Mr. Ajay Singh is the popular fund manager of Polestar Mutual fund. He manages 5 growth mutual funds of Polestar. Three are large cap based funds and two are mid cap based funds. All the mutual funds except Polestar Long term equity mutual fund have consistently outperformed the respective benchmark indices over the last 10-year time horizon. Given his stellar track record in managing funds, Ajay is keen on improving the performance of Polestar Long term equity mutual fund. In this regard he rebalanced the portfolio of Polestar Long term equity mutual fund. Ajay is interested to give a growth boost to the mutual fund and as a result he decided to invest in three growth stocks. Polestar mutual fund has a very extensive system of selection of stock. The mutual uses various filters thats addresses the following aspects Operational ability Capital allocation ability Management integrity Ajay finally shortlisted 3 stocks from three different sectors that had a fantastic run in the stock market over the last 10 years. He conducted a thorough analysis of the business model of the three companies. He found that they are equally good in terms of all the metrics and also in terms of future prospects. Hence it was decided to make a final call based on Price to Earnings ratio. Ajay recalled the important point that they learned from various reference materials on PE ratio that he has referred in the process of conducting analysis. The important point he identified are summarized as follows: Price to earnings ratio is basically Market Price EPS PE ratio can also be expressed as 1 b K g where b is the retention ratio, K is the WACC, g is the growth rate which is basically retention ratio multipled by ROE(return on equity PE ratio is the perception of market. Suppose PE ratio of a company is 50. It means that for each unit EPS of the company market is willing to pay 50 units Within a sector, higher the PE ratio, stock is over valued and lower the PE ratio stock is undervalued. The last ten years performance and current PE ratio of the three stocks identified are given in the table given below: Performance of 3 multibagger stocks over last 10 years No Stock CAGR Price as on 23-05-2018 Forward EPS P/E as on 23-05-2018 1 Page Industries 48.84% 23484.60 286.61 81.94 SAGE 2018 The Indian Institute of Management, Kozhikode. All rights reserved. SAGE Business Cases Page 3 of 4 Pay Up, but Dont Overpay 2 Eicher Motors 54.30% 29392.05 717.75 40.95 3 Relaxo Footwear 64.08% 689.40 13.38 51.51 If we look at the PE ratio of all the three stocks in their respective sectors they are on the higher side. Ajay made a presentation to the investment committee of Polestar mutual fund. Some of the investment committee members already expressed their reservation on investing in stocks that had a big run over the last ten years. But Ajay is convinced of the fact that high PE ratio wont be a problem by looking at the future prospects of the firms. Since there was a detailed research report on all the three important aspects of the companies, the only criteria the committee will be focusing on is the PE ratio. The equity research report contains detailed estimates of the growth rate of the company based on the future prospects of the company and other market conditions.

QUESTION: How can you convince the investment committee of the importance or the lack of importance of PE ratio in this situation?