Musings on valuations of certain stocks

Case study : Valuations

 

These are scenarios of 4 famous companies. which it’s not important to name.

 

Scenario 1 : Your grocery/consumables  bill purchase for the month is 10000 Rs. And you buy at a low-cost famous supermarket. Assume, that someone else offers the same set of goods for Rs 9500/- . What would you do. Most probably, you will buy from the 2nd store.

Scenario 2 : Let’s say you want to buy a TV. Price is 1 lakh and Rs. 30000/- is your down payment. Rest is 0% EMI (financed by store/manufacturer). There are 2 counters of the financial lenders. First one, who is a very well-known and famous lender,  offers 24 month EMI, 2nd one, is not a well-know name but  offers a 30-month EMI. Majority of users would use the 2nd option.

Scenario 3 : You want to buy undergarments. You go to a store which offers it for Rs. 300/- and is a famous brand. There is/are also other brands, which gives same fabric, elastic, finish but sells the product for Rs 200/- . Most will still go with the 1st option due to the brand pull.

Scenario 4 : You want to buy a cruiser bike. You go a showroom of a famous player in this segment who sells it for Rs 2 lakhs. There is an adjoining showroom, which sells a similar cruiser bike with same engine option, etc. and prices it at Rs 1.5 lakh.  Most will go with the 1st one as they had their eyes set on that one.

The first 2 in this example, are superb companies, with superb execution, but point to understand is that there is no moat. One should not confuse great execution with moat. These can be disrupted in a short period, let’s say 2 years. The 3rd and 4th are also great companies, with great execution, but have a superb moat. Disruption, if it has to happen, will take much longer time, maybe 5+ years.

 

The point, I am trying to make is on valuations front. Do all 4 companies deserve similar kind of valuations ?

Just my musings on valuations in some stocks currently in the market.

 

Disclaimer : These are personal thoughts. None of these are recommendations/thoughts by Aurum Capital.

-Jiten Parmar

Interesting times in equity markets

Dear All,

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After a stellar run in 2017, broader equity markets have given a very good correction. A handful of index stocks are up, and hence index is at a new high. The founders of Aurum Capital have been giving their views about the markets for more than a decade, trying to help investors make better decisions.

We had anticipated a correction in small and midcaps as a lot of froth had built up. The fall has been severe and sharper than even our expectations. We had moved significant funds to cash and into safer stocks in Dec and Jan.

Reading of the markets is important and if we can get it reasonably right, we can outperform. The reasons for the fall in small and midcaps were:

  • Over-valuations due to frenzy and euphoria among investors, ignoring fundamentals
  • New regulations of reclassification of mutual funds, which resulted in the money entering into few large-caps and away from mid/small caps
  • Regulatory measures like ASM, GSM
  • The feeling of political uncertainty
  • Macros turning bad – high crude prices, current account deficit widening, rupee depreciating, higher US interest rates resulting in selling by FII’s
  • Geopolitical events like the possibility of trade and currency wars
  • Increase in commodity prices
  • Interest rate hike

Some of these are still valid and can be a challenge in the future. On the other side, we are seeing micros improving

  • GST rollout has more or less stabilized. Collections are improving. Recent rate cuts in GST slabs give a leg to growth
  • Compliance in taxation increasing meaning that revenues for the government will increase
  • Good monsoon prediction
  • Huge focus on infrastructure by the government
  • Consumer discretionary spends increasing
  • No major negative surprises in corporate earnings so far

Some good signs emerging are that crude has started moderating, growth is coming back. The economy is much more robust and major disruptions are over, and we believe steps taken by the government will put the Indian economy on a very good growth path.  We believe valuations in quite a few of the large caps are not sustainable and there could be time or price correction or both. We, at Aurum Capital, believe in value investing and are very particular about the price we want to pay, howsoever great a company maybe. We believe a lot of companies have corrected well and look good at current valuations. We might have short-term hiccups, but we definitely believe in the long-term story of India and remain positive.

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