Equity Valuation Techniques: PE de-rating vs. PE re-rating.

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PE de-rating vs. PE re-rating.

Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Equity Valuation Techniques
Forum Discription: While valuing equities no individual technique works. Mostly it is a combination of techniques. Discuss the various techniques in equity valuation ranging from PE to RoE to Market Cap
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=382
Printed Date: 26/Jun/2024 at 11:50pm

Topic: PE de-rating vs. PE re-rating.

Posted By: monu_duggad
Subject: PE de-rating vs. PE re-rating.
Date Posted: 21/Sep/2006 at 12:15pm

How does a stock get re-rated ?

And when it does get,say from a PE of 20 to PE of 15....who decides this? And once the news is out that a stock will get rerated from 20 to 15...does the price reflect this change immidiately ? Say on the next day....

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If you think you can,You Can

Replies:

Posted By: basant
Date Posted: 21/Sep/2006 at 12:28pm

How does a stock get re-rated ?

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PE of 20 to PE of 15.... - De ratring

The price changes first the PE is just a number derived by dividing the market price with the EPS.

You could read more about it at http://www.theequitydesk.com/pe_rerating.asp - making the biggest money from a rerating and losing in a derating

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: prosperity
Date Posted: 21/Sep/2006 at 4:10pm

Basantji,

The link explains very simply and very beautifully - the IMPACT of growth w.r.t. EPS de/increases...

that the PE re-rating efffects to much larger order of magnitute than simple earnings increase/decrease ..

Thanks for giving us such insights and putting these in so easy-to understand manner .....

And wanted to tell you that - you have developed a power to see the deeper meaning behind the simple concepts and happenings like PE re-rating !!!!

I have started envying you since you are a competitor to my TV18 business.. (coz i hold the stocks - i consider it my business - Buffet way)

I hope in 2010 - the internet market becomes so big that my company, TV18 should not get effected by you as its competitor ..

Just Joking !

Thanks a lot for the Equity Desk Forum !!

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Posted By: basant
Date Posted: 21/Sep/2006 at 4:26pm

It took me a few years and a lot of money (would not quantify) to understand that money is lost or made in a PE derating. and rerating. It is very important to keep track as to whether the PE would expand or contract or remain the same. Most of the time money is made in growth stocks because the PE expands and money is lost because the PE contracts.Money lost from a fall in EPS can be recovered but money lost from a PE derating is generally irrecoverable.

And I am also an investor to Tv 18 so we have a vested interest in the internet business going up Just the magnitude of interest varies.!!!

Posted By: prosperity
Date Posted: 21/Sep/2006 at 5:21pm

Buffet says - Ignore Markets and what price they are paying you for the stock that you hold... If you are owning a business that classifies as Buffet kind of investment - then the time to sell is NEVER..

So i never thought of how market is giving me money - whether it has given me money from earnings increase or from PE re-rating ...

And all the time i felt, i am following Buffet...

But reading your article on PE re-rating and de-rating - i have started thinking again - challenging my earlier conclusions !

Share your thoughts, if you get one/many !

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Posted By: prosperity
Date Posted: 21/Sep/2006 at 5:29pm

Basantji,

So i never thought of how market is giving me money - whether it has given me money from earnings increase or from PE re-rating ...

And all the time i felt, i am following Buffet...

But reading your article on PE re-rating and de-rating - i have started thinking again - challenging my earlier conclusions !

Share your thoughts, if you get one/many !

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Posted By: omshivaya
Date Posted: 26/Sep/2006 at 1:31am

A smaller company with fast growth may be growing 50% y-o-y Basant jee while Infy at such a bulk of revenue having a growth of 35% is also good. But, the smaller company deserves a higher PE than an Infy, as its rate of growth in coming years should be higher than Infy's.

TCS at 10 billion US$ and a PE of 30 let us say and Nucleus software with revenues of 300 million US$ and a growth of 40% y-o-y. Easily, nucleus would get the higher PE.

Comments welcome and Correct me if I am wrong.

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: basant
Date Posted: 26/Sep/2006 at 7:50am

Growth is not the only factor determines a PE ratio management integrity; RoE; sectro leadrship etc etc are http://www.theequitydesk.com/why_should_hll.asp - various other issues determining PE.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: Equity Buff
Date Posted: 26/Sep/2006 at 8:25am

Dear Basant,

Thanks for your views. Two things:

A) A company which has pricing power and keeps increasing earnings(by maintaining price and increasing volume) can possible get rerated even higher than a company which also increases earnings but does not have pricing power(lowering price and increasing volumes). The P/E a company gets, in addition to growth also depends on other factors, one of them price leadership.

B) As per what you mentioned about INFY, it seems INFY should have the highest P/E in the IT space. But I am not sure that is the case.

Look forward to your views.

Rgds.

Posted By: basant
Date Posted: 26/Sep/2006 at 8:34am

Market generally loves growth in volumes not as much as pricing as pricing power stops after a level.

Infy is the bell weather and over period of time will have highest PE you may have some other cos having higher PE for earnings disappointment etc etc but over period of time highest PE will go to the leader who ever it is.ANy cos that has more PE then Infy right now on sustained basis?

Posted By: Equity Buff
Date Posted: 26/Sep/2006 at 8:46am

As per info I have IFLEX and Subex had higher P/E'S than Infy on TTM basis. This information is as per last month.

However your point on Infy is well taken.

Rgds.

Posted By: basant
Date Posted: 26/Sep/2006 at 8:59am

I-FLex market is expecting another open offer from Oracle so the run up could be because of that and the PE has expanded. On the other hand SUbex you could be looking at trailing PE if Fy 08 PE is higher then Infy then there is reason to be concerned.

Posted By: omshivaya
Date Posted: 27/Sep/2006 at 12:28pm

Uhmm ! Nice point there Basant jee on Infy. However, I simply fail to understand this, let's say:

Let's assume:

1) Infy with a revenue of 20 billion US$, let's say with an annual growth rate thereafter of 10-15%, would deserve what PE? ROCE is let's say 40%

2) A much smaller company, with earnings visibility, growing 50% Y-O-Y and maintaining at least 40% y-o-y growth for next 5 years. What PE here? ROCE is let's say 35%.

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: Equity Buff
Date Posted: 27/Sep/2006 at 12:38pm

As mentioned in my post P/E is based on TTM basis. Subex projected FY 08 EPS I am not aware of. If someone who has this figure can post then we can compare Subex P/E with Infy P/E based on their respective Fy 08 earnings.

Rgds.

Posted By: basant
Date Posted: 27/Sep/2006 at 12:48pm

1) Infy with a revenue of 20 billion US$, let's say with an annual growth rate thereafter of 10-15%, would deserve what PE? ROCE is let's say 40%

2) A much smaller company, with earnings visibility, growing 50% Y-O-Y and maintaining at least 40% y-o-y growth for next 5 years. What PE here? ROCE is let's say 35%.

________________________________________________________

a) If Infy as sector leader grows at 10% -15% the whole sector has been derated and stocks would not enjoy fancy PE's

b) If Infy grows at 10% - 15% and the small cap grows at 50% then we have a new sector leader (high PE maybe higher then Infy) which will take over the baton from Infy. But 50% for 1 or 2 years is possible the real test would come if it can do 4 or even 3 years in a row. the IT guys could lend some thought to this!

