True. I didn’t want to edit it after making the post. The earnings crashed by close to 30% from Oct 20 to Oct 22; stock price crashed by close to 40% during the same period. ( I am referring to the values 18.96 and 13.87 for EPS during the periods and 166 & 103 for stock price )
P/E came down but not substantially as I stated before. So you can basically call it as a stock trading below its own ten year median P/E during both the periods.
The change was in P/B. In Q2 and Q3 of 2022-23 it traded at a low P/B value and at times going below 1.
When the video was shared the assumption was that the high P/B was justified because there are entry barriers in this business. Even while agreeing that gold focused players are here for the long term and not everyone can scale this up , it is also true that many are opportunistically getting into this business affecting the margins and business growth at least for a short period.
So for such a business which goes through these cycles P/B alone could be a good reference. When it is trading at high P/B chances are that the market is reflecting the high ROEs and RoAs . But the high returns are attracting many opportunistic players into the business . When it is trading at low P/B those opportunistic players have already got in bringing down the returns . Now the returns are no longer attractive so that only focused long term players continue. The cycle repeats as non gold NBFCs/ banks etc get out of it.
So what about the low P/E? Where does it fit in? I think the easiest way to think about this is that the ratio of P/B and P/E , which is RoE , should go through a cycle if you believe that the business shows a cyclic nature – even if they are short cycles. If you believe that there are strong entry barriers then the returns or the ratio of P/B to P/E should improve or remain stable.
I am thinking this afresh so please don’t mind any contradictions with the previous post. Also I am thinking as I am writing this so the arguments may have holes. I am trying to think about what he was referring to a low P/E and high P/B scenarios. Let’s think about the truck business which had a book value of 2000 Rs and providing a return of 500 Rs. If it is trading at 2000 Rs then the return is 25% which is high. So for the sake of simplicity let’s assume that the market is pricing it at 4000 Rs and the earnings yield if you buy the stock now is only 12.5% . The P/E is 8 now. If the owner deploys another 2000 rs that gives zero returns then the P/E is still at 8 but price to book has become an attractive 1 now. So the essence of his message, I believe , was that you shouldn’t be looking at the high P/B negatively. You shouldn’t if you believe that entry barriers are strong. But if they are not strong then many players will enter this business bringing down the returns and the stock price would react to that.
Now something else.
Right now the projections on gold loan portfolio seems positive. But my question is how do you see the non gold loan portfolio. If I remember right only about 50% AUM is gold loan now. How good you think are their non gold loan portfolio? It is not the secured kind as referred in the video. In fact when we say that non gold NBFCs and banks may not do well since they are not focused , the same should also be true for gold focused players entering into other business. Will they lose the advantage they had on as a gold focused player or the present stock price take care all of that?
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