#DeepakNitrite valuation is most attractive in the space...

growth will be most explosive in the space...

Reverse DCF calculator is now available on Tijori

You can edit the earnings field, discount rate and terminal multiple to any value you like. Below is an example of Astral Pipes

Hope its useful to gauge optimism being baked into the current price!

https://t.co/Y6iV8LVLzT

When a stock is trading around 15-20x sales - ask why would an accident not happen? What could be the valuations damage in that case?

If the Adani stocks trading at more than 50x sales are able to sustain for next 3 years, we will enter a new era of valuation.

And we have never entered in the new era of valuation before.

There was only one since the beginning.

If you know, you know.

1/ Howard Marks once said that before buying an asset, above anything, he wants to know “the amount of optimism that’s in the price.”

All investors can do this with a handy tool: The Reverse DCF.

I'll also leave a download link to my compact DCF Model at the end of this thread.

2/ We all know a regular DCF. But's what a "Reverse DCF"?

If we consider that a DCF is a Linear Equation, we could say the 'X' (The unknown variable) is the Intrinsic Value.

In a Reverse DCF, we start with the Market Price and try to find some other variable, say Sales Growth.

3/ Let's start by taking an example: VST Industries, a Cigarette-maker based in India.

I valued them on my blog a while ago. I'll be retaining the old assumptions, but using the latest financials.

So please note that the Valuation isn't accurate

4/ This is a "Regular DCF" of VST Industries. The Assumptions I've made indicate an Overvaluation.

The Intrinsic Value is Rs. 3,012, but the Market Price is Rs. 3,492.

Let's not dwell on whether this is correct, since we discussed earlier that this isn't an accurate Valuation.

5/ If we want to do a "Reverse DCF" instead, we need to pick a different variable to 'find'. Say, I will pick the Sales Growth numbers.

I will now remove the Sales Growth numbers from the Model and assume that Sales Growth is the same across the years for ease of calculation.

@ramnath2015 DCF is a lot of bullshit.
5 yrs back u could have run a DCF in ITC and come to great conclusion but over the last 5 yrs the youth globally has moved away from cigarettes to weed

Here's a fun fact for all the proponents of buying 'Quality companies at any price':

Wipro is a 'Quality Company' and a part of Nifty 50 for most part of the last 20 years

Between 2000-2021, Sales went up 22x while profits went up 33x

Stock returns were basically almost ZERO

@contrarianEPS Interesting. In India, people who give such suggestions get sued for 100 crores.

Fresh out of the @mjmauboussin oven is a paper titled "The Impact of Intangibles on Base Rates"

Key finding: Companies with higher intangibles asset intensity tend to have higher growth rates. The dispersion in growth rates is also higher for them.

Link: https://t.co/0u1dk0h0UK

"The good news is that intangible-intensive companies can grow faster than their tangible counterparts. The bad news is they can also become irrelevant and shrink fast. As a consequence, we should see two effects in the data: higher growth and more dispersion in the outcomes."

@unseenvalue Got it sir 🙏

Once in a while one should study the company which lacked the execution, which always over-promised and under delivered. Check how market valued it over the period of time. As it gives us the framework to avoid potential capital allocation mistakes i future. 🧪⚗️

VALUATION MULTIPLES FROM FIRST PRINCIPLES

• There is a lot of misunderstanding & misapplication of valuation multiples, both among retail and institutional investors
• Get clarity on this by revisiting the 1st principles here

Prerequisites:
• Finance 101 knowledge

THREAD 👇

KEY CONCEPT: VALUE STAKEHOLDERS
"Beauty is in the eye of the beholder"
"Value is in the rights of the user"
So it is important to ask, "VALUE TO WHOM?"

There are 2 main types of stakeholders in a company:
1. Equity holders
2. Lenders

KEY CONCEPTS: MCAP and EV

Value to equity holders is represented by the Market Capitalization (MCAP).

Value to equity AND lenders is represented by Enterprise Value (EV):

Notice how you can convert between Enterprise Value to Market Capitalization easily

KEY CONCEPT: FCFF

Free cash flow to the firm (FCFF) = Cash flows available for distribution to both equity holders AND lenders

Related:
Free cash flow to equity (FCFE) = Cash flows available for distribution to ONLY the equity holders

We will focus on EV & FCFF in the examples

KEY CONCEPT: FUNDAMENTAL VALUE OF A COMPANY

The fundamental/intrinsic value of a company is equal to the present value of the cash flows it would generate in future.

The growing perpetuity expression of value is shown below:

Doesn't matter what's the market cap is - micro or large, the quality of any business is never unseen. You screen through the last 5-10 years of balance sheet and cash flows and you'd know what can and cannot compound wealth. Narrative alone is useless. Numbers have to match.

Aswath Damodaran: “We have all these people telling you to buy a quality company. That's really bad advice. If you buy a quality company that everybody else recognizes as a quality company, you're going to pay through the roof. Good companies can be bad investments….”

Grateful to @AswathDamodaran for sharing his wisdom in this remarkable conversation with @veiled_value about the book, The Dark Side of Valuation.

Excerpts follow in this thread.
Members, access the full interview

On every investor's worst enemy:

On uncertainty:

On multiples vs. DCF:

On stories and valuation:

Paying 50-100x earnings for 'blue ocean' sectors has become normalized with promise of changing trends and immense future opportunity. Stock markets look forward, if the future opportunity is great, in most cases that 100x valuation already factors a 30x valuation in 3 years.

For investors, the question of where the buck stops is difficult to answer, because the goal post keeps changing. 30x is reasonable for one business, for another 70x is acceptable. So why not everything in between too?

Not every business captures the opportunity available. There is many a slip between the cup and the lip, as my English teacher used to say. When investors have seen valuations creep from 20x to 100x in a matter of a year or two, it is easy to to keep dancing to the same music.

But like we used to play musical chairs in childhood, someone will be left standing too. And here the rules aren't that 1 person gets eliminated at a time, hundreds get crushed at the same time. In childhood, we had a 1/X chance of being caught standing when the music stopped.

The margin of safety was high till you got down to the last 3-4 people playing the game. Similarly, your margin of safety reduces dramatically when valuation becomes irrelevant. A few months of underperformance and suddenly things don't look so rosy any more.

@soicfinance @ishmohit1 Learning and taking inspiration from you sir..🙏🏼🙏🏼

A thread: How to value? 🏦💰❓

Sharing my learnings from my journey so far.

Initially when I started out I used to ignore what anybody would have to say about their style of valuing a business and I would blindly copy what Benjamin Graham’s book, The Intelligent Investor had to say.

Later came a stage where I realized Benjamin style was not working.

Before we get into the learning, here is the background to it:

If you have been following me for the past 1 year you would have noticed how my valuation method has changed.

I used to struggle a lot with valuation and it would be at the back of my mind the whole day thinking what are these investors doing to value. I tried DCF but that didn’t work for me. (Don’t hate me for that, its my personal choice)

I used to attend Bloomberg Quint’s talk on Zoom, message investors, read books, etc. to figure out: How to value? (The frustration had got to a level that I took break from investing for 3-4 weeks)

It’s perfectly possible for a company to generate rising EPS at the same time it is employing increasing amounts of capital at falling & inadequate rates of return

In laymen’s terms, a company can be busy destroying shareholder value even as it increases earnings

Terry Smith