Posted By: omshivaya
Date Posted: 27/Sep/2006 at 3:44pm

Not making any recomms. here, but Nucleus MD on Bloomberg earlier this year, had made an interesting remark: "We shall grow by 40% y-o-y for the next 5-10 years easily". Even if we take the lower band of 5 years, that is a relatively good growth. And if management is any criteria for judging a company, Nucleus management is par excellence and their corp. goverance(despite being so small) has really impressed me. Vishnu Dusad is a really honest and transparent guy, I feel personally.

So what PE do you think it deserves? Last year EPS growth was 100%, last to last year was around 50% I think.

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: basant
Date Posted: 27/Sep/2006 at 4:41pm

Would not even hazard a guess. tech companies cannot guide so long would have toi take it as it comes.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: omshivaya
Date Posted: 27/Sep/2006 at 5:55pm

Allright then. Thanks Basant jee. Let's see how things roll out. By the way, Nucleus has had a 15-20 PE all along, which is relatively cheap. Anyhow, as I said, let's see.

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: basant
Date Posted: 27/Sep/2006 at 6:03pm

Yes, But if it does that kind of a growth you have a 5 bagger in your hand!!!

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: basant
Date Posted: 21/Mar/2007 at 11:08pm

This is in continuation to the discussion on the thread http://www.theequitydesk.com/forum/forum_posts.asp?TID=177&PN=17 - here

	April 2003	March 2007
Market Price	8.00*	420
EPS	*1.40 (Fy 04)**	12.83 (Fy 08)
PE	5.7 times	32.7 times
Increase in stock price		52.50 times
Attributable to PE expansion (5.7 to 32.7)		5.73 times
EPS growth (Rs 1.40 to 12.83)		9.16 times
Had it not been for the PE expansion Pantaloon would not have been even a 10 bagger today

* Price and EPS are split and rights adjusted.

Posted By: kulman
Date Posted: 21/Mar/2007 at 11:26pm

Noted. You had bought a fantastic growth stock at great value.

As one legend-in-the-making says: "It is easier to look in the rear view mirror, but it is wind shield that has foggy vision".

Now for someone who buys today at Rs. 420 @ PE of 32.7 what kind of returns would you project by 2010? Will it be only in line with EPS growth? Would PE contract in 2010?

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Life can only be understood backwards—but it must be lived forwards

Posted By: basant
Date Posted: 21/Mar/2007 at 12:13pm

Remember that ENAM expects http://www.theequitydesk.com/forum/forum_posts.asp?TID=135 - 's EPS to grow from current busionesses only. they have not made any provison of income from other allied busines activities that we have discussed descriptively on the pantaloon thread.

But surely EPS and spinoffs could treate a 4 bagger in 3 years. Sales are expected to grow at 70% and PE's should not contract from these levels. That is because retailing is a high visibility business if Biyani messes it up then all hell can break lose and investors could be poorer by 50% from current levels but I am bullish on http://www.theequitydesk.com/forum/forum_posts.asp?TID=135 - as a moderate multibagger from these levels also.

Posted By: xbox
Date Posted: 21/Mar/2007 at 6:07am

EPS discounting is very subjective process. It depends upon many factors, micro aswellas macro.

Small PE does not warrant a buy and vice-versa.

Company Sector PE/growth(%)

mature mature always equal to or less than 1.

emerging mature typically more than 1. A typical M&A candidate.

mature emerging typically more than 1. A moderate multi-bagger

emerging emerging highest among all. A typical multi-bagger.

In my opinion, Pantaloon was 4th in 2003 and now it is 2. Walmart, motorola, GE, Toyota, Samsung are all belong to 1 and being so their PE is around 11-12. A typical bottom-up approach comes from above table. Anybody who picks stock at 4th position can enjoy the ride till, 1st. So pantaloon picked at 2003 is must hold stock. Example of companies maturing ahead than it's sector are INFY, WIPRO, ICICI Bank. Invariably they come from strong promoters.

Example of companies remain emerging even their sector is matures are IDEA, Tata steel, Hindalco, RANBAXY. These companies do lot's of M&A or restructuring to multiply their EPS.

Example of mature companies in mature sectors are basically found in developed markets only. In developing countries companies sometimes stay at level 2, as they see lots of action worldwide. Examples TATA steel should belong to 1 but recent corus, natsteel merger brought them at 2.

Example of emerging companies in emerging sectors are Reliance retail, United Phosphorus Ltd, IBREL, NELCO.

But many companies are present in probably all of 4. Take L&T, RIL, Tata Sons etc. So sometimes it is difficult to put them in one grade. As companies climb the ladder, their capability to fetch higher and higher PE gets affected.

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Don't bet on pig after all bull & bear in circle.

Posted By: basant
Date Posted: 21/Mar/2007 at 10:42am

In my opinion, Pantaloon was 4th in 2003 and now it is 2.

___________________________________________________

Retail has not matured as an industry. The sector continues to grow at 35% CAGR and shall grow at this rate till 2011 Clearly sectors that grow at 35% cannot be categorised as mature and also companies within that sector cannot mature so easily when the sector itself grows at 35% CAGR.

In my conversation with the smarter level guys in this sector all that they say is that growth is not a problem the problems is to manage that growth.

Posted By: prosperity
Date Posted: 22/Mar/2007 at 4:42pm

Basantji,

Between a Bharti and Pantaloon, what would you add at current levels for fresh allocation of money? Assuming that you already have some exposure to both.

Thanx !

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Posted By: basant
Date Posted: 22/Mar/2007 at 5:20pm

Cannot compare the two Bharti is less risk with less reward compared to Pantaloon. So it is more of a risk reward call!

Posted By: deepinsight
Date Posted: 22/Mar/2007 at 6:27pm

Basantji:

A) Should pe-rerating be part of our original investment hypothesis?

B) is it simply an outcome of buying a good company at a reasonable price? (and the company getting recognized by more people as good through operational outperformance)? and investors getting a "bonus" through pe re-rating.

The question is more rhetorical but I am trying to understand if such assumptions of pe rerating should be part of ones thoughts while analyzing or taking the initial position in a company? And if its really possible to narrow down companies which could get re-rated in the future? It would obviously strengthen the investment argument.

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"Investing is simple, but not easy." - Warren Buffet

Posted By: basant
Date Posted: 22/Mar/2007 at 6:45pm

Originally posted by deepinsight

Basantji:

A) Should pe-rerating be part of our original investment hypothesis?

I would go with (B) above because a good company will always get rerated upwards (if it is trading at a lower PEG). I do not buy low PE companies just to see them get a higher PE but if an opportunity comes along then it is like icing on the cake.

Generally low PE stocks remain at a low PE for a reason. SOmetimes we get small cap companies at low PE because no one has discovered them and that is the opportunity. But the analystical process does not start from a low PE stock which could be bought in the hope of a PE rerating.

Now if we hjave two stocks with a PE of 15 and 25 then it is not that we shall buy the 15 PE stock because then we are using only the PE in analysing a company whereas investing goes far beyond that.

Posted By: prosperity
Date Posted: 22/Mar/2007 at 8:48am

Thanks Basantji, I have understood..

Now my second and last question on this, between NW18 and Pantaloon - at current prices, which should be added on with fresh money - assuming that one has decent exposure in both stocks ...

