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Hello Amit,

I see you are constantly in a flux regarding valuations of various companies. There are many ways to tackle this - simple is to just stay away from over valued companies. But, it’s not so simple actually.

I think you are regularly evaluating & learning. All the best.

You will not get straight forward answer from me, sorry for that. But if you can understand these, you will be a better investor in due course.

I will digress & write my thoughts first & then offer my opinion.

As I often write, there are infinite ways to make money in stock market, below is one of many from investor’s point of view. A trader’s point of view will be completely different.

I’m invested in highly over valued companies like Dmart, Page, Nykaa, Kotak, Delhivery, PB Fintech. I have not touched these companies to trade in & out from a long time. - as a policy (result of market lessons), I’m sticking with them.

1. I’m not in a hurry to get over sized returns in short period of time.

2. I believe in the vision of the managements running these companies (CEO of Delhivery is from my alma mater as well, not that this matters much - I’m just bragging) & the opportunity size these companies are running after is mammoth.

3. I will let time, patience & execution be the judge. I will only monitor.

4. From my experience, it is better to buy high quality companies and wait for 1-1.5 years of time correction if bought at expensive valuations and then let the compounding work.

5. Most people in the search of alpha will trade unnecessarily & will have returns far lesser than what holding a Page over a 5 years would have given.

6. See the stark difference in the behaviour between Lux & Page. When valuations are being sliced through, Page has actually re-rated through the last year. Of course, if some one keeps buying at absolute top every time, then it’s his/ her issue. Any one can show bump in revenue by relaxing the trade receivable days, worsening working capital & cash flows. But this is not sustainable as 1 down cycle will wipe you out. Running a business is immensely difficult. That’s why some companies get 25 PE while others get 60 PE.

BUT, if some one is just starting out with small capital, I would INSTEAD suggest learning technical analysis or learn the art of evaluating small cap multibagger skills from super seniors like @hitesh2710. For example, a trader in Lux would get better returns than an investor in Page if technical analysis is properly executed.

Example: It DOES NOT make sense to invest 10,000 INR in DMart or Page and hold for 15 years. For compounding to work wonders, the initial capital or the capital at work must be large enough. That’s why the strategy to be followed must vary according to the individual’s circumstances.

PRICE - Most people irrespective of how they call themselves is a slave to the short term stock price movement. So, it’s better not to JUDGE people of other investing styles. Our communication must at all times be with Mr. Market. Take lessons and move on. Long threads on twitter, analysis paralysis will take a U turn if a stock falls 15% in a day. It applies for me or for any one.

CAGR is what matters, rest everything is academic & excitement.

If the business model is strong the returns will eventually follow but with a “lag” depending on the level of over valuation.

Nykaa: I’m comfortable with 8 times EV/Sales FY24E. If some one can identify a stock at 15 PE with attributes to reach 45 PE then such a stock will give much better returns than Nykaa. No questions asked. But this is not something I’m good at nor want to do. In the current environment, there might be many such companies actually hidden.

I also look at valuation at this way, most of the times - Will Nykaa or a company X exist by FY2026? If yes, what are the sales or earnings likely to be? What valuation would you give 2-3 years down the line if a company is growing at 30% and is profitable? At that valuation, how much are my returns? Are these returns OK for the risk I’m taking today? Personally, 2x in 3-4 years is what I’m happy with.*

For example, I expect Dmart to report 80 EPS in FY2026. In September 2024, I’m happy with giving 80 times 2026 based on its average historic valuations. I would get roughly 40%-50% in 2 years & I’m elated with this. If there is a material risk to these earnings or to the mortality of the company, I will re-evaluate & sell or stay put.

At this point there are so many other companies that WILL give much better returns than DMart, but I will not waver as my monitoring time & risk is much higher.

Car Trade: I have exited long back & not actively tracking & I’m not sure if the management can withstand competition from Cars24 backed by Tata etc. A used car is a commodity. Same car if placed on multiple platforms, a user will buy from some one who is offering for less. Cars24 might have a lot of money to burn. If Car Trade withstand and be different can then the stock could offer superior returns. At this price, the stock is roughly 5 times EV/Sales? Probably, fairly valued? Not sure.

Disclosure: Stocks mentioned are not recommendations & I’m not SEBI registered. I have a position in the stocks mentioned. The earning estimates are mine are obviously are prone to error/ changes.