Praveen’s Information Attic (Obervations, Lessons, Thoughts)

Valuation, the mystery:
I have always found it (still does) to understand how much valuation a co. deserves. Even though I believe P/E is not always true measure of valuation of any co, I’ll consider P/E based on normalized earnings to the measure in the current write up.

Question to the reader:
Please try to answer these Qs for yourself to follow the post better. Here for the answer for any Q needs to be normalized P/E in a band (20x-30x P/E band)

1. Let’s say there’s a co that grows at 10-11% CAGR with decent stability in margin and growth. How much P/E does it deserve ?
2. Let’s say there’s a co that grows at 10-11% CAGR with decent stability in margin and growth. But always lags the industry growth. How much P/E does it deserve ?
3. Let’s say there’s a co that grows at 10-11% CAGR with decent stability in margin and growth. In addition to be this it distributes 4% yield (buyback and dividend included. )But always lags the industry growth. How much P/E does it deserve ?

The I was referring to is wipro ltd. It has traded in a P/E band of 17.5x to 33x during the cycle of the industry.

My personal view: The P/E of 33x is insane for this co and P/E of 17-18x is fair (not cheap). However, there might be few reasons why it trades as 2-2.5x PEG (more in upcycle).

1. Stable and predictable cashflows
2. Large cap co with proven track record of 3 decades
3. Consistent distribution of wealth to shareholders in terms of Dividend and buyback

Question to the reader:

1. Let’s say there’s a co that grows at 20-25% CAGR with decent stability in margin and growth. How much P/E does it deserve ?
2. Let’s say there’s a co that grows at 20-25% CAGR with decent stability in margin and growth. Also leader in the industry in terms of growth. How much P/E does it deserve ?
3. Let’s say there’s a co that grows at 20-25% CAGR with decent stability in margin and growth. In addition to be this it distributes 3% yield (buyback and dividend included. ) and leads the industry growth. How much P/E does it deserve ?

Should the P/E band be definitely higher than the first co on normalized earnings basis??

The I was referring to is angel one. It has traded in a P/E band of 11x to 36x during last 3 years.

My Personal view: For a co growing at 20-25% CAGR (Inf act Angel one grew faster) 36x P/E may Not fairly valued. Not expensive either. But this co has traded at 11x to 36x P/E band for whether it’s right or not. The reason could be why this co trades at 0.5-1.5x PEG

1. Broking industry (at least the incumbents) has always been cyclical
   I can’t find many reasons for this undervaluation in this co. But at 10.5x P/E it’s criminal undervaluation for a co growing consistently. The optoinalities are a bonus.

Why did ANGELONE trade at 10.5x P/E at bottom and Wipro trade at 17x P/E. The reasons I’ve mentioned earlier could be part of the answer. But it can’t explain the whole thing. 10.5x P/E is surpirising under valuation but Mr. market decides what’s correct and what’s not. We make better money by predicting what Mr. Market thinks or how Mr. Market has behaved in the past

A stock or co could be undervalued/ over valued by just looking at the numbers ( before I revealed the name of the co). There is higher chances for us to go wrong when we do this.

The solution ?

1. Looking at the historical valuation band. It works well for established players. But not necessarily for the cos with very short history (Would have helped with WIPRO Ltd)
2. Consider all the available details in hand and decide for your self how much valuation a co deserves (would’ve helped with ANGELONE)

Solution 2 is difficult for new entrant in the market (like me). But sometimes we know we can’t be absurdly wrong at a particular price
Solution 1 could be a solution for some cos. But derating is a bth. Investor could’ve gone absurdly wrong by following solution 1 and invested in Coffee Can kind of stock in last 5 years.

Will try to write a follow up of this post, If I find good hypothesis/idea worth writing down for my self and fellow VPers.

Thanks for reading through

Praveen

Disc: Hold both the mentioned cos (although the weight of Wipro Ltd in insignificant for a reason)