Thanx !

Originally posted by basant

Cannot compare the two Bharti is less risk with less reward compared to Pantaloon. So it is more of a risk reward call!

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Posted By: basant
Date Posted: 22/Mar/2007 at 8:55am

NW 18 is value cum growth Pantaloon right now seems to be pure growth so I would prefer the former when it comes to between the two and after knowing that an investor has decent exposure to the two companies.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: basant
Date Posted: 15/Apr/2007 at 12:28pm

Originally posted by nikhil090

Basantjee,

I agree with your view. After the recent rise again, the margin of safety in Educomp has diminished considerably. It was looking much better at 900 than at 1300+.

Looking at the http://www.theequitydesk.com/forum/forum_posts.asp?TID=429 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=135 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=29 -

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 12:34pm

The same logic is true for Pantaloon as well who wish to take exposure at these levels. There can be PE derating (absolutely no chance of PE expansion). Even if EPS grows, returns can be dismal if the stock gets derated.

From 2000 till now, EPS of Wipro/Infy has grown multifold, but not the returns as PE was derated for these.

Posted By: kulman
Date Posted: 15/Apr/2007 at 12:44pm

Originally posted by basant

Originally posted by nikhil090

Basantjee,

I agree with your view. After the recent rise again, the margin of safety in Educomp has diminished considerably. It was looking much better at 900 than at 1300+.

Looking at the http://www.theequitydesk.com/forum/forum_posts.asp?TID=429 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=135 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=29 - My request to Basant jee & other TEDies is like this: there could be opportunities outside the TED-XI universe, if so which sectors are likely to witness re-rating of PE multiple? Would it be beaten down (& further likely to be beaten) Banking/Financial Services sectors? If we keep on looking & studying, would it be possible to identify another Everest Kanto kind of niche player?

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Life can only be understood backwards—but it must be lived forwards

Posted By: basant
Date Posted: 15/Apr/2007 at 12:52pm

Very tough to identify that opportunity and when we get one we would put it up but I think opportunities should be identified not searched. The moment we try to look desperately for a multibagger it ceases to exist. The two biggest criteria for a multibagger is

1) Sector leader

2) Non Cyclical

This narrows down the search to just a few stcoks only. Obviously there would be many but the real conviction to bet 100% of your portfolio in any of these (this is an psychology test to evaluate how good I am feeling about a company) are just a few.

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 1:06pm

From margin of safety point of view I like Idea Celluler.

If MK Birla and his team can get his execution & plan right, Idea can be a 5 bagger in 5 years from here onwards with very little downside risks.

Compare this with Pantaloon, If Biyani can get his execution 100% right, where will be pantaloon in next 5 years from here. My guess is 5 bagger in next 5 years with downside risk of becoming half from here if he can not execute.

I find Idea having better margin of safety than Pantaloon with both might be able to give similar kind of return over the next 5 years.

Technology is very inportant piece of Telecom company. Having IDEA giving 700 million$ contract to IBM and IBM's ability to execute big projects (Bharti project is an example), we should see Idea becomimg a pan india player in Telecom (though they are not the leaders)

In case both Idea and Pantaloon, the buzz is execution.

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 1:18pm

If we assume Reliance/Bharti-walmart/Pantaloon/Subiksha all can get their execution right for the next 5 years. who will be the leader in retail in 2012?

I will bet for someone who invests in Technology heavily & can bring efficiency in processes. Do not forget that for Bharti the turning point was giving billion dollar contract to IBM.

Posted By: ramki830
Date Posted: 15/Apr/2007 at 1:40pm

go4lalit,

I dont think that Technology is that much of a winning-factor in the case of retail..

It is the building of a large retail network of shops/outlets at right locations which is the key to be a leader in retail...

In Retail, the most important thing is Location. At least in initial stages, organised retail is going to be focussed in urban India... and most shoppers prefer to shop in places with proximity. But at the same time, real estate is hard to acquire in such locations..

So i feel that retail is having lot of challenges... rest my case there.

Posted By: omshivaya
Date Posted: 15/Apr/2007 at 2:11pm

Originally posted by go4lalit

From 2000 till now, EPS of Wipro/Infy has grown multifold, but not the returns as PE was derated for these.

Taking an EPS of Rs. 20 for Pantaloon for FY08, it is currently trading at around 20 forward PE FY08. And in March 2008, if it trades at 40 trailing PE FY08, then what kind of rerating are you talking of lalit ji.

Assuming it grows at let's say not even 60% but just 40%, then a 20 PE forward, seems pretty okay to me.

Am I missing something Basant jee?

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 2:52pm

I think Pantaloon EPS of 20 for FY08 is too stiff. May be in FY9-10 they will be able to achive this kind of EPS.

Think of Pantaloon in the last 18 months. The EPS has definately grown in that period. What abt the returns?

My point of view is margin of safely if someone takes exposure at these levels. If I had bought Pantaloon at 10/- and sitting on 40 bagger, I will not sell, as even if it doubles in the next 2 years, it means 80 bagger for me.

I might not buy Reliance at these level (assume double in 3 yrs), but if someone has bought Reliance at IPO, he may continue to hold. Will you buy Wallmart at these levels? Buffet will not sell wallmart though it is not multibagger from here.

It boils down to what we want and at what risk. If we only want 10 bagger in 2-3 yrs with margin of safely, we need to look elsewhere.

BTW, RJ had increased exposure to Pantaloon last year(should have bought at 400+ levels). He had sold part of Praj Industries below 100 levels.

Posted By: basant
Date Posted: 15/Apr/2007 at 3:06pm

Originally posted by omshivaya

Assuming it grows at let's say not even 60% but just 40%, then a 20 PE forward, seems pretty okay to me.

Am I missing something Basant jee?

Like Tigershark mentioned on the Tv18 thread we can go on discussing the issue but the final outcome will have to wait. Rs 20 EPS willl depend on kicker from multiple businesses which at this point looks very fluid and the direction will have to wait till we get the first signs of that in place.

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 3:17pm

Originally posted by basant

Originally posted by omshivaya

Assuming it grows at let's say not even 60% but just 40%, then a 20 PE forward, seems pretty okay to me.

Am I missing something Basant jee?

In the short term with limited number of stores, Technology and efficiency may not be crucial to retail industry. But in the long run, when number of store grows multifold, How do you expect anyone to control thousands of stores efficiently without scalable technology investment.

I agree that location of the store has some role to play, but in the long run you still do not know which kind of retail business model will be successfull/leader in india. Probably that is why Biyani has been trying all kind of models. I would have been more apprehencive if he has opened 500 Big Bazzar stores instead of 5 different kind of hundred stores.

If you have 5 different kind of business models, it is more difficult to manage comparing to only one model. Long run their will be different leaders in each model (as that will be their only focus). Studying China/Korea retail market will be helpfull to find which model will work best in India in the long run.

Still retail has a long way to go in india.

.....Cheers

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Posted By: omshivaya
Date Posted: 15/Apr/2007 at 7:43pm

Thanks for that. My point was related to the rerating part, rather than the tech. part which you had written. Anyhow, still informative your post. Thanks and Cheers

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 11:29pm

Om .. My apolozies.. The above thread was reply to another thread.

