Someone had done calculations for laurus FY23 earnings based P/E of 14 and was asking whether it is cheap or not. I wanted to share my thoughts on valuations. Copy pasting my answer here to ensure my thoughts on valuations are documented on my pf thread. I could also link, but my suspicion is my laurus post might get deleted since it is technically unrelated to laurus .
Valuations lie in the eyes of the beholder and are the most difficult part of any investment thesis for me personally. I have seen so many amazing businesses but given them a skip (prince pipes) or decided to
sell out (poly medicure) because the valuations seemed stretched/not enough margin of safety. Everyone has a different way to value a company. There is no single “valuation” to speak of. Each investor must make their own decision on what is cheap, what is expensive. I can give you some guidance on how I think though note that this is not investment advice.
I personally think valuations are completely driven by (narratives around growth & unit economics) and and opportunity cost. If the collective market thinks a company will grow topline at 10-12% for 10-20 years with high and stable or improving unit economics and with some operating leverage higher bottomline growth, then valuations would remain elevated. P/E of 100 is elevated. P/E of 50 is also elevated (to most investors). Why I add opportunity cost is that some growth hungry investors (count me in this bucket) would decide to sell off their 12-15% Asian paints compounder and rather go after economy facing stocks like X,Y,Z. As long as the narrative around growth and unit economics remains, valuations would remain elevated as price discounts decades of growing stable profits.
So we must ask ourselves about laurus labs. Are laurus earnings as predictable as some of the other companies? Does market believe so? I would say no. Thus, since you are looking at FY23 earnings whether 14 P/E is expensive or cheap would depend on Laurus’s growth prospects and unit economics in FY23 and beyond. Now investor can do their own homework (by reading this VP thread, and other laurus labs material like the collaborators laurus thread: Laurus Labs: A much bigger journey ahead?) and try and understand what laurus labs would look like in FY23 and beyond. What would the growth prospects be? What would the unit economics be? Are both trending down or trending up. How stable or sustainable are they versus lumpy or one-off. Are there going to be far superior opportunities to Pharma/Laurus in FY23 which cause opportunistic investors to jump ship depressing valuations. Answers to these questions and experience based on studying evolution of valuations of multiple companies over market cycles can help an investor answer whether a P/E of 14 based on FY23 profits is cheap, or not.
The next question becomes how do we figure out these numbers. How do I figure out what growth beyond FY23 and unit economics beyond FY23 look like. Well, this is why valuation can only be done after developing a deep understanding of the business. And since a business is like a movie, we need to keep repeating this exercise every few months/years. Some places to start doing so for laurus would be sajal sir’s biotech seminar to understand the industry structure, growth prospects. In this BQ interview Dr chava gives some soft guidance on what richcore/laurus bio could look like in K years.
In short we have to consume all publically available direct evidence/sources (interviews, concalls, ARs) as well as read industry reports and understand broader trends to figure out the quantum of the growth we can expect. Also, we can track product mix change from same management commentary to understand the way unit economics and margins are headed.
There is another interesting aspect to valuations. One does not need a weighing scale to tell whether someone is fat or not. Similarly we do not need exact estimates of FY23 beyond growth and product mix changes to tell whether a P/E of 14 is expensive or cheap. We only need to evaluate whether there are enough growth and unit economics triggers to sustain or improve current valuations. Then, as a corollary, P/E of 14 on FY23 earnings would be cheap.
PS: Since valuation is an art, all of these are just my opinions. I could be entirely wrong about everything