I found following info in one of Sanjay Bakshi's Lecture (http://www.capitalideasonline.com/articles/index.php?id=694 ):-
Could someone please explain me how did he arrive at numbers 175 and 95?
Let me just give you very quick example. Here are two companies
Both companies have same amount of capital invested -- Rs. 100 crores. Return on capital -- 35 percent in A and a pretty mediocre 10 percent in B. A sells for 10 times book, B sells for 20 percent of book. Market Cap â 1,000 crores for A and 20 crores for B. PAT -- 35 and 10. Price to earnings -- 29 and 2. Dividend payout -- same in both the cases. Dividend actual payment 7 crores and 2 crores. Dividend yield -- 0.7 percent and 10 percent.
Now, one looks like a growth stock, the other looks like a value stock. Now, if you keep the assumptions intact, if you assume that the future will be pretty much as what is been displayed on this slide then obviously company A well turn out to be, not only a better company, but also a better investment.
Company A is no doubt a better business than company B because it earns a higher return on capital and has a rational dividend policy because it retains most of its earnings and so long as the return on capital is high, this money will build up and like an internal compound machine should eventually show up in increased market valuation.
Now, if the model assumptions hold, and if we assume that 5 years from now the same assumptions apply, then over those five years A will produce a 175 percent return, while B will return 95 percent. So A would have been not only a better business but also a better investment.