Reply to your thread was here:

http://www.theequitydesk.com/forum/forum_posts.asp?TID=382&PN=5 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=382&PN=5

I think Pantaloon EPS of 20 for FY08 is too stiff. May be in FY9-10 they will be able to achive this kind of EPS.

Think of Pantaloon in the last 18 months. The EPS has definately grown in that period. What abt the returns?

It boils down to what we want and at what risk. If we only want 10 bagger in 2-3 yrs with margin of safely, we need to look elsewhere.

BTW, RJ had increased exposure to Pantaloon last year(should have bought at 400+ levels). He had sold part of Praj Industries below 100 levels.

Posted By: omshivaya
Date Posted: 15/Apr/2007 at 12:51pm

Hey no apologies needed Lalit jee. Pantaloon is of course a high risk-high return stock.

Let's see what happens to that Rs. 20 EPS for FY08. Does it come in FY08 or in middle of FY09. Of course, it is all a risk-reward game.

What is your margin of safety line, for Pantaloon?

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: omshivaya
Date Posted: 15/Apr/2007 at 12:52pm

Originally posted by basant

Originally posted by omshivaya

Assuming it grows at let's say not even 60% but just 40%, then a 20 PE forward, seems pretty okay to me.

Am I missing something Basant jee?

Right Basant sir, got it. Thanks

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: xbox
Date Posted: 15/Apr/2007 at 5:36am

PE, ROC, ROCE, EPS, BV are few toys gives to aam aadmi. Can we do some serious work with toys ?

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Don't bet on pig after all bull & bear in circle.

Posted By: basant
Date Posted: 15/Apr/2007 at 8:51am

Vipulji I agree, these are just a few tools that we employe the biggest of them is the business model because all these tools are a derivative of the business model and management quality.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: go4lalit
Date Posted: 15/Apr/2007 at 9:14am

OM,

My margin of safely will be below 350/- If it comes to this level I will definately buy.

With 70% sales growth this FY till now, if we assume 60% EPS growth it comes to

2QFY07 EPS = 5 * 160% = 8

(5 was EPS in FY06)

Current PE = 400/8 = 50

At current FY PE of 50 and growing at 50+%, I am uncomfortable. Margin of safely will come if I buy at around 40 current PE and 25 forward PE.

Assuming another 60% EPS growth in FY08(might be conservative, but that is where I will make money), EPS wll be minimum 13. So 14 month forward PE is 30 and I will be comfotable with 25 forward PE.

With 70% EPS growth in FY07 & FY08, target PE in 2QFY08 will become:

= 5 * 1.7 * 1.7 = 14.45

For me the cream is already out of milk - now it is skimmed milk and I do not want to buy skimmed milk at the price of cream milk. This is like pure grocery shopping and I would like to invest this way. Even if I miss couple of INFY this way, many more opportunities will come if we wait patiently.

... Cheers

Posted By: Vivek Sukhani
Date Posted: 15/Apr/2007 at 9:28am

Mr. Vipul,

They are toys alright but it can be qiote useful as well. The only thing is that people dont observe the transformation that is taking place, through the help of such ratios.At St. xavier's, I had a friend who used to do moving average calculation with the fundamental figures. Problem, is we look at figures in a vacuum. And then it doesnt make any sense.

Mr. Lalit,

100 p.c. agree with you. We have to conyinuously roll over the stones to get a pearl. But once we get once, we should try to hold on to them. Also, I beleive that PE-rating/de-rating is done by markets, something which we as individual investors myst not try to take a gauge of. So, by sticking to a few core principles, and PE-re-rating may be one of them if one is comfortable with it, we can easily locate what we wanted..... what will happen with our picks will be best left to market to determine....

Regards,

Vivek

Posted By: kanagala
Date Posted: 15/Apr/2007 at 9:31am

Hi,
Do you have any idea how much PRIL earn in 07 and 08?

Posted By: basant
Date Posted: 18/Apr/2007 at 10:04pm

I just thought of suggesting this example to explain how high PE stocks could make more wealth:

Let us assume that there are two companies Company L is a low PE co. whereas company H is a high PE company. L trades at a PE of 10 times and grows at 10% whereas H trades at a PE of 25 tiomes and grows at 25%.For sake of simplicity let us assume their base EPS at Rs 10 each in the first year of study:

	2007	2008	2009	Absolute Return
Company L
EPS growing at 10%	10	11	12.1
PE = G = 10%	10	10	10
Stock Price	100	110	121	21%
Company H
EPS growing at 25%	10	12.5	15.625
PE = G = 10%	25	25	25
Stock Price	250	312	390	56%

So higher the PE higher the return. Even if the PE contracts a bit in the case of high PE companies the ent result will be better compared to a relatively lower PE company.

Posted By: BubbleVision
Date Posted: 18/Apr/2007 at 10:40pm

BasantJi...Please Clarify if I am wrong.

Now let us suppose that the Growth for H slows down to 10 % in 2010 while the growth for L increases to 25%. Then what happens, as according to the calculation above...in 2010

L has an EPS of 151 and with a conservative re-rating, PE is asumed to be 15.00....So L is quoted at 226/-

H has an EPS of 17.18 ...with the PE derating at 15...the stock would be at 256.00.

So in 2010, the absolute return for L would be 126% and H would be 3%.

IMO High PE is a "High Risk High Reward" strategy, which may NOT be suited for everyone!!!

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You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!

Posted By: basant
Date Posted: 18/Apr/2007 at 11:15pm

Companies growing at 10% do not experience increased growth. Size does become enemy especially after it becomes large.

Even with that hypothetical example the second company had not done bad for investors who have held it since inception. Also switching midway from H to L is more a matter of chance rather then choice.

Generally I assume these companies are from different sectors. You can assume HDFC bank as a H and any other company as L.

Posted By: xbox
Date Posted: 18/Apr/2007 at 5:32am

If we can spot a company which is growing 20-25% and have such visibility for 3-5 years, then most likely search is well executed. PE for growth stock does not matter. MCap matters instead of PE.

<<Serious note>> Sector matters the most. Can we spot sunrise sector ?

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Don't bet on pig after all bull & bear in circle.

Posted By: basant
Date Posted: 18/Apr/2007 at 10:08am

Vipulji: That is the bottomline. You have really defined how to get a multibagger but growth should be in upwards of 35% at least. That is the benchmark I look for and in 6000 listed companies we do get at least four and I want no more

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: kanagala
Date Posted: 19/Apr/2007 at 3:47am

Hi Basant sir,
I have one more question on ROE. ROE is calculated based on the Book value. How reliable are these book values given for each company?.
If we take the example of Bajaj auto, it has significant investment in Insurance in other places. Is Bajaj auto book value represent fair value?

Posted By: basant
Date Posted: 19/Apr/2007 at 8:47am

INteresting. Bajaj Auto BV will reflect investments in insurance - benefits of which are yet to kick in so RoE becoems a subjective tool here. Rather we should compute RoCE (excluding the investments in insurance and other businesees) something like the ROIC that Haish Biyani referred to above because ratios tend to get misleading vey quickly.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: kanagala
Date Posted: 19/Apr/2007 at 11:44am

I have the following question on "Company growing faster than ROE" without diluting the equity.
By increasing the efficiency ( better pricing the products, increase in NIM), it is possible to increase the EPS by using the same equity. In this case, it should possible for companies to grow more than ROE?

