Valuing growth and growing value: Decoding the value-driven investment playbook at AIF PMS Conclave 2.0

Understanding and balancing the concepts of value and growth in investment strategies continues to baffle investors. To address this fundamental question, Samit Vartak, shared his expertise in identifying key drivers of investment returns and explained how perception, growth, and valuation multiples (P multiples) influence investment outcomes. Vartak, who is the Founder and Chief Investment Officer (CIO), SageOne Investment Managers LLP), was in a conversation with Vikas Aggarwal, Founder, AIF PMS Experts India at the AIF PMS Conclave 2.0.

The AIF & PMS Conclave—powered by ET Markets—is India’s largest summit on alternative investing funds (AIFs) and portfolio management services (PMS).

This second edition of the conclave spanned two days, featuring 26 thought-provoking sessions, with some of the finest financial minds in India—including CXOs, VPs, founders, MDs, and other experts—coming together to offer expert analysis of this emerging investment space. The experts demystified this space through the investors’ lens keeping in view market sentiments, volatility, economic challenges, and political climate.

In this particular session titled ‘How to Value Growth and Grow Value of Your Investments’, Vartak, who has been investing in equity since 1999 and has experienced and studied many pull and bear cycles over the last two decades, spoke at length about how the distinction between value and growth is often misunderstood, among several other critical nuances. Having worked closely with various companies in the US and India, advising them on business strategy, profit optimisation, growth, and valuations, Vartak leveraged his niches to deliver a fine analysis of the growth and value conundrum, breaking one myth at a time.

Growth and value: Two sides of the same coin
At the outset, Aggarwal highlighted the importance of empowering investors by challenging preconceived notions. In line with this, Vartak explained that being a growth investor is not necessarily opposed to being a value investor. Echoing Warren Buffett, Vartak remarked, “Value and growth are part of the same equation.” This is reminiscent of the “Oracle of Omaha’s famous maxim on investment: “Market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component—usually a plus, sometimes a minus—in the value equation.”

Vartak elaborated that the distinction between value and growth is often misunderstood. He explained that sometimes a high-growth company with a high P multiple could be undervalued, while a low-growth company with a low P multiple could be overvalued. As Vartak elucidated, “It’s very difficult to differentiate between what is value and what is growth because sometimes high-growth companies at high valuation multiples can be really cheap, while low-growth companies at low valuation multiples can be really expensive.”

The power of earnings growth and P multiples
There are two main drivers of investment returns: earnings growth and P multiple re-rating, Vartak explained. “For example,” he shared, “the largest multi-baggers have been companies where they have delivered like 10x earnings growth over a 10-year period, and the P multiples have also gone up 2x or 3x, giving an overall return of 30x.”

Vartak further elaborated that a high P multiple is often associated with companies that show consistent growth over a longer period. It is important that prospective investors consider the duration of growth: “A company growing at 25% for 20 years could trade at a 30 P multiple, while another growing at the same rate for just five years might only trade at a 15 P multiple,” Vartak maintained.

Perception of risk and discount rates

A critical factor in evaluating investments is the perception of risk associated with the business. Vartak illustrated this point using the discount rate—a reflection of the expected return from a business. “For example, commodity businesses or PSUs often have unpredictable earnings, which increases their risk, and thus the expected return from these businesses is higher.”

In contrast, businesses like Hindustan Unilever (HUL) or Asian Paints have a lower perceived risk because investors expect stable and long-term growth. Vartak explained, “If the market expected returns are 15%, such businesses may just demand a 12% return, whereas riskier businesses may demand 18%. When you apply these discount rates to a valuation model, the P multiple for the safer business could be 60 times, while for the riskier business, it could be just 10 times.”

The importance of market perception

Vartak further emphasised the role of market perception in investment decisions. Understanding whether a business is perceived as risky or stable can significantly impact returns over time, Vartak advised. “From a directional perspective,” Vartak noted, “it’s important to see, what is your perception versus what is the market perception?”

A key lesson here is that businesses initially perceived as risky might experience a re-rating over time as they demonstrate stability and consistent growth. Investors who buy such businesses at a lower P multiple can benefit immensely when the market adjusts its perception, causing the P multiple to increase.

The dangers of euphoria and overvaluation

Vartak cautioned against the euphoria that often grips the market, leading to overvaluation. He pointed to the recent boom in PSU stocks, particularly in the railway sector, as an example. “Today, the price-to-book has gone to 10-15 times, and the P multiples have multiplied by five to six times,” he remarked. However, he warned that this growth in multiples was not backed by consistent margins, making such investments highly risky.

Vartak advised investors to be wary of paying high P multiples during periods of market euphoria. “Paying a high P multiple at the highest margin is one of the most risky decisions that you can take because if something goes wrong, you will take a hit on both the P multiple and earnings,” he cautioned.

Vartak’s insights offer a nuanced perspective on how to dive deep into the growth-value equation when making investment decisions. By shedding light on the dynamics of P multiples, risk perception, and market sentiment, Vartak highlighted the importance of a balanced approach. Investors must not only focus on growth but also consider how the market perceives the business and the risks associated with it. As Vartak aptly summarised, “If you evaluate companies from this perspective, you will have a higher chance of avoiding mistakes and getting the valuations right.”

Watch this space as we decode the further sessions at the conclave.

To know more about the AIF & PMS Conclave 2.0, visit the website.

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