Raamdeo Agrawal reveals three stock filters that he uses

Raamdeo Agrawal, Chairman of Motilal Oswal Financial Services, has spent decades building a reputation for blockbuster bets in the Indian stock market. In a recent conversation with CNBC-TV18, the veteran investor revealed at least five secrets about his investing style.

Early bird gets the worm

The chief of the Mumbai-based broking firm likes to get into a stock early in its lifespan.

"Today, Balkrishna Industries is a very famous company, a very large company. But when I bought it, it was ₹100 crore company, and I bought it 1 P/E (price-to-earnings), with that 40-30% return on equity, and there was no taker. I went to the company... They offered me rasgulla, and they told me the whole story. Then, we bought. The stock went from ₹100 to ₹1,200 in two years, we sold everything," Agrawal said.

Price to earnings ratio is calculated by dividing the current price of a stock with the earnings per share. Some people look at the earnings for the preceding12 months, and others look at the estimated EPS one or two years down the line.

The P/E ratio shows how much the market is willing to pay for each rupee of future profits. Higher the P/E ratio, more expensive the stock.

Don't just look at the growth, look at the price too

Agrawal was always excited by the prospects presented by Asian Paints, but the stock almost always cost more than he wanted to pay.

"When I wanted to pay 50, it was 20. So I didn't buy when I want to pay 20, it became 25 and then finally, once I agreed to buy at 23 and again, my dear friend, he said, let's wait for some more time. And it went to 90. So I never made a single penny out of that," he said. Essentially, no FOMO!

But how does arrive at the right price to pay for a stock? Look at the Price and Earnings to Growth (PEG) ratio. If it's one or less, it means the stock is priced in line or less than its growth potential; that's the formula Raamdeo Agrawal applies.

Unlike the P/E ratio, the PEG ratio also factors in future growth, making it a 

better signal for the future prospects of a stock or a group of stocks.

Add this filter to return on equity and separate the wheat from the chaff

Return on Equity (ROE) is a popular metric that shows how efficiently a company uses shareholders’ funds to generate profits. 25% RoE is bare minimum for a stock to make it to the MOFSL shortlist. However, that isn't enough.

"Can he (the business) collect his money in 30 days? If you have a 25% RoE, but 100-120, days (to collect the dues), God knows what you are writing," he explained.

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