Posted By: basant
Date Posted: 19/Apr/2007 at 11:50am

Absolutely that can be done but these are temporary things cannot do it for ever.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: kanagala
Date Posted: 22/Apr/2007 at 12:44pm

Originally posted by basant

Absolutely that can be done but these are temporary things cannot do it for ever.

Hi Basant sir,
This is regarding the validating company P/L statements and Balance sheets.
Is there some one to check these numbers reported to share holders?
How accurate are these BV calculation? I can sure about them for banks. Because whatever banks have on their Balance sheet is money? But what about the companies who have lot of fixed assets and intangibles.

Posted By: basant
Date Posted: 22/Apr/2007 at 12:50pm

It is funny but the markets trust the auditors of the company. Book value are subject to change for example a LCD Tv which you buy ofr Rs 125000 would be valued at Rs 87750 after a year whereas the realisable value would actually be Rs 50,000 only!!!

Unless company has been caught trying to cheat promoters we should believe in those annual reports!

Posted By: absolut
Date Posted: 18/Jun/2007 at 4:03pm

PE ratio is often interpreted in different ways there by confusing the already confused investor . Here is a very easy way of finding if the share price is over valued or undervalued . Take the PE ratio of the shock and the earning growth ( % ) for the last fy or quarter which ever is applicable . If the PE is higher than the earning growth , then the stock is overvalued ( see GMR Infra ) but if the PE is lesser than the earning growth , then the stock is under valued ( we shall see that happening with RPL ) ... the ideal situation is when the PE = 1/2 of earning growth ....it will turn out to be a multi bagger ....try it your self ...look for the data for Pantaloons or Financial Technology , when ever they became multi baggers !!!!!! any comments !!!!!

Posted By: basant
Date Posted: 18/Jun/2007 at 4:13pm

Hi, the dififcult thing with finance is that most of the mathematics stays on paper. The creation of these rules is science but their application a serious art!

Companies never grow at one rate and with some companies like RPL the growth rate is not in their control but are governed by external conditions like Govt. policy, crude oil market etc.

Posted By: smartcat
Date Posted: 18/Jun/2007 at 4:30pm

Take the PE ratio of the shock and the earning growth ( % ) for the last fy or quarter

The trick is to try and estimate the future growth, not the past. That's why it might make sense to buy a 100 P/E stock even if the company grew by only 30% last year.

GMR's real earnings will start when the Hyderabad and New Delhi airport becomes operational. Hence the high P/E.

Posted By: kulman
Date Posted: 23/Jul/2007 at 9:41am

More than 30 of BSE 100 stocks have a PEG multiple of well below 1, indicating that they are still not overvalued 25 Most expensive stocks in terms of PE multiple
Company Name	Closing as on 23rd July	PE multiple
Indiabulls Real Estate Ltd	664.15	934.11
Videsh Sanchar Nigam Ltd	483.55	895.46
Reliance Natural Resources Ltd	43.20	190.31
GMR Infrastructure Ltd	960.00	172.66
Glenmark Pharmaceuticals Ltd	709.45	168.65
Tech Mahindra Ltd	1417.10	134.17
Aban Offshore Ltd	2995.10	134.11
Financial Technologies (India) Ltd	2855.55	124.97
India Cements Ltd	226.50	86.06
ABB Ltd	1136.10	70.75
Zee Entertainment Enterprises Ltd	339.50	65.35
Titan Industries Ltd	1269.40	56.37
Siemens Ltd	1322.15	56.11
Suzlon Energy Ltd	1532.85	51.16
I-Flex Solutions Ltd	2363.20	50.23
Aditya Birla Nuvo Ltd	1554.55	48.58
Divi's Laboratories Ltd	7035.05	48.53
Bharti Airtel Ltd	940.95	43.90
Reliance Capital Ltd	1214.65	39.32
Punj Lloyd Ltd	278.90	37.49
Housing Development Finance Corporation Ltd	1986.05	36.82
Nestle India Ltd	1180.65	36.13
Unitech Ltd	576.75	35.85
Crompton Greaves Ltd	271.45	35.32
Wipro Ltd	507.80	34.55
Source:Bloomberg
** for trailing twelve months

Source: Costly stocks still a bargain: analysts http://www.livemint.com/2007/07/24004019/Costly-stocks-still-a-bargain.html -

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Life can only be understood backwards—but it must be lived forwards

Posted By: basant
Date Posted: 23/Jul/2007 at 10:26am

Reinforces that principle that good stocks like doctors always remain expensive.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: kulman
Date Posted: 24/Jul/2007 at 12:01pm

Reinforces that principle that good stocks like doctors always remain expensive.

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Shaayad isiliye bujurgo ne kaha hain: Health is Wealth!

By the way, has anyone seen physical fitness program titled 'Marathon Managers'?

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Life can only be understood backwards—but it must be lived forwards

Posted By: kvinodhan
Date Posted: 06/Aug/2007 at 10:08am

Basantji...

With wipro buying out the New US Firm(infro crossing) should it not be re-rated....It is over a 600mn bought entirely from internal accruals....

thanks

Vinodhan

Posted By: basant
Date Posted: 06/Aug/2007 at 10:54am

Look at the margins of Wipro and the company being acquired. This acquisition is being doen at a PE of 50 times+ (Price paid is about 50 times the net earnings).

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: kulman
Date Posted: 01/Sep/2007 at 9:24am

When stocks get ‘re-’ or ‘de-rated’

“Real estate stocks have been de-rated because of sub prime risks”… “Telecom stocks are being re-rated by institutional investors”…. When you come across such phrases in debates about stock markets, have you ever wondered what re-rating or de-rating is?

We know that the price-earnings multiple, the most commonly used valuation metric, refers to the amount investors are willing to pay for every rupee earned per share. When this multiple expands, or in other words, when investors are willing to pay more for every rupee earned by a company, a stock is said to have been re-rated. Multi-fold gains in share prices typically occur when earnings growth is combined with a re-rating of the stock.

Re-rating often occurs in mid-cap stocks as the company’s ability to scale up its business and grow faster than its larger peers becomes clear.

Stocks belonging to sectors such as media, infrastructure or retail now command more fancy valuations compared to a few years ago, as investors have steadily gained conviction in the growth prospects of such sectors and have chased these stocks.

Conversely, when the market begins to expect growth rates to moderate, stocks get “de-rated.” This de-rating may happen much ahead of the actual slowdown in performance.

Just as a re-rating can inflate returns from stocks of high-growth companies, a de-rating coupled with slowing earnings growth can be a double whammy for investors.

When a sector is in a take-off mode and several players are in the fray, it might be hard to tell which company is best placed to grab a chunk of the market share. There may also not be too many investment options in the listed space. In such instances, all stocks that operate in that particular space may enjoy similar valuations.

Finally, growth expectations are not the only factors that drive valuation re-ratings. Liquidity and risk appetite too play a role.

In the absence of liquidity to fuel a re-rating of stocks, investors will have to rely on earnings growth alone to drive stock performance and will, therefore, have to be more selective.

So a stock’s performance does not depend on a company’s earnings growth alone. The trick is to identify stocks before the market re-rates them and book profits when growth rates start to peak.

Of course, if it was as easy as all that, we would all be Warren Buffets.

