in the working capital scenario and also forex exposure. The new products are higher margin products compared to astral’s usual 14% margins. All this could lead to net profit growth outperforming the revenue growth. I personally would not be surprised with 40-50%+ cagr in profits over the next 2-3 years and I believe this price may not look so expensive in the hindsight when we look at it again in 2 years time.

Similarly for page, I think 30% cagr growth expectations are calibrated to a 5-6% GDP growth scenario. Page has grown higher at 40% rates in the past and I see no reasons for why it can’t grow at those rates again if growth picks up. There again, the new drivers of growth for page is leisurewear which is a higher margin product compared to its traditional innerwear portfolio. Margins have not expanded because page has been deliberately keeping them in 20-21% ebitda region by spending extra on marketing and advertisement which has made it an undisputed leader.I believe earnings over the next 2-3 years would grow at a faster clip than revenues so 40%+ cagr wouldn’t surprise me. And market is smart in reflecting that in the stock price.

I have held astral for the last 2 years without booking any profits and would hold until growth slows down. The growth leaders would stay expensive and become more so for the entire length of the fast growth period. I think what we should keep a keen eye on is what could lead to this growth slowdown. Market may excuse a quarter or two of slow growth but in case of consistent slowdown, punishment dealt would be severe.


Hi Hemant,

Thanks for your views on Astral & Page. I agree with some of them. And you may well be proved right :slight_smile:

The only counter-point I will offer is - we need to be conservative in our projections - remember this is in the context of the VP Public Portfolio. Most folks from the VP Community who follow these Reccos are not active investors like me & you - Margin of Safety must be High. [I can and do afford to be more aggressive in my Personal Portfolio].

This discussion is more on the broader objective )- than really the earnings trajectory of an Astral or a Page Industries - which we can differ on. It will be better if we can FOCUS on the Model proposed )- do we know where and how to draw the line - and make calibrated exits?

No one has a crystal ball! Who knows where the Markets will next take an Astral or a Mayur or even an Atulo Auto to?? But can we keep sanguine all the way through - I can’t seem to accept playing blind. I want my MODELS in place!

Do we agree - capturing more than 3-5 years earnings in the Price today )- can be used as a model for calibrated exits/ Why or why not?

Do we have better models to share? What are the other insights from your experience?

I am interested in especially hearing how most folks handled overvaluation to extreme overvaluation stages in (not Large Caps but) well-discovered small caps and quality emerging businesses like in VP Portfolio - the last time?

And pardon me - but is it wrong to opine - anyone who stayed invested all through in small caps (no matter how well-discovered) must have had very poor returns to show versus say the perennials?

What are the right examples from last time around?

That will make for much more engaging a discussion and real insights for most of us - who are already sailing in uncharted waters.


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I like Bharat Shah of Ask Investment a veteran of 30-35 years with an impeccable track record.

He says that we need to focus on

  1. Size of Opportunity

  2. ROCE

  3. Promoters ethical reputation n their execution track record

He says to focus on these parameters only n forget about PE which is more of an optical illusion and stay invested for long long periods till the above criteria are being met. Indian IT , Pharma, Agri , select NBFCs, consumption stories do meet this criteria.

I feel for most of our picks are meeting these criteria and as such lest stay invested in these quality business n reap the benefits.



A counter point to your thesis.

Assume you are sitting in 2005 and hold asian paints, pidilite and Marico. The PE has started discounting 1-2 years and you are getting nervous. By 2006-2007, the market is discounting almost 3 yrs of growth …what should you do ? sell ?

This is what i did because i missed a very important point - it is not growth alone we should focus, but the competitive advantage period and opportunity size for the company.

Selling a stock which discounts 3-5 years growth means that one is implicitly saying that the company will do only as well as the general market - that is grow at the rate of the economy with the an ROC of the 15-17%.

If that is the case , then one is right to sell.

So the question we have to answer is - does the company in question have a deep and wide moat wherein it can sustain above average growth for a long period of time.

When you do the above for each company, you will get a different answer for each.

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Hi Donald/Hemant,

I am no expert here, but just trying to rephrase what Hemant might want to say. Apart from considering “Price Capturing xyrs ahead” , we should also give aweightage to quality of earnings of the company. That would help in envisage things better 2 years or 3 years down the line better. So on these lines one should be quite comfortable holding Astral at Price capturing 2 years ahead , but not with sticking to Atul Auto with 2.

Disc: I sold off Astral long back and still hold Atul :slight_smile:

There’s a saying - Don’t fix what ain’t broken. I believe this holds true when evaluating investment sell decisions. If the business is delivering (=compounding at a healthy rate) and the scale of opportunity is significant, it is better to stay invested. It takes care of the “reinvesting” problem. Being able to hold on to a 25% compounder for 10 years is preferable to doubling capital every 3 years on an idea and trying to find another such idea to ride. Over the long term, what you earn on your investment is largely the underlying return on the business. Point of entry (=undervaluation) merely enhances the return by a few % and the difference reduces the longer you hold.Many people sell when they think a stock is about fairly valued. That’s a mistake 90% people make. A compounder has a moving intrinsic value that grows every year by its rate of compounding.

