Reply to a Mail from a Friend on Valuation

Begin forwarded message:

From: Sanjay Bakshi <sanjay>

Subject: Re: question

Date: 11 April 2015 10:11:48 GMT-4


I don’t think in terms of entry multiples. I do think about exit multiples though and never value a business at more than 20 times owner earnings ten years from now. And I only limit to high ROE, low leverage businesses (most of my portfolio businesses are debt-free) which can grow earnings where return on incremental capital is high.

Under those conditions, no matter what the entry multiple, I can estimate a return over ten years. If entry multiple is high, I factor in a multiple contraction, and if low, then an expansion. Obviously the best returns come in the latter situation but by focusing on expected returns, I have sometimes bought high P/E businesses too because even if there was a multiple contraction, there is good money to be made in a decade…

In some businesses, I don’t go beyond 5 years – as my visibility is a lot less in them.

Also when I said 20x multiple ten years from now as maximum I will value the firm at, I mean it. Many of them are valued at 15x and some as low as 10x…

It’s pretty rudimentary, but has worked for me over the last several years…

On 10-Apr-2015, at 19:33, xxxx wrote:

stupid question may be : how will you correlate a compounder roe, eps growth to a pe multiple or any multiple. have u come across any mathematical formula. i think i saw some people writing about it but cant remember.

no rush or urgency.

12 thoughts on “Reply to a Mail from a Friend on Valuation”

  1. Your transparency in sharing your thought process is admirable. What makes it rare and ineffect even more appealing is that you back it up with actual trading record. Oh and did I say it comes free unlike ‘experts’ with dubious records.

  2. Dear professor,
    Would like to know the thoughts on conglomerates were in one business makes outstanding ROCE and the other ones make minimal or negative roce
    What if incremental growth is coming from the outstanding ROCE biz.Should we value the co.. as a whole or should we use SOTP

  3. Hi Sanjay G, Thats a valuable insight. And also very nice presentation given at IIM Rachi. I would like to know on how do you enable yourself to prepare for recession/slowdown and cash in opportunities there after ? I mean how will be your portfolio ? Do you have some percentage always in Cash or Do you always stay in 100% equity but good percentage in High Quality Reasonable return stocks like HDFC or Do you rely on Dividends/Regular Income during slowdown ?

    I would really like to hear your experience on managing your portfolio during bubble market (2005-2007), deep recession (2008-2010) and recover (2011 – current)

    1. Hi Srinivas, I think the Prof is alluding to increase in earnings (which in effect leads to PE contraction given static price). If earnings are continuously increasing at an expectedly good pace then over a long 10yr period Price “should” catch up. Right Prof?

  4. Sir, When you project the earnings growth, you are referring to EPS growth I assume. Do you project based on past 10 years CAGR removing the outliers?

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