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Collection: Mohnish Pabrai - #58 'Intrinsic Value'


Video Link: https://youtu.be/sCTGTmF9MDY


In this episode, Mohnish Pabrai was asked how does he quantify the intrinsic value of an investment?


In this episode, you’ll learn:

  • How to calculate intrinsic value based on future earnings and multiple?

To check out all Collection: Mohnish Pabrai <click here>

[Transcript]

(Source: https://youtu.be/dnS5xWIxo1I)

MOHNISH PABRAI 00:08

Well, you know there was a – there is a guy in your group who mentioned that they owned Jammu and Kashmir Bank, right? And so what's the PE ratio of Jammu and Kashmir Bank?


STUDENT 00:27

6 times earnings.


ARVIND NAVARATNAM 00:29

6 times earnings.


MOHNISH PABRAI 00:30

Its that cheap?


STUDENT 00:35

I think so.


ARVIND NAVARATNAM 00:36

Yes (Laughs), definitely yes, he is saying.


MOHNISH PABRAI 00:39

Okay, I got it. Okay and what should be the multiple of Jammu and Kashmir Bank?


STUDENT 00:47

Maybe its close to a 10 or 12.


ARVIND NAVARATNAM 00:50

10 to 12 times maybe more, he is saying.


MOHNISH PABRAI 00:53

I mean, you know, if you look at a bank in India for example.


Generally speaking, what happens with India probably elsewhere too. But I think probably more towards India is a bank in India, reasonably well run bank ought to grow at a multiple of GDP.


Did you consider that in your thesis?


STUDENT 01:25

Yeah, I mean I took into account [Inaudible].


MOHNISH PABRAI 01:28

Okay, so like what is India's recent GDP growth?


STUDENT 01:35

Its about 5 to 7 percent.


MOHNISH PABRAI 01:37

So and you know, that is pre-moldy.


STUDENT 01:42

Correct.


MOHNISH PABRAI 01:42

So what do you expect India's GDP growth to be, let's say in the next few years?


STUDENT 01:50

Maybe about 8 or 9.


MOHNISH PABRAI 01:53

Okay and so you know, typically I would say that a bank, a decently run bank in India should be growing at something like 2 times GDP.


And so you know, 8 or 9 make it aggressive but let's say we don't even put anything much of a moldy factor in there. I mean it would not be surprising, if something like Jammu and Kashmir bank is growing earnings at like 15% a year, right? Right? I didn't hear a yes.


STUDENT 02:37

Yeah, yeah.


ARVIND NAVARATNAM 02:38

Yes.


MOHNISH PABRAI 02:39

Okay. So if we have in business that is earning let's say a 100 dollars a share – 100 dollars a year – let's say its earning 100 million a year, for example. And let's say that 100 million a year is increasing at 15% a year. What multiple should we put on that business?


STUDENT 03:03

10 to 15 times, maybe a little higher.


MOHNISH PABRAI 03:07

Okay, so let's say that Jammu and Kashmir Bank, let's pull some numbers out of the air. Okay, let's say it has a market cap of 600 million and let's say they are earning a 100 million. Are they at 6 times earnings?


STUDENT 03:24

Yeah.


MOHNISH PABRAI 03:25

Okay, so let's say they are earning at 100 million, let's say the market cap is 600 million. And some of you guys have calculators, let's go 5 years. So at a 15% increase in earnings every year, what is the earnings in year 5? Is it 200, Arvind approximately?


ARVIND NAVARATNAM 03:48

Yes, you don't need a calculator. Yes.


MOHNISH PABRAI 03:50

Okay, it's 200. Okay and if you put a 15 multiple on 200, that will be 3 billion.


ARVIND NAVARATNAM 03:57

Yeah.


MOHNISH PABRAI 03:58

And if you put a 20 multiple, it will be 4 billion. Are those numbers higher than 600 million?


ARVIND NAVARATNAM 04:09

Yes.


MOHNISH PABRAI 04:10

So does it matter what multiple you put on it?


ARVIND NAVARATNAM 04:16

No.


MOHNISH PABRAI 04:17

I mean, what I am saying is that does it matter if it trades at 15 times earnings or 20 times earnings in 5 years?


ARVIND NAVARATNAM 04:23

No, it doesn't matter.


MOHNISH PABRAI 04:26

What if the multiple is 10 times earnings? [Inaudible] That will be a 2 billion market cap. So 2 billion, 3 billion, 4 billion are there all acceptable answers?


ARVIND NAVARATNAM 04:42

Yes. Assuming that the assumption played out the way you expect them to be.


MOHNISH PABRAI 04:48

Yeah, so what I am saying at least we don't need to rack up our brains on what the multiple will be or should be or ought to be.


We can just say that if those numbers played out if it goes from a 100 million in earnings to 200 million in earnings and it goes steady up like that. The odd are very high that the market cap is between 2 or 4 billion, right?


And of course, we don't know whether earnings will do that. And there could be a choppier or they could be a better – I mean the thing is in the sense that it's possible moldy really kicks in and the bank is doing 20% a year instead of 15% for example.


Or moldy doesn't kick it and the bank is doing 12% a year. So you can run those same numbers at 12% and even then you would still end up – So the thing is the where you would kinda lose money is – What is the book value of the bank? You know what the book value is?


What multiple to book does it trade at?


ARVIND NAVARATNAM 06:12

He's saying close to 1.


MOHNISH PABRAI 06:14

Right. So basically, if their loan book is good, if their reserves are good. And in fact, they don't even need to be that good – Basically, if their future earnings can absorb any hiccups they have on their books if you will.


Basically, there is – That is the kind of bet. That's very well worth making and I'm so grateful that you brought it to my attention.

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