PE ratio is determined by number of factors. Some are business specific like competitive advantages (low cost in this case), management’s execution, promoter’s credibility. Dmart deserves a premium valuation on these factors. Another factor is that Dmart is able to deploy all its profit back into buying land and building stores. It has huge opportunity available to deploy its capital for high returns. In addition, the land it has to buy is an appreciating asset.
Then there are macroeconomic factors which affect the PE ratio, the most important being interest rates and fiat liquidity. If FED becomes serious about raising interest rates to fight inflation, all stock markets will fall. A recession will also be bad for Dmart’s business and we can expect PE ratios to deflate across all shares including Dmart and ‘low’ PE ratio stocks. I see such a fall as an opportunity and always keep some spare cash to take advantages of it.
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