When Not To Buy

For cyclicals like steel, auto ancillary companies pb ratio, mcap/sales work very nice. just open screener and see the last 10 years pb ratio and price to sales ratio for sail, tata steel, jsw steel, Fiem industry, lumax industry etc.

Then lets say u have found a company which is trading within it’s historical valuation range. or the price is consolidating. But u know that the company is doing something for which the roe, roce will increase in future. maybe it’s developing a higher margin product, or selling off some assets which will make the balance sheet light then u know it’s a rerating candidate. multibaggers are found in such a way. Deepak Nitrite is such an example which did capex for sepciality chemicals which resulted in higher roe roce and earnings in 2020 and the stock got rerated from 10-11 pe to 30 pe along with earnings growth. Price shot up from 400 to 2800. One more example is Prataap snacks the company’s margins are down because of palm oil price rise. and so did the price along with the EV/EBITDA. Now at a 1400 cr revenue the company has an ebitda margin of 4 for fy22. Now with reducing palm oil price and the cost cutting measures taken by the company the margins will rise to around 9-10 as it did in past and the EBITDA will rise disproportionately.Even if sales doesn’t increase the ebitda will rise from some 50 to 135 just because of margin rise. then the company is growing in mid teen rate. With the schools opening demand is also coming back. so Depressed valuation (ev/ebitda, mcap/sales)+margin expansion+ sales. So it’s a deeply undervalued stock. Even if you do some dcf the bear case price will come around 1100 and the stock is now at 730. So it’s god damn cheap that u cam tell within 5 min.