“Today there is euphoria. Clearly, there is too much optimism riding. In giving valuations, you are not discounting what the company has earned in the last five years but discounting what it may earn in the next 25 years. This is bizarre,” said Agrawal while speaking at
ETMarkets Global Summit.
The virtual event, which kicked off on Wednesday at www.etmarkets.com, ended today. The session was moderated by Roshi Jain of Franklin Templeton MF.
In recent years, some technology companies have been trading at astronomical valuations, despite reporting losses for multiple quarters or not having a revenue stream at all–just on hopes that someday in the future they will be extremely profitable.
Agrawal was talking about companies like Netflix and Tesla that have blown billions in acquiring customers. The market valuation of Tesla is more than the combined valuation of the next nine largest auto companies, each of which produce a significantly larger number of cars than Tesla.
“Only after 5-10 years, will we know what was right, what was wrong. All the wise people are saying that this is exuberance or a bubble that will burst,” he said.
Agrawal termed the stock market as the most confusing place in the world as one can not comprehend where it begins and where it ends. But he conceded that it is the biggest and most interesting game in the town.
“The more I know about it (market), the more I read about it, the more dimensions I find that I don’t know. When you try to know more about it, you realise you know so little about it,” he said. “Yet it is the biggest game in town. The wealthiest guys of the world are made of market caps. So this game is extremely important.”
In order to win this game, Agrawal said you need a method in the madness, or your own checklist that will help you determine the value of a company before investing. (In a recent report, he had came out with a 25-point checklist, that you can read
“In stock markets, everybody knows the price of the company. Very few know the value of the company. To determine the value, you need to go to, say, a 20-step checklist that examines a company from various angles. If you go through that, the probability of your success in the market will increase,” he said.
In investing, the Dalal Street veteran said, you require vision to see, courage to buy, and patience to stay with it. He added that one good thing about buying for 25 years, is that valuations don’t matter as you cannot ascribe value 25-year beforehand. However, he conceded that investing for 25 years is not practical for most investors.
The recent Motilal Oswal report mentions 25 companies that the brokerage claims can create immense wealth over the next 25 years. They include Ajanta Pharma, Astral Poly Tech, AU Small Finance Bank, Bata India, Bayer Crop Science, Dixon Technologies, Dr Lal Pathlabs, HDFC AMC, HDFC Bank, HDFC Life Insurance, Honeywell Automation, ICICI Lombard, ICICI Securities and Indiamart Intermesh, among others.
“Practically, everybody is investing for a defined period of, say, 5 years. In that scenario, valuation is important. In the stocks we suggested in our report, we did not look at the price at all but just the management and the potential of the company,” Agrawal said.
He said he will buy anything that has a low price-to-book ratio with growth and high RoE (return on earnings) but agreed that finding such a company in the current market may be difficult. “My chosen path is 25 per cent RoE, 25 per cent growth and anything below 25 PE. Lower the PE, better it is. Whenever you find one, you pile on,” Agarwal said.