Thursday, December 9, 2021
HomeMarket Live UpdatesIPO market primed for future; valuations not comfortable: Dinshaw Irani

IPO market primed for future; valuations not comfortable: Dinshaw Irani


We believe the markets are at fair valuations today, given the level of interest rates, says Dinshaw Irani, CIO, Helios India.


Nykaa IPO opens today, Paytm IPO opens very soon and then you got Policybazaar. These are good, relevant companies which are going public.
On the IPO front, all these businesses are phenomenal. These are all primed for future but then when you are looking at that, you also have to keep some valuations in mind. I think most of these guys are coming at valuations which would not leave much on the table for IPO investors, forget when the listing happens! So maybe when the listing happens, that is when one should re-evaluate these businesses and see if one is comfortable giving this kind of value for a business which is going to fructify in the next four-five years. That is a call which is left to each individual investor but we believe that at the time of listing, real juice will be taken out from the thing as such so be cautious yes I mean IPO price probably is a good price but then they will be massively oversubscribed so I do not know how much the investor will get. So businesses are good and primed for the future.

When Zomato went public, naysayers said it is expensive, the market cap of Zomato is more than the market cap of the entire QSR market in India and will not sustain but the stock is sustaining beautifully. Even though we have seen a sizable correction in the so called good quality expensive stocks, Zomato is still holding on!
Yes. Most of the other IPOs which came after Zomato in new sectors which are mostly e-commerce or

, did not leave more than 15-20% on the table for investors. So the valuations were pretty high. But apart from that, our house view is that it is better to be in the IPO than in the market when the listing happens. You wait it out and then see how the price movement is. So IPO is a good time to enter these stocks but one has to wait for the listing to happen and then decide whether one wants to continue with this holding or buy afresh. That is a call that has to be taken.

Ultimately investing is about buying growth. We are getting 15% growth in consumer companies at a PE of 50 to 70 times. We are getting a promise of 15% growth in other sectors like cyclicals and industrials at a PE multiple of 25 times. What is the better strategy?
In consumers, there are two halves after this quarter’s results came out. One half consists of the companies which could not pass on the inflated commodity prices or input costs to the consumers and they were in the space of big ticket discretionary items and FMCGs, which deal with small ticket items. Whereas the medium ones, small ticket consumer discretionary or durable plays were able to pass it on. So, that was an eye opener for us that the regular bread and butter kind of things are not moving much, it is the big ticket items and the middle ones are the ones which are really moving.

You talked about cyclicals. I think these are the ones which are creating inflation in the market today. But in the case of metals, we thought it is a cyclical industry but it did not work out that way. It is more of a structural call here in metals from here on. We believe that going forward, these are the sectors one wants to be in where the valuations are reasonable and the fact that they are more of a structural play on the demand hike which has happened.

Normally in a cyclical what happens is demand rise is followed by a step up in capacity. But here it is not working out because of issues with China in particular where we are not seeing these steps in capacities happening. We believe that this capacity step ups are going to be more staggered as compared to the past when it happened and mothball capacities will not come online for a very long time. That is why we believe that this is a more structural play and those are the ones you want to be in as such. I will go with the cyclicals but selectively, not across the board.

We have also seen of late the comeback of the banking sector and how the Bank Nifty has outperformed the Nifty. But even when one looks at the earnings, blockbuster performance by ICICI. Today IndusInd Bank is being rewarded handsomely by the markets as well. The comeback of the retail loan book as well. How can one play this theme?
The best way to play this is to go with the private banks because they are more retail focussed than the public sector guys and we have been doing this. We are very clear that private sector banks are the way forward from here on because not only of their retail book, but also their focus on how they service the client and how efficient they are in this manner.

NIMs for banks have gone up and they have managed their books very well. We have been saying this all along that an economy grows via consumption and when we are talking about a $5 trillion economy in next six-seven years, we are talking about a consumption driven economy. The private sector retail facing banks will drive this consumption. One derivative of this is NBFCs who are consumer facing. That is another area that one should look at. These are the two major heavyweights in our portfolio also as such.

What about auto? Should one go overweight on auto? Maruti earnings were a disappointment. However, the stock saw a spike because it is being seen as the worst is over for the, even though some EPS downgrades have come. On the other hand, has a new platform for EVs and a massive TPG deal?
We believe that EVs are going to be a big disruptor in autos going forward and especially in the two-wheeler space. Already, disruption is happening in a big way in the two-wheeler space but in the PV space, it will be spaced out a bit. Obviously the existing players will be looking at EVs going forward and they are getting into it like Tata Motors, but it is a very small segment for them today.

But the fact is that in the EV space, more players will be coming in. It is not that only the auto manufacturers will graduate to EVs, there will be new players coming in and there will be a lot of disruption happening out here. Unfortunately the chip shortage hit the EV space at the wrong time because this was the time when they could have produced more IC engines and stuff like that. We believe that probably just after the middle of this decade, EVs will outsell ICEs. So, that will be a big negative for autos going forward. We are very cautious here.

Earlier also, people who were there were all disruptors in their own fields. It is obvious that the world is looking at EVs in a big way and that is what is making us cautious on the PV space going forward. We like structurally long term stories and we do not think that structural play is there in PVs today. One can play a blip here and there, but on a longer term basis, it is not going well for them. It is going to be a very messy market going forward for PVs.

When do you see RBI move on from being a growth propeller to an inflation warrior? If the trajectory gets changed or a rate hike occurs, could that be the turning point for the markets and could it really spook the markets?
A couple of things out here, you just asked about how rates will impact the market. It will impact in a few ways. When Covid came, it made the central bankers very resilient towards the spikes in inflation or in growth because they wanted the rate hikes or tapering to happen only as and when stability kicks into the markets. I think that resilience has been tested to the hilt for most of the bankers.

Again, inflation is not an India specific event, it is a global event. As a house, we believe that whenever this tapering happens or when the interest rate hikes start happening, it is going to be a global event. It is not going to be driven by the fact one single banker would decide enough is enough, maybe a few here and there.

Secondly, in terms of discounting, the markets today are at high multiples mainly because interest rates are at low levels. If the interest rates rise, the multiples are low. Another thing that has helped these low interest rates is that the balance sheets of India Inc have become stronger. Today India Inc. has come out of Covid in a very strong manner by repaying their debts and having a lot of cash in their books. Debt equity today is at an all-time low. So when one is looking at a strong balance sheet, one always pays a higher multiple for a strong balance sheet and that happened in the case of India. In fact that is what we believe that the markets are at fair valuations today, given the level of interest rates that there are.

The third thing that one should look at is if these rates are hiked in a very gradual manner. The balance sheets are strong with low debt equities. So, a hike in interest rates in a gradual manner may not impact these balance sheets in such a big manner. In fact, the enterprise value to free cash flow today is at a 20-year flat line. It has not moved up much. It is in fact slightly lower than the 20-year average that we have seen.

At the peak of 2008, when the markets were rallying like mad, it was 40-50% lower than those levels. So it is a strong balance sheet we are talking about so the interest rate hikes may not impact them that much but it will impact the market sentiment to an extent. But it has to all trickle down to how gradual they are and the bankers seem to have learnt their lesson and will remain cautious here.



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