A) See EPS cannot grow at more then 40% CAGR for 5 years unless the company is exceptionally placed.
Maybe we could have 25-30 companies in the history of the Indian stock market that have grown EPS at 40% CAGR for 5 years. The predominent ones came from the
software sector and there also the
growth in EPS at 40% CAGR was reflected by a handful of them for 5 years at a strech.
So at a 40% CAGR a company with an EPS of Rs 1 would report an EPS of Rs 5.37 in 5 years. So we have a close to a six bagger in 5 years only on EPS alone.
After 5 years the size would become the enemy and growth would taper off or PE would be around 30 times or let's say 40 times.
SO a 15 PE company is now a 40 PE company that means the stock price could rise by 2.66 times because of
PE expansion.
So the net increase in the stock price is 2.66 x 5.37 = 14 times. See Here we are taking the best case scenario.
Generally companies standing at the cusp of a structural boom retail, telecom, software, construction and having a low PE (undiscovered stock) are a fit case for a 10 bagger.
Now I did not say we cannot get a 10 bagger but what I said was that it would not come in a hurry. Else HDFC bank is the best stock to by it would be a 12 bagger in 10 years but
here we all want to play a one day International and finish the match in 40 overs - hence the need for a big boost to come from
PE expansion..
B) You were right and farsighted in taking the initial position at 12 times current years etc. however as soon as you are re-investing in your existing success stories be it HDFC Bank, TV18, Nucleus, etc. we end up having to pay up - and the question is what is the line "laxman-rekha" in forward valuations one should not be willing to go beyond?
Here it becomes a case for relatives. Let me explain this with an example. Last year when I switched out of Trent into Tv18 (prior to demerger) it was a case of selling 30 times current year (Trent) and buying 15 times current year (TV18)
But I would not have switched had it not been for the lethargic management at Trent and the dynamic management at Tv18. Otherwise also I did not switch from Pantraloon to Tv18 because Pantaloon was doing all the things it could to manage its growth.
But I have seen after the initial entry if the stock price goes up a it means that the story has got discovered. But I thought that since I had made a 6 bagger in Trent and if I can make a 5 bagger in Tv18 from say Rs 600 predemerger I am already ending at a 30 bagger.
I like attempting for multiple multibaggers. So a 4 bagger after a 5 bagger still gives a 20 bagger with no headline news.
As the sensex goes up and our portfolio increases in value the potential for big multibaggers from existing companies diminish - and we have to adjust to that.
Edited by basant - 22/Mar/2007 at 7:10pm
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I hope you have thought of date at least, not just till 2010 sir
