I agree that may be true in somecases. But it’s not applicable for all cases (infact not applicable for most of the cases)
Take example of pidilite
One can see that the profit growth in last 10 years is in teens and the returns are higher because of the rerating. Basic common sense tells that the chances of profit growth will be only in teens for next decade as well. So, the returns would also be in teens (as valuation rerating from here onwards is quite difficult).
So what I mean to say is, If we pay high valuation like (50-100x) for a co growing <20% in sales and profits be ready for derating.
Short response to your above point is, “In Indian market with 2000+ listed stocks why buy a low growth, high PE stock that may fall 50% ?”
I’d rather wait and buy the stock at historically low valuations
Take example of Saregama Ltd
It’s a co that can grow profits at 20-25% CAGR. If someone paid 67x P/E for it, he/she should be ready for derating. But at Current P/E of 33x It’s not a bad decision to buy.
Cases where I’d pay high valuation:
- MTAR current P/E of 70x. But FY24 P/E would be 53x and I’d happily pay that for a co that can grow 30-35% in sales and profits for next 4-5 years (Why would I pay the same P/E for Pidilite growing in lower teens)
- I’ll pay 30-35x for SRF, Gujarat Fulorochem that can grow 15-20% , but not 45-50x
- Will pay 30x P/E for Dodla dairy growing at 15% CAGR but not 45-50x P/E for Britannia growing at 13-15% CAGR
Finally If someone is experienced enough to have vision on a co. for 10 years time frame, they should very well be aware and consider the entry valuation and drawdown potential
@CreateBetterVersion If the comments you’ve made are coming from experience of holding a stock for few years with drawdown, please share with examples. This would be a good case study to oppose the point I made and would help other participants
Thank you
Praveen
Disc: No recommendation by any means. Holding some of the cos discussed
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