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Why FOMO can’t stop Nikhil Kamath from steering clear of Zomato, Nykaa, Paytm IPOs

“I do not buy into the story that something is growing at x today and it will continue to grow for the next 20 years and based on that, I will pay a certain multiple today,” says Nikhil Kamath, Co-founder, Zerodha & True Beacon.

The mother of all IPOs Paytm is coming this week, on the anniversary of demonetisation. With Nykaa and Policybazaar, we saw millennials flocking to Dalal Street. What is your view on the IPO scene?
It is a Happy Diwali with Nyka, Policybazaar IPOs with Paytm coming up this week. With , CarTrade and other IPOs of late, it is nice to watch new age businesses getting listed. It allows a larger proportion of our population to participate in the India growth story and the technology growth story of India. I like the timing of it coinciding with Diwali.

Coming to valuations and whether one should invest or not is another story altogether. I am a fairly pessimistic person today where I believe valuations of a lot of these companies are higher than they should be. I do not like the concept of smart money, in a certain way offloading to retail money when IPOs happen. But notwithstanding all that, I am happy to look at all these new IPOs and tech companies coming to the stock markets to raise capital.

You said you are a pretty pessimistic guy when it comes to these IPOs. I take it you did not apply for Zomato, Policybazaar, Nykaa or any of them?
None, none whatsoever. Not that I am happy about it, considering how some of the IPOs have done from a price point of view but I am fairly traditional in the way that I like to look at companies with cash flows and profitability and value when the time is right.

I personally like to avoid the flavour of the season and I think even though one has tremendous FOMO and one feels like missing out all the time, hopefully in the long run, it is better to err on the side of caution.

So no regrets?
Regrets about not having made money? Yes totally. How can I not? But in the long term, hopefully it gets converted into no regrets.

You said that you are traditional but if I want to look at Nykaa, it did declare profit last year. It is only one time but it is a relatively new company and it has solid founders. You still do not want to go in for it?
See outside of declaring a profit, I think the question is how many times the forward profit are you actually looking at? In the listed space, right now there are manufacturing companies trading at 130 times. There are chemical companies trading at ridiculous valuations. What one needs to remember is when one buys a company at a 130 times forward earnings, if the company makes the same amount of money, one has to wait 130 years to get back your investment in terms of profit. That does not fit well with me. I get the rate of growth and predictability; I feel like nobody can truly foresee the future. Even if a company is growing today, it does not mean that it will grow for the next 50-100 years.

Companies historically have had a life cycle. If one goes back in time, one will get all the companies that have been around from the very beginning. A company on average survives for 8 to 10 years and I am talking beyond a certain scale. I do not buy into the story that something is growing at x today and it will continue to grow for the next 20 years and based on that, I will pay a certain multiple today! I am not on that side of the boat and you know I do not believe in valuing companies like that.

The cyclicality of stock markets not just in India but across the world, means there will be opportunities, may be not today, but may be five years down the line when things go back to near long term averages and near historical valuations. The idea is to have enough gunpowder in hand to fire then and invest when that opportunity arises. At this point in time, at the current juncture, scepticism is ruling my decision making a bit more than optimism.

What you are doing is indirectly benefiting from all of these IPOs via Zerodha. Can you give any insights on Nykaa and Policybazaar? At the time of the Zomato IPO, we saw record openings. It was also said that a lot of customers were opening demat accounts because they believed in Zomato?
Yes, Zomato has set a precedent in a certain manner. The fact that the IPO was so large and ended so well means the appetite for IPOs in a similar realm will continue to persist for a certain point of time. The way retail psychology works is when tomorrow one IPO does badly and it is all over the news, and we are all talking about it, the ensuing IPOs will not see much appetite. But right now, people are liquid, they have cash to allocate, a lot of greed is governing sentiments. So all these IPOs, up until something goes wrong with one of them, will continue to see a lot of interest and a lot of money will come into Nykaa and Paytm and everything else that will come in the following months.

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