How To Invest...With Raamdeo Agrawal: The Power Of Price
Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd., speaks during an interview in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

How To Invest...With Raamdeo Agrawal: The Power Of Price

The quality of a stock or the growth it has registered doesn’t amount to much if the price isn’t right, veteran investor Raamdeo Agrawal said.

“A stock has no emotions. It will go where it has to go. It doesn’t know you’ve bought it,” Agrawal told BloombergQuint’s Niraj Shah on the fourth and final episode of the special series ‘How to Invest with Raamdeo Agrawal’. The focus today was on the ‘Power of Price’, the last of parameters Agrawal advocates – Quality Growth Longevity and Favourable Price.

Value, according to him, has three dimensions: value for the seller, value for the buyer and the true value. It’s important to first arrive at the correct value and then look at price, Agrawal said. How does one differentiate between the two? “Value is derived from the story or the business, price is the value of the business.”

To substantiate his point, Agrawal spoke about his Eicher Motors investment where he has not sold a single share till date. Out on a walk one day, one of veteran investor’s friends told him something interesting is happening at Eicher.

The original story at Eicher Motors was revolving around trucks. He decided to buy after attending the global analyst meeting conducted at Pithampur plant. The truck story never played out but demand for the Royal Enfield bike shot through the roof.

“The only game in town is to find out who will make money.”

A company trading at 60 times its earnings and growing at 40 percent annually would be dirt cheap because it would be available at 12 times the estimated earnings five years from now, he said.

Bharti Airtel was an exciting story for him. Agrawal recollected seeing a man using a cellular phone during a U.S. visit in 1996-97. In 2002, Bharti Airtel issued shares at Rs 45 each and the company was not profitable yet. In 2003, the company announced break-even for a quarter and the stock went from Rs 25 to Rs 1,180 apiece. Eventually, he sold at Rs 650 apiece.

Watch the full interview here.

Here are edited excerpts of the interaction.

Rahil Mehta: What is the difference between pricing a company and valuing a company?

Although both sound the same, there is a difference. Pricing is valuing the company. Valuing is about the story or the business of the company. Value is something that is invisible.

One must look at the value first and then the price.

Kiran Darapareddy: How to understand how future earnings growth is discounted in the current market price of the stock?

This is the most important and the difficult part of the equation. It is always important to gauge the immediate past of a company as most of the market works on rear-view mirror driving.

Tanmay Prakash Gupta: How does one identify if the prices are too high? Which parameters would you look at to justify the current price?

You have to know more than what the market knows about the future of the company. This is the starting point. You must know about the company, its current profitability, current strength etc.

If you don’t have the company in your portfolio and you are not comfortable in buying it, I recommend you not to buy it. Don’t come in front of a speeding truck.

Praveen Ravindran: What is the best price-to-earnings, the price-to-book value we should consider for the Indian market since the 22.5 value suggested by Warren Buffet might not be suitable for India?

First thing is ask yourself how much money you want to make. The stock will go where it has to go. The stock doesn’t know that you bought it.

Sumit Shah: Dear sir, your words of wisdom on “if secular top class quality stocks (highest growers in sectors) bought at higher P/Es, and P/E drops despite reported good earnings.”

A good stock has to drop. Once an investor exits, another buys the stock. A good stock does not mean that it doesn’t correct. You must look at a stock with the attractiveness of the business story.

Contrarian: How would you justify the expensive price paid for a company that has longevity but growth rates are more gradual, e.g. insurance? Should one buy ‘expensive’ insurance companies via IPOs today even with a long-term view? Because price at which one buys is as important as holding it for long period.

Your goal has to be very clear. You need to figure out your return requirement first.

In the first episode of the series, Agrawal talked about the “power of focus investing” where he explained that irrespective of the price, the game is to find value. The second episode was on the power of compounding, which Agrawal also referred to as “the eighth wonder of the world”. The third episode was about the most important parameter in Agrawal's investing philosophy - the quality of business and management.

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