Source: http://www.thehindubusinessline.com/iw/2007/09/02/stories/2007090251071300.htm - HBL

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Life can only be understood backwards—but it must be lived forwards

Posted By: sandeeptulsiyan
Date Posted: 29/Jan/2008 at 2:45pm

Originally posted by omshivaya

Since I know very less about Voltas...if someone is expecting a much better growth rate for next 3 years, simply multiply that growth rate with 0.3

Hi Omshivya,
May i please know the rationale behind multiplying the expected increase in earnings by 0.3.

Is there any specific assumption that you have considered while calculating. If yes, then please enunciate, i am keen on knowing it.

Posted By: omshivaya
Date Posted: 29/Jan/2008 at 3:22pm

Originally posted by sandeeptulsiyan

Originally posted by omshivaya

Since I know very less about Voltas...if someone is expecting a much better growth rate for next 3 years, simply multiply that growth rate with 0.3

Hi Omshivya,
May i please know the rationale behind multiplying the expected increase in earnings by 0.3.

Is there any specific assumption that you have considered while calculating. If yes, then please enunciate, i am keen on knowing it.

First of all, Admin jee may move my post to any other thread if it does not suit the title of this thread.

Ok now Sandeep jee. This is not rocket scienCe, but just my way of getting a good bargain price. It is important for me to to buy good stocks but as important for me, is to pay a reasonable price for buying it. I use this method 0.3 only when entering a good business. It is my method and I feel comfortable in it, and is not necessarily meant for everyone! To each his own as they say.

See...the method I follows is as follows, step by step:

1) Find out a reasonable growth rate over next 3 years(not any more, thanks to Basant sir) for my company.

2) Multiply that growth rate by 0.6. This is usually my "Trailing Twelve Month PE" which I set for my company and have a mental target in mind. If the TTM PE comes anywhere above 40(like 45,50 etc.), I try to keep the TTM PE at max. 40 no more.

3) Then I multiply the number I got from point two by two sets of numbers, 0.4 and 0.5. Thus, it comes to 0.24 to 0.3.

4) 0.24 multipLied by the growth rate becomes the lower end of the entry band and 0.3 multiplied by the growth rate is the top end of the band. I try buying the business between this range.

Let me illustrate and hope it helps

Yes Bank growth rate(as this point), I have assumed would be 70% for next 3 yeArs. So, I multiply it with 0.24 and 0.3 and hence my forward PE range becomes:

16.8-21

My assumption for FY09E EPS if Rs. 10. Thus for any fresh entries, I would ideally like to get in between 16.8x10 and 21x10, that is betwen 168-210.

This take care of a lot of things(not fully but to some extent): earnings disappointment, slight pe-derating

Usually, no matter how good the business...I would think twice before entering at a Forward PE of above 0.3 x growth rate for next 3 years.

Hope this helped Sandeep jee. This is my method, so nothing great about it...only that I am comfortable using it. May not be the case for everyone else!

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: kanagala
Date Posted: 29/Jan/2008 at 11:10pm

Thanks for your explanation. Very nicely explained. I will also follow this principle. It has enough Factory of safety.

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While one person hesitates because he feels inferior, the other is busy making mistakes and becoming superior.

Posted By: PrashantK
Date Posted: 29/Jan/2008 at 1:09am

Originally posted by omshivaya

Originally posted by sandeeptulsiyan

Originally posted by omshivaya

Since I know very less about Voltas...if someone is expecting a much better growth rate for next 3 years, simply multiply that growth rate with 0.3

First of all, Admin jee may move my post to any other thread if it does not suit the title of this thread.

See...the method I follows is as follows, step by step:

1) Find out a reasonable growth rate over next 3 years(not any more, thanks to Basant sir) for my company.

3) Then I multiply the number I got from point two by two sets of numbers, 0.4 and 0.5. Thus, it comes to 0.24 to 0.3.

4) 0.24 multipLied by the growth rate becomes the lower end of the entry band and 0.3 multiplied by the growth rate is the top end of the band. I try buying the business between this range.

Let me illustrate and hope it helps

Yes Bank growth rate(as this point), I have assumed would be 70% for next 3 yeArs. So, I multiply it with 0.24 and 0.3 and hence my forward PE range becomes:

16.8-21

My assumption for FY09E EPS if Rs. 10. Thus for any fresh entries, I would ideally like to get in between 16.8x10 and 21x10, that is betwen 168-210.

This take care of a lot of things(not fully but to some extent): earnings disappointment, slight pe-derating

Usually, no matter how good the business...I would think twice before entering at a Forward PE of above 0.3 x growth rate for next 3 years.

Hope this helped Sandeep jee. This is my method, so nothing great about it...only that I am comfortable using it. May not be the case for everyone else!

Omjee nice logic....but in the yes bank illustration ...why do you have a lower price band for entry...i mean ...what if you are getting it at less

than 168..

Posted By: omshivaya
Date Posted: 29/Jan/2008 at 10:36am

Well, usually I put "buy limit orders" between lower band and higher band and hence I need the lower band price. But if price goes below lower band, it is a rare situation. If fundamentals of the stock remain the same, then I would think any price below lower band is at a super-discount.

Usually, I have seen that the price being below lower band of mine is very rare(especially in the bull market).

Hope it helps!

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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

Posted By: Janak.merchant1
Date Posted: 18/Feb/2008 at 8:28pm

Dear Basant and other intelligent investors,

I wud be interested to know your views about P/e ratios. Do you rely on them for any of your investment decisions?

In what way has that ratio helpe you people.

I basically focus on business dynamics.

Thanks in advance for any insights.

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I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money.

Posted By: basant
Date Posted: 18/Feb/2008 at 8:44pm

I do look at PE but it is just an enabling factor. Buying low PE companies is a misnomer. It is too easy a way to succeed. Can a Rs 2 newspaper which has a list of low PE stocks indicate the next big idea on Dalal Street?

Generally we try and equate PE with the RoE but busienss dynamics and management quality are of paramount importance because whereas a PE does not affect the other two these two aspects can significantly affect the EPS and therefore the PE.

More often then not contrary to popular belief low PE stocks do not outperform the markets but as in investing there are no rules here.

Posted By: Janak.merchant1
Date Posted: 18/Feb/2008 at 9:01pm

Originally posted by basant

I do look at PE but it is just an enabling factor. Buying low PE companies is a misnomer. It is too easy a way to succeed. Can a Rs 2 newspaper which has a list of low PE stocks indicate the next big idea on Dalal Street?

More often then not contrary to popular belief low PE stocks do not outperform the markets but as in investing there are no rules here.

Wow. That was a great insight. your statement that pe does not affect the other two but business dynamics and management quality can affect the EPS and PE. Hoping to learn something from you each and everyday.

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I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money.

Posted By: shivkumar
Date Posted: 18/Feb/2008 at 10:11pm

Two companies with low P/Es that come to mind today are DCM Shriram Consolidated and Birla Corporation. Good companies with reasonably good managements. Especially, the latter. Under Lodha, Birla Corp is expanding without debt using its internal resources. Expect to hear more of B C when plant expansion in Madhya Pradesh and others get underway.

as and when haryali kisan bazaar gets sold or taken over by retail biggie DCM Shriram Consolidated will be rolling in cash.

right now both are waiting to be picked by value investors.

