We always advocate to invest in the good quality businesses and buy them when your research says that they are trading cheap. Gruh finance released its first quarter results last week and you will notice everyone in the media are talking about their results as a positive results but still Gruh finance has dropped 7% in last week.

It doesn’t make sense and you feel frustrated especially when you are the shareholder of such businesses and prices are falling down even the results are great.

Gruh finance is the investment grade business and we do grade them as ‘B1’ business. You would have really created great wealth in this business if you are owning it from last 10 years. If you would have invested Rs 100,000 in 2005 than your investments today would be worth Rs 3,428,000, this is excluding dividend payments.

That is really an extraordinary results! One of the value investor said to me that he only invests in the stock if he believes that he will make 10 times of its investment. Investing in Gruh Finance today at Rs 240 and expecting 10 times in a decade raises lot of questions to us.

When any analysts values any business, the standard practice is to assume that business will grow at constant rate forever. But this assumption are flawed, if you look at Gruh finance it doubled its revenues reported in 2008 from what they reported in 2006. It took than another three and half years to double its revenues which were reported in 2008. If we look at the last 10 years average growth than they have reported 100% growth every year but from last two years the average growth is 30% and analysts are expecting its revenue to grow by 25% and are supposed to diminish in the future years.

These declines are inevitable by any businesses; if you are making good returns than others to jump into it and give competition and share the revenues pie from that market segment. It is important to factor in those declines and by what speed will the growth decline.

One thing to consider for this business model is also if the trend of interest rates reverses than it will impact negatively to its growth and will also give competition from other financial segments.

Today Gruh Finance is trading at Rs 240 which is almost 10.67 times to its expected 2016 book value 9.50 times to its expected 2017 book value. It is also trading at PE ratio of 35.82 times to its expected 2016 earnings and 29.20 times to its 2017 earnings.

We think that last eighteen months run of more than 100% has dislocated its price to its value on how conventional valuations are prepared by analysts.

You do not need to listen to us. Do ask your financial planner and stock broker about its conviction on purchasing this stock at current price. We believe it is expensive and we do not own any shares of this business in our portfolio.

Aziz Dodhiya is a co-founder and chief Investment Officer for our closed ended funds of Valueoperations. If you have any questions please email him at aziz@valueoperations.com .