August and early part of September have been more than satisfactory for everybody. Nothing has changed in terms of the big picture on the Fed, locally and also on the medical front. If at all, on the medical front, things have slipped slightly and yet markets have registered double digit gains, why?
One of the key things has been the continued retail participation and that has given the edge to the market that whenever there is some pressure on sales coming from institutions or mutual funds in some order, it has been lapped up by the retail public. This is a very peculiar timeframe that we have seen and there has been no major institutional presence in the market in terms of incremental investment.
There has been a churn of course. Retail has picked up the stocks directly. They are not going through mutual funds or anybody else. So between PMS as well as retail funds, that is where the big pickup is taking place and it is important because most retail public are now trying to build back equity into their portfolio.
It was primarily real estate, fixed income and now we are seeing that systematically, retail is building up equity and that is being a good base which is true for India, the US and everywhere. Institutional action is more in the private space; retail action is more in the secondary space.
The historical benchmark is that when there is activity in the IPO market, it is dangerous; when there is participation by retail folks, it is dangerous and when we have both, it is time to get out! Somehow the historical logic has not translated into reality this time. Why is that?
The history of the last three years has shown that buy on dips has been a very good strategy for most retail public and the biggest example of course was March ’20 when the selloff happened and the recovery after that. So the recent historical memory shows that buying on dips is a very good idea, given the fact that the retail public in India is largely underinvested on equities. If you go around and talk to people, their equity portfolio would not be only 5% of their net worth or maybe maximum 10% of the net worth; so there is a large gap in the equity portfolio.
Also, the real action in the space is coming from the private equity space. The valuation of private equity space far exceeds anything in the space of the secondary listed market and therefore till that thing does not disappear, this market will remain robust. The real trigger for the correction would happen only and only if we see a dramatic slowing down or valuations slowdown in terms of the private equity space. A slowdown in the private equity space will trigger a more reasonable pricing in the market. Most stocks have expanded and the PE multiples are way beyond what they should be. Today listed spaces are cheaper than the private spaces for most companies.
It looks like those steep valuations that we are seeing in the private equity space may soon be entering Dalal Street with more unicorns getting listed. Do you agree?
Zomato has shown a lot of sceptics about what will happen to highly priced unicorns post listing. It may still be too early perhaps, but the fact is that these companies coming to the market have got a scarcity value. There is no other Zomato. A BYJU on a turnover of about Rs 2500 crore can be valued at Rs 120,000 crore. It sounds ridiculous but the fact remains that these are scarce equities in the market and therefore when an edtech company comes to the market, it will be the first company to come to the market after the debacle of two other education companies including Zee Learn. But that was some five years back.
So, these companies are driven by scarcity value but the key point of the IPO is their ability to place blocks of shares to another institution. If a PE fund wants to get out of a million shares of five million shares or two billion dollars, they are not going to get retail to buy those fresh shares. They are going to get an institution to buy the shares and that is where the phenomenon comes that if that play stops or slows down, then we may see a domino effect in valuation. I am not saying a major correction but certainly the euphoria that we see, the valuation multiples may be gone. Liquidity is keeping it going in a manner and we are not even understanding what is happening in this phase.
So yes, it will shift to the IPO space but Indians will lap it up because we do not give a scarcity value. You have seen the ferocity of why in an Apple or a Google, in less than a year since people discovered the way to buy foreign equity, billions of dollars have poured into those stocks and those stocks are relatively much cheaper than Indian stocks!
That tells us that there is money in the system and there is money in the domestic market. Nobody wants to do business in India; they all want to put equity in the market at this point of time and therefore the flows will continue to give the benefit of it. If you are a long-term investor and you have already seen sensible investors moving a lot of money to consumer stocks because they know no matter what happens, 10 years down the line Hindustan Lever will still give them a good 20-30% rate of return as will a Nestle or an Emami or a Dabur etc.
That is why, the moment the market gets frothy, there is a lot of movement to IT and consumer stocks because that is the defensive play in the market to balance the volatility in the other part.
What could be a sign of the liquidity gush slowing down? First the US and now perhaps the ECB as well will talk about tapering. Could that be a sign of withdrawal of liquidity which has primarily been boosted by very loose central bank monetary policies?
Not only loose central bank policy, there is much leverage in the system. The private equity funds used to invest customer money, now they leverage customers money. If you see the latest deals done in India, you would have seen private equity funds themselves starting to leverage their investments to juice the yield and that is the dangerous part.
First the leverage has to go down in the system and then we should see some slowdown in the valuation multiples and we have seen that. I will give you an example. Two or three large deals — whether it is Suven, Granules, etc, — did not go through in the pharma market in the private space. They have to be sold out although they are listed stocks. The deals could not go in the market and you will see the rest of the valuation of the pharma industry has not picked up after that debacle of the last six months with two or three major deals falling apart.
Suddenly the whole sectoral re-rating is happening in the market. When it happens, the private equity space will start to slow down. It will start to slow down on valuation and that will move to this market but it’s anybody’s guess when it will happen but certainly we have seen it happen sectorally in India in the pharma industry.