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Is market giving different valuations for new tech and traditional IT companies?


The valuation or a market cap within the unlisted space would be $500-600 billion today and more companies are getting funded and the ecosystem is accelerating at a very fast pace. I do not see any significant correction in the market anytime soon. If a correction does happen in India, it will be led by the US or global factors, not anything specifically in India, says Gautam Trivedi, Co-founder & Managing Partner, Nepean Capital.

This market is defying a very basic principle that whatever goes up, has to come down! The best of the bull markets correct, but this bull market has not even corrected for 5% at a stretch in the last 18 months!
I agree. Honestly, a week does not go by when I get calls on whether this is going to be the week when we will see a correction come in. It has been like this for about three months. So instead of spending time to figure out when that happens and if it does, let us look at the macro picture and what is basically causing the bull market to continue upwards.

We have been seeing a series of game changing events happening in India. So we have seen the advent of 4G, the advent of smartphones, the emergence of discount brokerages, the advent of money actually flowing out of mutual funds and people making their own investment decisions. And of course, then comes the work from home, not to mention e-KYC. So all of these factors put together, have basically caused the bull market to continue upwards. A lot of the millennials and younger people who are investing in this market have not seen cycles. So there will be some disappointment as and when that correction happens.

How deep the correction will be is really the question. Right now, if one goes back to where it is all germinating from, which is the United States, there is no let up there with respect to fund flows.

I was reading a recent report from Bulge Bracket Investment Bank, where it says that in the first half of this calendar year, a record $900 billion has poured into the United States. Here we are talking of FIIs putting money into India. Year to date, we are at $7.6 billion but this is a record $900 billion going into the United States. I am sure a lot of money is also coming from countries like India where people are investing in the Nasdaq or just in the US market in general. So, for the time being, I do not see any significant correction. If a correction does happen in India, it will be led by the US or global factors, I do not see anything specifically in India.

Do you think the fears in the auto sector are slightly overdone? Do you think the fear centred around semiconductors is slightly overstretched because one day semiconductor shortage will be addressed and EV is a reality but it is not going to be a reality tomorrow morning?
Yes they are overdone for sure and it applies also to auto ancillaries and not just the OEMs. But having said that, the semiconductor shortage is for real as much as TSMC is going to invest $100 billion over the next three years to put up more factories. There is a real shortage. It is a real problem.

Even for some of the EV manufacturers here, the wait is six to eight months simply to get a car because even more semiconductors are needed in EVs than in traditional cars. A lot of people are focussing on two-wheelers rather than passenger cars.

Why are midcap banks going through this stress test? If the economy revives, credit demand will make a comeback. But with each passing day, the gap between large banks and small banks is increasing and otherwise also, banks have not been the go-to sector.
Non-food credit growth has been 5.5-6% and that is it. So, incrementally companies are not borrowing. In FY21, 87 companies deleveraged 30% or more out of the top 200 Nifty companies. This tells us that there is a huge aversion to leverage. People are raising equity money and reducing leverage and that is factor number one.

Also bigger companies are getting bigger whether it is banks or industrials.In FY21, for the first time ever, listed companies paid more taxes. The top 4,000 listed companies paid more taxes than the rest of the unlisted space of 1.5 million companies. The assumption here is that the 4,000 listed companies are bigger than the rest of the 1.5 million companies.

Secondly, of the 4,000 listed companies, the Nifty 50 companies accounted for 31% of all corporate taxes paid versus 23% in FY20. So, indeed the big are getting bigger and that should be a cause for worry as well. Credit growth is indeed not increasing on the capex side. L&T’s domestic order book shows 90% is comprised of central government, state government and PSUs. So where is the private sector? We are not seeing that coming through and that is a key risk to the economy.

What could be the implication of the crackdown on the powerful tech giants? How could India benefit out of this?
A short answer is the implication will be there, but is not going to be as significant for a variety of reasons. If you look at Chinese tech, in February this year, when the Chinese stocks were at their peak, the combined market cap was as high as $3 trillion. In India, ex IT and ex software, it is a mere $60 billion.

It is a very tiny market today. In some sense, India today is where China was 10 years ago and of course we will catch up, and quite fast too. I do not think it is going to take us 10 years to get to where China is today. But the fact is the China tech sector has corrected more than 50%; individual stocks have corrected even more. But the point is how big China is even now with a $1.5 trillion combined market cap.

Now will you see a fund manager sitting out of Boston or New York sell off Chinese stocks and come and buy similar stocks in India? He cannot because the combined market cap is only $60 billion. Maybe in three years’ time that will mushroom to $200-300 billion but unfortunately, we are not there yet. So the mutual funds, the public market hedge funds will not be able to find similar opportunities in India at this point of time. If they are interested in the unlisted space, that is huge in India. Conservatively, the valuation or a market cap within the unlisted space would be $500-600 billion today and more companies are getting funded and the ecosystem is accelerating at a very fast pace.

But today one can’t expect the Chinese tech meltdown to have a positive impact on India.

Where do you find investing opportunities in this market as certain pockets are definitely looking a little overvalued or overheated?
It is not easy to find sectors or stocks that are not overheated but within the old economy, I still like software and I am using the old economy for software but I would club cement, chemicals which have had a phenomenal run year to date. Some of the best performing stocks within the BSE 500 have been chemical stocks.

I still think pharma has a lot of legs left. Outsourcing companies — whether it is Dixon or Hindustan Foods — are just going to keep going from strength to strength and they will be trading at higher multiples than they were even three years ago; but that is the rate of growth and the market is giving them respect for that.

I should also mention textiles as that is a very fast emerging sector. In a sense, it has been around forever but we have got a dynamic minister Piyush Goyal. He has got a very positive government policy towards textiles and it is becoming a huge job creator. So that also will do well over the next three to five years. But having said that, let us also look at what are the new emerging sectors in India and that is the very key.

Besides new tech, whether it is Zomato or Nykaa or Paytm and others, look at solar, EV infrastructure, green hydrogen. These are going to be businesses and sectors of the future. We do not really have in some sense too many listed plays. Tata Power, for example, is already at 500 EV charging stations in the country. The year-end target for FY22 is 3,000 which is fantastic. So there are no direct and easy ways to play this today but watch that space. There are going to be very interesting companies emerging which did not exist up until now.

You spoke about some of the new tech names Zomato and the ones that are lined up like Paytm, Nykaa etc. Would it perturb you that these companies have not really posted a profit almost ever as that is one of the key parameters we look for companies to invest in on Dalal Street?
I was asked this question by another TV Channel probably two days after Zomato listed and I said let us wait for a month and see how the market behaves and how the stock price of Zomato behaves because that will make or break the next bunch of IPOs that are slated to come over the next 12 to 18 months.

Frankly it is quite impressive that Zomato’s valuation has sustained. I am not promoting the stock but I think the market is starting to discern between new tech and the rest of India. Of course, you could have a company that is not in the tech space and say why is Zomato trading at a multiple of revenue when they have not made net profit ever? It is a very valid question but the fact is in the US which is really where the valuation metrics and parameters are actually coming from, people tolerated losses at Amazon for several years before it became profitable and today look where the company is!

So the market seems to be in a patient mode and appreciating losses but that is a Zomato or any of the future companies that are coming. If this sustains for another few months, it will tell us that the Indian market has decided to give a different valuation for new tech and the rest of India which also includes the traditional IT and software companies.



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