How optimistic are you on tech? There is going to be a slew of IPOs. On what parameter should one really judge these IPOs? How does one analyse these new age businesses?
First look at things on principles. A lot of companies throw words around tech and platform and of course now it is all ML and AI and sometimes there is no justification for any of it. On first principles, it is important to understand what exactly the company does, how it leverages technology. If there is an offline business that has a website, is that a tech business? I do not think it is a tech business. It is just another channel for them to market their products.
So one has to understand what constitutes a tech powered business. For me, that means the business can find a proprietary source of data which it can sensibly analyse and that the growth can be exponential and nonlinear. They do not require incremental capital for a unit of growth and if they achieve a scale doing that, then the barrier to entry for the next year becomes quite high. It is not something easy to do and we feel that there are very few companies that are able to actually do that now. One has to figure out the management team first because business plans for all these tech companies have to pivot very quickly and very often.
The world is changing too fast to stick to a five year plan for any of these tech companies and so their ability is paramount. The second is whether they actually have the jobs for technology innovation. Whether it is in their DNA.
Then one has to understand whether the unit economics of the business even makes sense or is it just going for top line growth and doing more deliveries or selling more products online but the unit economics almost would never add up to what is required. When one puts these three or four things together, the recipe comes together. One can then look for a company that might fit that long term compounding machine in the tech space.
The recent rally that we have seen is also on the back of retail investors’ SIP flows and more demat accounts. Many experts are saying that this is going to be India’s decade. How are you looking at all of this when there is an energy crisis in China and Europe? When other assets start doing better, are you seeing the property markets come back in India as well?
While talking about macro, the biggest risk out there would be higher interest rates because once inflation in the west goes up, oil prices go up and therefore India has to follow suit too. But it is important to keep in mind that it does not necessarily mean that higher interest rates means definitively lower stock prices. That is a very important distinction. Sure discounted cash flows means that the cash coming later on is worthless, but there is also the other metric — the numerator, which means that if businesses are really strong, the earnings are going to be much higher.
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So, when you discount that at a higher rate, the net result might still be better. It is very important to understand that aspect. In the past, we have seen that in India rising rates can also lead to rising stock prices. So that is one important aspect I think to keep in mind.
The other thing is retail flows. There are good retail flows and new retail flows and this is a global phenomena — be it the Robinhood traders or our version of Robinhoods, that is something which never has ended well in the past. It probably would not end well but it does seem that a lot of the activity that happens on those kinds of retail platforms do not typically tend to be high quality semi-boring long term compounders. These tend to be a little bit more of the flavour of the week and the flavour of the month.
Things like that can get hurt from time to time but fundamentally, the only real macro issue is inflation and correspondingly interest rates. A minor rise or a gradual rise can lead to significant catching up by the Fed because they are behind the curve if that is the scenario that is something that would derail things for a while.