Interview

"Price to earnings is a rubbish way of computing value"

In the final installment, ASK group’s Bharat Shah explains why using P/E to derive value is plain stupid

Can you elaborate on your investment philosophy? What are the key things that you look for?

Size of opportunity is the mother lode. It is about how big something can be in the future compared to what it is now. Every business can be converted into a tangible template based on the size of opportunity. You need to ask: What is there today? What are the gaps? How practical is the assumption that the gap will be covered? This understanding is the size of opportunity. It is about the size of the pond not about the size of the fish. In a large pond, both, large and small fish are welcome. But if the size of the pond is small, even a large fish will not create value. Apart from the size of opportunity, the quality of management is important. It can be assessed in terms of integrity and the ability to convert the future into a rewarding outcome. Management must be wise enough to allocate capital to deserving opportunities and return excessive capital to shareholders.

Can you explain with an example?

Of the 120 crore people in India, half of them are males, so need to shave. Of the 60 crore people, if we exclude the very young and the very old, there are 45 crore potential customers. Out of the 45 crore, based on the affordability you can determine how many will be your customers. Based on their habits; whether they shave daily or four times a week, you can assume an average of 2.5 times a week. If the shaving solution costs ₹2 per shave, the weekly potential opportunity is some ₹220-240 crore. And multiplied by 52 weeks,

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