Posted By: kumardiwesh
Date Posted: 10/Sep/2008 at 12:08pm

How much time would it normally take for PE-rerating?
For example, if a company's PE is 10 at present and it's going to grow its EPS by 30-40% for the next 2-3 years, would it get a PE of 25-30-35?
What should be the period of sustainable growth of 30-40% for the company to command a PE of 25-30-35?
For example, if the company will grow at 30-40% for the next 2-3 years, but its growth will slow after 2-3 years, will it get a high PE?

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"History does not tell you the probability of future financial things happening" - Warren Buffett

Posted By: basant
Date Posted: 10/Sep/2008 at 12:20pm

No rules here but it takes anywhere between 10-12 quarters for a PE rerating plus you need abull market as a catalyst for that to happen.

Posted By: kumardiwesh
Date Posted: 10/Sep/2008 at 1:36pm

And this PE-rerating can happen only in small-caps and mid-caps.
In these markets we do have small-caps and mid-caps trading at single-digit PE multiples, and these are companies which can grow by 20-30% for the next 2-3 years.
But the growth may not be sustained after that.
What I wanted to ask is whether thse companies will ever be re-rated or the market would start discounting the decline in growth these companies will experience after 2-3 years, and never re-rate them?

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"History does not tell you the probability of future financial things happening" - Warren Buffett

Posted By: basant
Date Posted: 10/Sep/2008 at 1:42pm

It takes several quarter for markets to realise sustainability in growth and therefore a PE rerating generally these are bouts of money that markets give to investors never easy to estimate when they will happen. It happens faster in sector leaders and companies that are scalable otherwise not.

Posted By: studentoflife
Date Posted: 25/Sep/2009 at 6:43am

Consider this scenario:

A stock which operates in a P/E of 10 -20 ,you buy at P/E of 10 in a bear market.

This company is a steady compounder growing at an average rate of 20 %.. You wait till the company is suddenly selling at P/E of 25 ...maybe in 5 years.......and this will most probably be a bull market peak..

Starting EPS of stock Rs 10

After five years EPS= 24.88

Bought prices =10 * 10 =100

Sold price = 24.88 * 25= 622

So Rs 1 lakh becomes 6.22 lakh in five years.

Now instead if initial P/E is also 20,then Bought price = 200 and Sold price = 622.

So Rs 1 lakh becomes 3.11 lakhs in five years..

But if the same stock if bought at p/E of 5 ,then

Bought price = 10 * 5 = 50,Sold price = 625.

So 1 lakh becomes 12 .5 Lakhs !!!!!

So as important as compounding..buy ridiculously cheap!!!!!!!!

and buy good businesses ,established mid caps...

So just margin of safety is not enough ,it has to be RIDICULOUSLY CHEAP or dont buy at all.

It is simpler than getting companies which grow excess to perceptions and also more predictable.

Kindly correct if wrong.....

Posted By: munna
Date Posted: 15/Nov/2009 at 11:54pm

Hello Ramprakashji & Basanji,

I am new to stock market & want to understand this "P/E Ratio" funda. I have searched and read about it on the net but still have following questions.

A) If I buy a stock at Rs.100 (EPS RS.10,PE 10) and eps is growing at 15%,after five years eps will be around 20.Is it certain that market will value my stock at 10 P/E (Rs.200) at that time?what kind of PE range should I expect?

B)If No,Why & what are the factors that will determine the ratio at that time?

I kindly request you to please help me understand this.

Posted By: prashantmohta
Date Posted: 15/Nov/2009 at 1:42am

If your stock is a sector leader Then u can expect pe expansion.

Posted By: basant
Date Posted: 15/Nov/2009 at 6:34am

Originally posted by munna

B)If No,Why & what are the factors that will determine the ratio at that time?

I kindly request you to please help me understand this.

../why_should_hll.asp - Why should HLL trade at a PE of 5 times that of Tata Steel or why should VST trade at a discount to ITC inspite of having a common foreign parent? Note down the drivers behind a PE ratio.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: munna
Date Posted: 16/Nov/2009 at 11:53pm

Originally posted by prashantmohta

If your stock is a sector leader Then u can expect pe expansion.

Hi Prashantmohtaji,

Thanks for replying. What I want to know is,if my stock is not a sector leader at what P/E market will value it after five years? What is the basic assumption with which the P/E ratio is used?

Please help.

Posted By: wiseowl
Date Posted: 03/Dec/2009 at 12:29pm

http://www.thehindubusinessline.com/2009/11/30/stories/2009113051170100.htm - IBM is cheaper than Infosys!

...the headline is quite uncharacteristic of BL

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You alone are responsible for your actions.

Posted By: prabhakarkudva
Date Posted: 04/Jun/2010 at 10:16am

I feel PE is decided by two factors:

1. Earnings growth rate
2. Perception of the durability of earnings(For how long the market thinks can earnings grow at the above rate).

So the real bet is this:

Many of us at TED are betting that Hawkins' earning is durable while the market doesn't think so yet.So one of the two of us is going to be wrong.That game b/w you,the individual and the market as a whole, is at the heart of investing.

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Take your chances and keep them in a box until a quieter time.

Posted By: nitin_jagtap
Date Posted: 04/Jun/2010 at 10:28am

Mail from Kulman on components of PE as advocated by Ram Charan

" To create a higer PE ratio you have to show financial markets that you are earning a solid return on your investors money and growing profitably and that investors can count on you to keep up the good work in the future ....here hows the market make the judgement -

Components of PE Ratio

Top line growth

Expansion of margins

Velocity (asset turnover, working cap ratios)

Capital investment

Leadership

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Warm REgards
Nitin Jagtap

Posted By: basant
Date Posted: 04/Jun/2010 at 11:15am

Pearls of wisdom. This brings objectivity into a subjective topic.

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: hit2710
Date Posted: 05/Jun/2010 at 12:26pm

Originally posted by prabhakarkudva

Hitji,
When was investing not about predicting?Although about the other walks of life i do agree

What I say is while predicting one has to tone down one's expectations to escape disappointments. And when one buys very high PE stocks just as many people did in educomp,(currently in titan--although I have all the chances to be wrong here, but better safe than sorry) etc, chances of getting burnt are very bad.

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Stockmarket is a weird place. For every person who buys a stock there is a person who sells it and both think they are very smart.

Posted By: prabhakarkudva
Date Posted: 05/Jun/2010 at 12:40pm

Very high PE has to been seen in conjunction to growth rates which we are predicting.But what we need to understand is that we are being reasonable when we are saying that we expect Titan to grow at 30% because:

1)It has been growing at that rate in the past
2)There is a good chance that it will do so in the future too since the opportunity is there and so is the expertise(management).

Now if we can find another retailer with Titan like prospects and business model(super high ROCEs)which is trading at 20 PE,then yes Titan is riskier than this hypothetical company.But of you are comparing Titan to a 30% grower in some other industry with totally different dynamics which is available at 20 PE then it is fair neither to Titan nor our hypothetical company.

Also one loses equal money if PE falls from 40 to 20 and if it falls from 15 to 7.And very rarely will a 40 PE stock fall to a sub 10 PE.Expecting a 40 PE stock to be any riskier just because the absolute PE is higher is not correct in my opinion.Buying low PE stocks is no safer than buying a high PE stock,when business model is analyzed properly.But lets just agree to disagree cos finally its about one's comfort level

PS:Titan is just an example to illustrate the point.

