Amongst the various thesis and
styles in investing, value investing is very relevant at the moment where the
markets have hit a high and there seems to be minimal upside and more downside.
It merits to look at this style
where we pick stocks that are trading at a discount to their intrinsic value,
offers reasonable margin of safety. Other metrics to look for, is if company is
operating in a space that has room for exponential growth, and the overall
quality of its business. Generally in markets like today, we will be able to
identify such companies which are no so popular and are mid-caps in category.
Better still if such companies
are going through temporary disruption or through a difficult period. You get
to buy a bargain when the seller is selling in distress. The famous example is
of investing in Rain industries which was available at P/E of 1 when the
profits were Rs 90 crores and the company was going through disruption. The
company then multiplied its profits over the next few years by 10X to Rs 800
crores profits. An investor would have multiplied his wealth 10 times in this
period.
The most important criteria in
value investment is that the down side should be minimal which makes the
investment 'low risk'. As they say, Minimize the downside and upside will be
taken care of by the business.
Currently a company in the mid
cap space that adds value in commodity space is available for a mcap of Rs 390
crores with headroom for growth. Aluminum is consumed by almost every industry
one can think of and offers exponential growth prospects. The business is
cyclical as it is closely connected to commodity cycle but available at
reasonable valuation. Because these companies are small in size, they have a
lot of room for growth and could even become potential multi-baggers. An ideal
time frame for which to invest in these companies would be 3-5 years.
As the legendary investor said “Never
count on making a good sale. Have the purchase price be so attractive that even
a mediocre sale gives good results”. India continues to offer businesses with prospects
for long term growth and opportunities for multi fold returns to investors.
