Think Beyond PE: Hiren Ved advocates PEG Ratio for smarter valuation assessment

Economic Times

14 hours ago

"But if you look at the last three, four, five years, they have not really delivered the kind of returns. The capital market plays have done far better and that is where we are invested frankly," says Hiren Ved, Director & CIO, Alchemy Capital.
ADVERTISEMENT What we want to know that what will work now?
Hiren Ved: So, again, I mean, this debate has been around for a long time that the large private sector financials is where the value is or where the valuations are reasonable, which is true. But it really depends on in your mix of portfolio what is the average growth that you are looking at. If you look at the latest numbers, credit growth has slowed down to like 9%.
So, maybe the efficient private sector companies can grow at 12-13%. But our sense is that while the RBI has given them the ability to fight off a reduction in NIMs because of the CRR cut, but unlikely that unless credit growth picks up in any meaningful manner, that we could see early teens kind of growth in earnings there.
On the other hand, if you look at the capital market plays, there is a structural story there and those have actually done far better than the big private banks. So, our sense is that there is this bias that we have because there was such a large weight in the index and therefore these big banks keep looking cheaper to us. But if you look at the last three, four, five years, they have not really delivered the kind of returns. The capital market plays have done far better and that is where we are invested frankly.
ADVERTISEMENT But there too the valuations have not peaked out and I mean, when I ask question of valuations, you are like who is to know what is the correct valuation for these stocks?
Hiren Ved: The right way to look at it in terms of valuation is to not just look at absolute PE, but to look at PEG. So, if earnings are growing at 50% or 30% and then if you end up paying 30 times, you are still okay versus paying 18 and 20 times for 10% or even lower growth. I mean, if you look at it, Nifty trades at what 23, 22 times one year forward, but Nifty earnings growth is 10% or lower. So, what peg are you paying for the Nifty.
ADVERTISEMENT
Or something like an expiry day change as well can bring about some shake offs on an intraday basis.
Hiren Ved: Correct, and actually that is exactly what we saw in Jan-Feb which is that the largest correction happened in areas where the participation was the highest and also those were the companies that were growing. So, there was a wave of whatever you call it, profit booking, precautionary money taking off the table, taking some risk off the table and when we were looking at it, the next 50 index corrected much more sharply than the Nifty 50 because that is where the money was made and that is where the earnings growth was, so that is where everybody had their exposure and that is where the exposure came off significantly.
ADVERTISEMENT So, I think that from here on given the broad valuations, we should have reasonable expectations of returns. And we are very clear that money is to be made in the broader markets. Probably barring Bajaj Finance in the top Nifty 50 and maybe companies like Trent and a few handful of ones which can still talk about compounding profits at 20-25% plus, everything else is in single digits or early teens. So, we have to moderate our expectations of growth. If we want to have lower risks, then you have to moderate your return expectation as well. And if you want higher returns, then obviously we will have to pay up for the growth that we have, so that is where we are in the markets today.
ADVERTISEMENT So, let us take it one by one and let me start off with the capital markets theme. Would you be willing to put fresh money to work right now and again, within capital markets also do you become selective or do you buy a basket of stocks, of course, the top creme within that?
Hiren Ved: Yes, I mean, I still feel that while valuations are expensive, but there is a structural growth in those. So, whether it is asset managers, wealth managers, exchanges, I still feel that there is money to be made there. So, to answer your question would you still deploy fresh money? The answer is yes, I would.
Let us also touch upon some of the sectors within the broader markets where companies have already delivered well and they are still looking forward to great growth numbers. One of the case, I believe, is EMS counters where Indian companies rather have showed what they can do and what they are capable of, of course, with the government support. And the other one is the quick commerce place where we have seen a bit of a turnaround as well in select companies. Do you believe it is still reasonable at these price points where the valuations are already stretched but still it is the case where you can pay more.
Hiren Ved: So, I agree with you. I think EMS is a great growth opportunity still. We are in the early stages of a growth cycle. Probably with the exception of Dixon which is just about going to reach one lakh crore of market cap, a sector which is so large and the opportunity which is so big, I think you will see the birth of many large companies there. And yes, the valuations are quite punchy, but you will have to, therefore, elongate your time horizon for investing.
Having said that, we have to be careful because a lot of the growth is in the price and valuations. So, unless you are really willing to bet for the next three to five years and wait for that growth to unfold, there could be intermittent quarters where the numbers may or may not pan out to be good and you could have a very significant draw down in these kind names. But on a structural basis, I still believe there is money to be made. It is a young sector in India relatively.