P/E re/derating is a double edged sword
I want to put down my thoughts on some point that I think will effect an investors returns a lot. That is P/E rerating and derating.
Let’s take a stock at 100rs and 20x P/E in Fy23 end with EPS of 5. Let’s assume we expect profit growth of 20% and the P/E to rerate downwards or upwards in FY24. The following scenario may occur

What does this tell me:

1. Try to be in a scenario of rerating as far as possible
2. Even though there doesn’t seem to be much difference in 20 P/E and 25 P/E, the returns are huge if we have a short term view. So, try to take advantage of P/E rerating whenever possible
3. One may achieve point 2 by following the trend (technicals) define the exit from a stock rather than exiting once it reaches the P/E you think is fair (there’s not much difference between 20 and 25 P/E as per me). So, hold it and take extra returns

Note:
One may note that the rerating or derating effect is bigger, as I considered a 1 year time frame. But, the difference may not be as big if we consider a view of 4-5 years. But market has lot of cycles, and the rerating and derating can happen in just a few weeks to few months

Example: I’d like to explain one of my current dilemma as an example for this. You may know that MCX is recently gowing through a low earning phase because of high software charges which would normalize from Q4 FY24 onwards. So, I made a calculation of how much return I can expect from MCX by FY25 end. Let’s look at the following scenarios

I consider P/E to be in the range of 35-45x, as this is peers CAMS, CDSL trade at 40,50x P/E and the growth rates are better for MCX

The data says the estimated returns can vary from 9.4% to 29.4% based on what P/E i think is fair. And 9% is very poor return and 29.4% is top notch and the the difference is just P/E change from 35x to 45x

KTA:

1. Don’t exit a stock just because it’s reached a P/E that you estimated. After all there is not fair value but there’s a fair band
2. Book partial profits or take help of technicals to make exit (for that matter even entry) decisions
3. If you have few stocks in P/F you returns may vary highly because of P/E rerating/derating, but if you have 15-25 stock PF, the effect of P/E on the total PF returns may not be significant

Disc: May have postion in the cos discussed

Please feel free to share your experiences of how P/E rerating and derating effected your returns or missed out on high returns as you thought the P/E has reached a fair band

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Poor sales number month on month basis. July aug sep 23 has poor sales data for ampere. Ev story seems to be dying in greaves cotton

@harsh.beria93 What is your view on Jagran Prakashan’s continued bad results compared to DB Corp. What is the major reason for this divergence in performance according to you. Any thoughts on selling Jagran.

Thanks for your time

Agree,Q2 is actually generally flattish for these companies the major ones are Q3 (because of festive and schools running on full pace) and Q1(School Projects and New FY for corporates).

Hopes are high and believe to seem some growth in the coming quarters