A Valuation View
We at Stallion strongly believe that there are 3 ways to learn about Stock Market.
1) Study the history of last 50 years (Experience of Market Cycles)
2) Study the Stocks that have created wealth (Factors that make money)
3) Study the People who have created Wealth and How (Qualitative factors that make money)”
The Problem of Determining valuation for most companies in India is that the Growth Rate is well above the Equity cost of Capital hence absolute Valuation techniques like DCF cannot theoretically work well.
What has happened in the Globe will happen in India and we Indians have an advantage of learning how wealth was created in other developed countries. We strongly believe that High PE Ratio alone can’t justify that a stock is Undervalued or overvalued, it’s the opportunity size and Market Position of the company which will determine the Valuation. We at Stallion Asset use valuations of Global Giants to compare it with Indian Companies and see where they stand against the global leaders. We found some amazing data points in our study of terminal value.
Page Industry V/S Hanes (Hanes) – Ofcourse this needs no Introduction, what a class compounder this Page (Jockey) has been. Page has Increased sales from 250Crores in 2009 to 2500crores in 2018 (30% Compounder) and in the Year 2018 it made a profit of 346 Crores. The Company trades at a Market cap of 30000 Crores or 4.2 Billion Dollars (That’s a Whooping 86 PE FY2018). Hanes the Global Market Leader of Inner Garments is present in 80% of USA Households has Sales of 46,800 Crores and a Normalized Profit of 4300 Crores this year. Interestingly the Profit of Hanes is 1.8x the Sales of Page Industry though Hanes get a Market cap of 5.6 Billion $ v/s 4.2 Billion$ for Page Industry.
Whirlpool of India V/S Whirlpool Corporation – Whirlpool of India is an amazing company and in Last 9 years it has Increased its Sales from 1700 crores to 4832 Crores (12% Compounder) , whereas it made a profit of 344 Crores in FY2018. The Company trades at a Market cap of 18000 Crores ($2.5 Billion). Whirlpool Corporation (Global) has 16% Global Market share of Appliances and does a Sales of 21 Billion$ (1.5 Lakh Crores) and made a Normalized Profit of 800 Million $ (5,760 Crores) this year. Interestingly Whirlpool Corporation (Global) who does 15x More Sales & Normalized Profit than whirlpool of India, trades at Valuation of 7.2 Billion $ and Whirlpool India Trades at a Valuation of $2.5 Billion. Whirlpool of India hold 20% Appliance Market share in India whereas Whirlpool Global Business holds 16% Market share of Appliances in the World.
Retail in India V/S Retail Globally – Globally Grocery Retail has Created a lot of wealth. With Walmart & Costco in USA, Carrefour in France, Woolsworth in Australia, Seven Eleven in Southeast Asia, Tesco In United Kingdom whereas in India the Total Market cap of Grocery Retail is $13 Billion for Dmart, $4 Billion for Future Retail, $0.4 Billion for Spencers, 0.6 Billion$ for Aditya Birla More (PE Deal) i.e. India’s Total FMCG Retailers have a market cap of less of $20 Billion Dollars whereas in USA Alone WalMart & Costco Combined have a Market cap of $370 Billion, Woolsworth an Australian retailer with 31% Market share of FMCG retail in Australia has a Market cap of $29 Billion which is more than the Entire Indian FMCG Retailers though Australia has a population of 2.5 Crore people which is at similar level to Mumbai metropolitan region.
Conclusion – This is no secret that the Valuation of a Company is determined by the Sustainable Growth Rate (opportunity Size), Long term ROCE (Capital Allocation) & Cost of Equity Capital (Interest rate). There are some Business models which are proven to create wealth globally and High PE Ratio Alone doesn’t make them bad. In India businesses like Page Industries are highly valued compared to their respective global giants because of the opportunity size but the question every investor needs to ask himself is that how much this growth has already been priced in by the Market.
Disclosure – This is not a Buy or a Sell Recommendation, we have just done a study on Terminal Valuation. We Strongly Recommend you to use it for education purpose only. Stallion Asset is a SEBI Registered Equity Research Analyst. (INH000002582). The data has been taken by various datasets we at Stallion Asset use.