I think current stock underperformance is more of a function of margin compression and not due to terminal value loss. I say this because in Feb 2021, they were trading at 2.5x EV/sales (~30x P/E) which is the higher end of their valuation band. The EV story was also known in Feb 2021. You can read my more detailed analysis in the link below. Overall, I feel company’s competitive positioning is intact (and actually better than 5-years ago). The management also gave a couple of interviews at the Davos meeting which are worth watching to know about company’s future outlook (link1, link2).
I look at stocks from an expected return perspective. Let’s demonstrate this with a couple of examples:
Maithan alloys: I first bought the stock at 350 in March 2020. I expected a cyclical uptick by FY24/25 and projected a stock price of 1408 (link). This implied IRRs of ~32% in a 5-year time frame and seemed attractive at that point of time. The stock moved very fast and crossed 1000 in June 2021 which was when I sold my last chunk of shares. Why? Because my price projection of 1408 didn’t change and at >1000, future IRRs came below 10% and I didn’t find it attractive anymore. So I sold.
Jubilant Ingrevia: I first bought the stock at 267.35 in March 2021. Based on my business understanding, I projected sales to grow by 12% in next 4-years and an exit multiple of 3x EV/sales. That implied potential stock price of 1004 by FY25 implying 39% IRR which seemed attractive at that point of time. Stock moved very fast and I ended up selling my last chunk of shares at 683 (where expected IRRs became <10%) as I didn’t find it attractive anymore. Plus, business was going through an upcycle and there was no way for margins to stay at those levels. Thus I exited.
Hope this clarifies my thought process, let me know if you need more clarifications.
I also have cash coming in from my day job, so I have been able to add money to positions whose weightage came down. Also, I have been switching from low growth to higher growth cos if both are available at similar valuations (thus trying to improve risk reward at a portfolio level).
I feel that bank backed AMCs have a structural competitive advantage over non-bank backed AMCs. Also, I consider HDFC group of cos to be much better in terms of execution, you will also see that I categorize HDFC as a core compounder and other NBFCs (like Sundaram, Manappuram) as cyclicals.
HDFC AMC is probably one of the very few businesses that can be held for a decade and can offer >20% IRRs. If ICICI AMC was separately listed, I would also have considered it as a core compounder (rather than a cyclical).