My aim of this post is to understand how good we are in understanding business moats. The entire point of this thread was should we hold on to overpriced stocks (by conventional valuation metric) if they are very good businesses.
The team categorized the following:
B Category - Balkrishna industries, Gujarat Reclaim, Suprajit Engineering
A category - Mayur Uniquoters, Astral Poly Technik
A+ category - Ajanta Pharma, Poly Medicure, Kaveri Seed, PI Industries
Cyclicals – Vinati Organics, Balaji amines
B category companies were correctly identified as their margins were mean reverting (implying vulnerability to raw material prices), hence more cyclical in nature.
A category: Mayur uniquoters was incorrectly slotted here as it hasn’t shown any meaningful growth in sales since FY15. Astral on the other hand has managed to grow their sales well (albeit with margins fluctuating b/w 12-17% implying some degree of cyclicality).
A+ category: Ajanta, Poly Medicure and PI have shown business leadership traits with FY20 sales meaningfully higher than FY15. However, Ajanta and Poly Medicure haven’t gave meaningful stock returns because valuations were reflecting a lot of optimism in FY15-16 and growth didn’t pan out to that extent. PI has panned out better in terms of growth and given meaningful returns. Kaveri turned out to be a cyclical, definitely not a A+ category stock (still to attain its FY15 sales number)
Cyclicals: Vinati turned out to be more an A+ category stock with low sales growth but expanding margins. Balaji has been thrown to the wood chipper.
In essence, its clear that if one simply ignored valuations for A or A+ category stocks, returns would have been underwhelming (detailed work on valuations here). Out of all A or A+ companies, reasonable stock price growth was witnessed only in PI Industries and Astral Poly. This makes me ask a fundamental question, Is an overvalued high business quality business a better investment than an undervalued business with decent quality but superior growth profile?