A situation where I think one should be okay exiting is when you find a sitter which gives you a potentially much much better risk adjusted return for a comparable investment horizon. Another would be when you get a 2000 tech boom like market where crap gets valued like gold. In that kind of market, one should not wait to be the last fool (ideally one should have the sanity to steer clear of such bubbles but that is easier said than done). In trading (not investing) though it is wise to leave some money on the table. Very few people can spot the turns and the last third is the sweetest as well as the most risky.


I understand that the difference in view is about a ~50pe business growing at ~40%, vs ~25pe company growing at ~30%.
a) I believe the former might not be a great pe re rating candidate so the growth (if pe) is maintained will be ~40%. I

b) The latter might have a pe re rating (20%) along with 30% growth kinda 50%. (It is still ok if there is no pe expansion)

But a risk aversion model would be the latter (b) even if the prospects of the 40% grower (a) are brighter.

There are few business which have a 40% growth rate for a decade (“unless it is different this time :)”)


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I think we are losing the whole objective of the discussion.

The subject here is not whether a business would continue to grow at 40% CAGR for the coming years. Itâs about the margin of safety one has when the valuations are blown up.

A stock may well continue to grow consistently for next 5-10 years. However, when stock price is considered, it is not a linear curve. It is more of a sine wave. Market always gives opportunity to load up quality stocks.

The risk that is inherent when a stock commands steep valuations â cannot be ignored. Itâs always undervaluation â fairly valued â discounts x years earnings â frenzy. Caution is warranted for when it approaches stage 3.

In my view the companies with huge opportunity size and proven track record(Page, Astral, Gruh to name a few) will not fall much even though they might run ahead of their earnings at times. They may remain in a range till the earning catches up and then again move in a spurt. One should never exit the secular growth stories, till the growth opportunity exits…at the max you may reduce the allocation.

Switching is not an easy game as as it is not easy to time the market and one doesn’t know what is the valuation Mr. Market is going to assign. For example, I switched(partially) from page considering that it was costly(@3500) and realized that I was wrong. Hence again started buying at around 5500. Although I didn’t lose money as the stocks I bought also moved up, but I just got into the hassle of short term capital gains and unnecessary buying/selling activities. The result eventually was similar.Hence it is better to stay put in secular growth stories.

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My personal experience is estimating valuation as defined by P/E ratio is pretty much irrelevant as far as timing of exits is concerned. In a bull market scenario like now, most stocks tend to become “overvalued” and trying to figure out which one is more overvalued than the other is pretty subjective.

We should focus exclusively on current market cap vs the size of the opportunity and the ability of the management to exploit the opportunity. Once these parameters are within our comfort zone, we can ignore the P/E ratio. Just to give an example Gruh is currently quoting at TTM P/E > 40 and P/BV >10). Definitely overvalued by any normal standards. But its Market Cap is Rs.7,250cr vs a market opportunity where it is conservatively estimated that 10 lac new rural households will require loans for housing every year.

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Hi, did some maths on how "mean reversion" of P/E by FY20 can affect price and how much returns we can get. The assumptions of growth from FY17-20 and mean reversion P/E is as per one's own estimate of opportunity size. Assumption of mean reversion is competitive forces will catch-up on these highly profitable businesses and beyond FY20 they may not be able to sustain high profitability and EPS growth. This is just a model, FY 20 can be FY30 for Astral, might be FY18 for Atul (I see good number of Tata small 4 wheeler coming out in kerala)