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Take your chances and keep them in a box until a quieter time.

Posted By: motiwebmaster
Date Posted: 10/Jun/2010 at 2:59pm

I think this is good example for De-rating and Re-rating.Today 10th June
in early afternoon trade as the market rebounded from lower level on higher US index futures. The market shrugged off lower European stocks.

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Stock_ Shares_SubBroker

Posted By: Shadofax
Date Posted: 25/Aug/2010 at 1:05am

In crores	2009 - 10	2008 - 09	2007 - 08	2006 - 07	2005 - 06
Total Income	274.02	195.82	57.9	43.81	31.55
Expenditure	-203.03	-157.6	-50.03	-38.65	-26.03
Net Profit	45.27	23.81	4.54	4.27	2.48

Growth in	2009 - 10	2008 - 09	2007 - 08	2006 - 07
Income	40%	238%	32%	39%
Expenditure	29%	215%	29%	48%
Net Profit	90%	424%	6%	72%

Current MCAP = 2300 crores

Trailing profit = 45 crores

Trailing PE Ratio: 51x

Let us just play with some numbers:

So without doing any real market analysis and product analysis, let us work with a couple of scenarios

Case 1: 30% profit growth and maintains a few years

- FY11 PAT = 58 crores

And because the growth has gone down drastically

- the trailing PE = 30x (for argument sake one can even say it can become 25x but I would like be less pessimistic )

- Therefore, MCAP = 1750 crores [24% downside from cmp] ... after 1 year.

Case 2: 40% profit growth and maintains a few years

- FY11 PAT = 63 crores

- the trailing PE = 40x

- Therefore, MCAP = 2520 crores [10% upside from cmp]

Case 3: 50% profit growth and maintains a few years

- FY11 PAT = 67.5 crores

- the trailing PE = 50x

- Therefore, MCAP = 3375 crores [46% upside from cmp]

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So basically the assumptions can make us rich and poor like anything.

The questions now comes is:

What can be the sales growth for a couple of years? The answer lies in understanting the pointers below:

1. Understanding the market size of this kind of products (Suger Free and Nutralite) and checking out

2. Entry Barriers for others to enter this business

3. Existing Competitors

4. Capital Requirement to grow

5. <<some one please add more comprehensive parameters>>

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Also one more thing ... In the case 1 (with 30% growth) above where there seems to be a 24% loss at the end of 1 year ... if we keep the stock for 1 more year and if the company does 30% growth for FY12 ... one will break even at the end of 2 years.

So what I mean is that there is decent capital protection here and as Basantjee says (also in transcripts) that the risk is to a great extent gone in high growth companies.

Not to forget that these kind of stocks can give a +ve surprises.

What if it gives a 60-70% growth in a particular year?

That is why I feel that more time needs to be spent in answering the above question ... and a few more that people will add.

Then we just have to sit tight.

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P.S: I think I am making sense but there is a possible that I might be missing something big and the above theory goes total false...

Senior members .. Am I missing something badly?

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Also Basantjee ... to sit tight after all the arguments needs conviction ... And it would be great if you can highlight something on it.

Also how do you predict or roughly gauge the Sales growth? Do you?

Something like meeting distributor of 1 region and assuming the same is repeated in every region ... is it safe to do that?

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$

Posted By: Shadofax
Date Posted: 25/Aug/2010 at 1:22am

Hope the logic explained in the Case1,2,3 makes sense. Would love if someone can highlight some serious faults. except for arguments like "markets wont give pe of 30x to company that grows at 30% because it was previously growing at 90%"

I mean .. is there any major flow in the logic.

---

I heard Basantjee saying that in this way the risk is reduced to a great extent (capital protection shown in case 1) and there is a scope of huge upside ... Have I understood it correctly?

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$

Posted By: basant
Date Posted: 25/Aug/2010 at 5:35am

Sometimes abnormally high PEs can hit back irrespective of growth and that happens when growth slackens as per market expectations so you make a list of consensus estimates first and then take a view as to whether the company will beat consensus - as I keep doing with TITAN.

Also try reading David Dreman's Contrarion Invetsment strategies also. Its a fantastic book on high and low PE investing!!!

Originally posted by Shadofax

wnside from cmp]

So what I mean is that there is decent capital protection here and as Basantjee says (also in transcripts) that the risk is to a great extent gone in high growth companies.

Also Basantjee ... to sit tight after all the arguments needs conviction ... And it would be great if you can highlight something on it.

Also how do you predict or roughly gauge the Sales growth? Do you?

Something like meeting distributor of 1 region and assuming the same is repeated in every region ... is it safe to do that?

Posted By: sameerde
Date Posted: 06/Aug/2011 at 12:46pm

hi, i had a thought about valuations and how to be a bit more specific. Valuations have always been a point of debate. How much P/E, P/BV etc? DCF is very tricky. Forecasting cash flow over next 20 years is a mechanical exercise.

What I am experimenting with is as below:

Take current EPS/FCFPS and derive earnings yield (E/P or inverse of P/E). FCFPS = Free Cash Flow per Share
Compare that with alternative yield that can be earned e.g. FD at 9.5% or some other investments as an option. Its preferable to take post tax at highest marginal tax rate=9.5%*(1-30.3%)=6.62% since that is what an investor will get in hand.
Take the next 3 years’ EPS/FCFPS (before raising debt—else company can keep raising debt in excess of needs)
The reason that current earnings yield in most cases will be lower than 6.62% (= 100/6.62=~15 p/e) is that there is a growth component in earnings. So if a company is valued at 18 p/e, earnings yield is 5.55% (1/18%). Therefore if somebody invests in FD at 6.62%, then that is the rate the earnings yield must reach in 3 years time. Any growth in earnings after that is a bonus.
So at 5.55% yield or 18x P/E, earnings yield needs to grow at 6% pa to reach 6.62% in 3 years time (5.55%x1.06x1.06x1.06=6.6%)
If EPS/FCFPS is growing at a rate higher than 6%. For instance at 10%, then we can discount back 3 years to find out the growth rate that earnings yield or earning must be such that if they grow at 10%, the earnings or yield will be 6.62% in 3 years’ time. Therefore 6.62/(1+10%)^3)=4.97% or a P/E of ~20x (1/4.97%).
So we are effectively paying a higher P/E for growth
Once we have a target price, it will give us an upside from CMP and we can then build in a margin of safety since the price is a target for achieving the expected growth rate.
We can combine this with other metrics like P/B, DCF to see how different the values are and if required take a weighted average etc. It then becomes a subjective preference. Additionally, if on analysis we find that for instance RoE is lower than a threshold of ~20% then we can increase the asking rate or the target yield by 50 bps or 100 bps. Similarly, if its RoE/RoCE, working capital is exceptional, then we can lower the asking rate by 50 bps etc.
This is not without its contradictions though. For instance at a P/E of 20x in above example, PEG is 2x for a growth rate of 10% when ideally it should be 1x.

Pls let me know about your feedback on the same. I am sure there must be some thing I may be missing but haven’t got around to it yet.

Posted By: sumitraepic
Date Posted: 09/Nov/2015 at 3:45pm

It is important to find that PE de-rating and re-rating. When PE expands money may be loss. So be careful while using the PE contracts.

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http://www.epicresearch.co/commodity-tips/ - Commodity Tips

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