Manaswa Singh

Big milestone for us at Raise 🚀 We’ve raised our Series B of $120 Million led by Hornbill Capital, with participation from MUFG and BEENEXT. This investment marks the next phase in our journey to build a truly best-in-class financial services platform for India. 🇮🇳

TRIL vs Shilchar : PE of 202 vs 56!! Is TRIL trading at four times more valuations than Shilchar? And if yes then is it because it has more revenue - TRIL has ₹1291 Cr and Shilchar has ₹386 Cr in trailing twelve months? Or is it because TRIL has top clients like Powergrid, ADANI, NTPC, SAIL, KEC, GE, Siemens? First thing about businesses is more revenue does not make a business better than one with lesser revenue. You can drop your prices by 5% and increase your revenue drastically in most businesses. Will that make your business better next morning? Answer is NO. Then what does matter? How do you judge if a business is better or not? You should look at margin. Imagine that earlier example of dropping prices by 5%. What it will do to your margins? In most businesses in the world dropping 5% price will mean you will become loss making from making profits. Rule 1 - Ceteris paribus if margins are higher then that business is better. But is it enough to say business is better just because of higher margin? It is possible that you may be taking money from buyer after 1 year but selling at higher prices compared to other guy who charges little less but takes money within a week. Who will then be better in running business? So, we also have to account for working capital basically cash conversion cycle. Like how fast a business is able to put the cash into business and turn it into cash again. Rule 2 - Ceteris paribus if working capital days are smaller then that business is better. But again, say a business has similar margin and similar working capital days then which business is better among the two? We have to look at which business is also using debt. Contrary to what you have been told debt is not bad thing but mix does not have to be so much in favour of high leverage that even small trouble can wipe out your equity. But being debt free is stupid if you have good opportunity to grow at good margins. That is why there is this thing called Return on Equity - ROE to say if a business is better than others. It is the product of Net Profit Margin (rule 1), Asset Turnover (rule 2), and equity multiplier also known as leverage. All these things that are so basic but most big handles miss and talk wrong about is because they have never studied basics. A business with high margin is not necessarily better if other business has very high asset turnover. And another business with higher asset turnover may not be better if first business has very high margins. It is the combination - the product of the two that matters. Dixon is good business despite low margin because of high asset turnover. Now let's look at ROE of TRIL and Shilchar. FY 23 ROE of Shilchar is 35% FY 23 ROE of TRIL is 10.66% Since cost of capital is generally above 10-12% TRIL has ROE that is below cost of capital. How then TRIL can be better business. It is NOT. In fact, TRIL management has acknowledged issues in working capital and despite huge tailwind in transformer sector they were not able to deliver good numbers in last few quarters and later they had to dilute their stake do fund raise to use that money for working capital. On the other hand, you have Shilchar which is flush with cash because it generates return way above the cost of capital leading to great cashflows which they are investing back in business to increase the capacity to address the fast rising demand. Then question is if Shilchar is far better business then why TRIL trading at 4X valuations of Shilchar. Short answer is it is NOT trading at 4X valuations. Look at forward PE because these businesses enjoying tailwinds are growing fast. Second TRIL has not been able to do business normally because of working capital issues hence margins were not normal for it and as a consequence profits. If E is lower because of business issues and is not normal then obviously PE will artificially look much higher and won't be normal. Then only a fool will compare the PE of such business with other businesses functioning normally or even otherwise looking at PE in this way is wrong. There is this accumulation - distribution guy who recently on Mach 31 2024 released a video saying TRIL is top stay away stock because it is overvalued due to PE being at 400+ and according to him since growth is also low hence PEG is also very high. All in all avoid was his final call. Of course, stock went from 395 to 769 that is 96% returns in less than four weeks and PE meanwhile has dropped from 400+ to 200+. What gives? You may ask why? Because of one quarter result that came was good with margins going back to where they should be. EPS for March 2024 quarter went to 2.8 from 0.68 Shilchar reported Dec 2023 numbers with 27% margin while TRIL reported blockbuster numbers compared to its past but still with margin of 14% only. Latest available Quarterly EPS we will check and try to calculate Forward PE without assuming any growth although both businesses are growing to see conservatively where these two stocks are trading at. For TRIL, March 2024 EPS is 2.8 hence annualized will be 2.8*4 = 11.2 and based on that forward PE comes to 56. This is not 202 you see which you have seen on screener. For Shilchar, Dec 2023 EPS is 34.21 hence annualized will be 34.21*4 = 136.84 and based on that forward PE comes to 44. This is not 56 that you see on screener. TRIL is at 56 PE & Shilchar is at 44 PE and this is assuming no growth in forward PE terms. Rule - In high growth industries, always look at forward PE disregarding trailing PE. You may be wondering why still TRIL at 56 PE when Shilchar is at 44 PE if Shilchar is better business that is because Shilchar is already at 28% EBITDA margin level so chances of increasing that are much lesser compared to TRIL which is at 14% and it can easily go to 16-18% or more given the shortage of transformers and that will make E explode leading to lower PE for TRIL. Plus, growth may differ for the two in terms of sales too. Most of the people masquerading as expert in easy days of social media are no experts. Anyone who speaks with confidence and authority but obviously wrong then call it out and unfollow without thinking that this guy has so many thousands of followers while you barely have few so he must know more than you. Cutting the noise is most important in this era of abundance of information. Conclusion: Sales does not make a business better neither top clients. Margins, good asset turnover and leverage when combined result into ROE which can tell us how good a business is. Never look at PE just like that on screener and scream overvalued or undervalued. Always try to look ahead 3-5 quarters and judge forward PE. Remember money is not made on the past but on future.