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% 20% 17.13 22.27 46.2 18-20x 15 693 11%
Astral 675.6 49.18 29.70% 25% 17.86 23.21 56.7 20-22x 15 850 4%
Ajanta 1514.9 24.21 118.41% 20% 81.34 105.74 219.3 22-25x 15 3289 14%
Atul Auto 535.5 20.12 15.01% 15% 30.61 36.73 64.2 12-14x 8 514 -1%
PI Ind 329 24.37 90.71% 20% 16.87 21.94 45.5 20-25x 15 682 13%
Kaveri 722.25 23.6 62.14% 20% 39.79 51.72 107.2 20-25x 12 1287 10%
PolyMed 503.35 25.73 79.07% 20% 24.45 30.56 63.4 20-25x 15 951 11%
Shilpa 418.55 19.05 75.94% 20% 27.47 38.45 79.7 22-25x 15 1196 19%
Avanti 696.55 9.09 131.04% 20% 99.64 129.54 268.6 8-10x 6 1612 15%
Alembic Ph 269.85 21.35 51.35% 20% 16.43 21.36 44.3 20-25x 15 664 16%
SCUF 1415.2 2.86 BV 15.91% 20% 109.85 137.32 284.7 2x-3xBV 2.5 712 -11%
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% 20% 17.13 22.27 46.2 18-20x 15 693 11%
Astral 675.6 49.18 29.70% 25% 17.86 23.21 56.7 20-22x 15 850 4%
Ajanta 1514.9 24.21 118.41% 20% 81.34 105.74 219.3 22-25x 15 3289 14%
Atul Auto 535.5 20.12 15.01% 15% 30.61 36.73 64.2 12-14x 8 514 -1%
PI Ind 329 24.37 90.71% 20% 16.87 21.94 45.5 20-25x 15 682 13%
Kaveri 722.25 23.6 62.14% 20% 39.79 51.72 107.2 20-25x 12 1287 10%
PolyMed 503.35 25.73 79.07% 20% 24.45 30.56 63.4 20-25x 15 951 11%
Shilpa 418.55 19.05 75.94% 20% 27.47 38.45 79.7 22-25x 15 1196 19%
Avanti 696.55 9.09 131.04% 20% 99.64 129.54 268.6 8-10x 6 1612 15%
Alembic Ph 269.85 21.35 51.35% 20% 16.43 21.36 44.3 20-25x 15 664 16%
SCUF 1415.2 2.86 BV 15.91% 20% 109.85 137.32 284.7 2x-3xBV 2.5 712 -11%

Hi Vinod,

Your calculations are scary. :slight_smile:

1). Growth slows down considerably from FY17-FY20.

2). PE in FY20 is considerably lower than current PE. 15 PE for Mayur, Astral & others; 8 PE for Atul Auto.

If this is going to be the case, it’s better to get out of all these stocks except maybe Shilpa.

What do you say on this? What are your analysis of this data & forecasts?

The when to sell conundrum is a difficult to decipher one.

I think basic reasons to sell a growth stock boils down to following

1). there is a better idea where business/valuations or preferably both is better and which is likely to fetch superior returns.

2). Because of sharp run up in stock prices of a particular stock in the portfolio, the balance of portfolio is skewed and therefore weightage of some stocks needs to be trimmed.

3.Overall froth in the markets as detected by objective parameters like nifty PE of 26-28 and above and/ or subjective observations which to the experienced investors is often all too familiar.

Coming to specific examples, for stocks where variables are few the earnings could be predicted fairly easily and with a high degree of certainty and accuracy.

e.g Page Inds fy 15 EPS could be 180 and fy 16 EPS Could be 225-230. Based on these if one evaluates Page at cmp then it wouldnt appear too expensive. Plus as remarked earlier, it could grow higher also and give positive surprise.

As long as bull market lasts, the fancy calculations for all expensive stocks will work very well. Once sharp medium term correction starts, all these calculations will for a toss and one will have to rework the strategy.


Jatin, its an excel file, you can put which ever growth forecast and P/E and make it lesser “scary”.

The idea was to only point to how mean reversion works. 20% growth was taken as standard (Astral 25%, Atul less). Just shows that even with 20% growth for 4 years a mean reversion of P/E can lead to lesser returns. If I put 40% growth for FY17-20 and P/E of 20 for astral the CAGR returns come to 18%.

Excel file attached


Mean-reversion.xlsx (11.8 KB)

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My two cents

1). I think looking at a company from a 2 year time frame is myopic and can give some incorrect signals.

2). We should ignore the speculative returns of the company which is factored into the P/E and just focus on the real returns of the company which is factored into the EPS. The growth in real earnings naturally depends on factors such as growth rate, size of the market, competitive advantage of the company.

I’ll cite an example of Gruh (please see excel sheet attached). We can expect around 12% CAGR return excluding dividends and 13% CAGR return including dividends for next 10 years. These numbers are based on loan growth rate of 25% of first 5 years and 20% for next five years. Now one can question if these growth rates are sustainable but in fact I think the numbers are conservative based on market size, Gruh’s competitive niche and inflation of asset prices. Gruh disbursed loans to just 32K families in 2013-14 with average loan size of 8 lacs (i’m simplifying the numbers) then you can understand the vast opportunity going forward.

Now you can object that 13% CAGR is not an attractive return but based on the margin of safety it provides, it is a very attractive return in my humble opinion. If Gruh can continue to grow at a modest pace, Mr.Market can provide much higher returns by applying a higher speculative growth factor, but we should ignore that. So if you looked at Gruh from a 2 year perspective it may not look attractive but if you stretch to a much longer period, it seems to be a sensible holding even at current prices.

Gruh-Finance.xlsx (48.9 KB)

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