What is your outlook when it comes to the recent spate of IPOs that have hit the markets? Quite a few non-conventional names have come into the market playing the overall digitisation play. Is there anything in particular that catches your eye?
There are two questions embedded there and let me separate them; one is demand and supply of paper. Typically when markets are very strong, supply of paper increases and usually the market tops are accompanied by buyers stepping away and lower quality issues increasing at the margin. That is a typical development at the top of the market. This time around, most of the issues are unique. Some of them are in areas which were not open or available in the public investing space. Many of them are really good businesses, very well managed with high return ratios, with responsible managements in place and so on.
The quality of the IPO issues has been very strong and investors have been very discerning. There have been attempts or IPOs that have not gone through because investors have stepped away as the asking price was too high or the business outlook was unclear.
So yes, supply of paper has increased and demand has abated. At the same time, one needs to be a little careful if the IPO pricing is aggressive and there is no money on the table. But on the second side, if there are unique businesses with unique opportunities, they might still offer an upside but one has to be cautious about the pricing because I do not think this is a time to be very cavalier about valuations. I do not think one can throw it to the winds.
Like many of the issues that have happened in the recent past, we have participated in some of them for sure and I hope these companies will do really well as we go along. A good quality issue always raises the bar and raises the standard of play for other listed companies. It is always a welcome thing in my view.
Some of the Covid hit businesses; airlines, multiplexes, restaurants will not shut down. Indian Hotels, IndiGo are backed by strong groups with strong cash flows. But the markets believe that it is the end of the franchise value and the terminal value and that is how the stocks are falling. What is your view?
This is really value investing and value investing is never fun, it is very painful. There are businesses out there in retail, in entertainment, in travel and tourism, in hospitality which will survive and they will emerge stronger because the competition will be weaker. These are the times when you buy these stocks. You buy them now in the knowledge that you might see another 20% down before the stock bottoms out and you might have to wait for a year to make any money. That is the patience that value investing requires.
Unfortunately, what happens is in the short run, the immediate returns or the prospect of immediate losses offset the upside potential in the long run and people say what is the rush? Let the data points emerge and we will look at it then. So it is a very different ball game, it is very tough to look past the immediate issues, immediate risks at hand and focus on the long term. But crisis is always a great time to be buying a good business.
Whenever a good, strong business goes through a crisis, history tells us that it has been a great time to make a long-term commitment to that investment but be prepared for seeing a little bit of red ink and be prepared to hold on to that. That is what I would say to investors. It is not something that you should attempt trading for sure.
What is that contra value pocket according to you? Nifty is at 14,000. What is the deep contra bet where the downside could be 15-20% but in three years an upside is coming?
In the financial basket. All these stocks are trading at book value. Let us leave out the top three four banks. We will come back to them later. Otherwise, the entire lending space is trading at book value give or take. There is a big section of the lending world which will not be able to participate in the growth because they do not have the capital. I am talking about the PSU banks barring
and possibly Bank of Baroda. Growth opportunity is phenomenal for all these lenders. All of them have come up the curve on technology, most of them have come up the curve on technology, most of them have the capital to grow. This is an absolutely simple investible place for somebody looking for value.
Now the problem is that the Bank Nifty or the banking stocks as a basket is the favourite playground for short-term speculation and it has high beta. So if you are negative on India, you say that well India is seeing these Covid cases and foreign investors are going to be scared and the rupee is going to go down. So, let me find something to short. Here is a place where there is liquidity, there is high beta and you short it. And that is what we are seeing.
But from a medium-term perspective, these stocks are very well positioned for growth. The only long term risk is can technology completely disrupt these businesses? We will see how that happens. We will have to see how that unfolds because India is also very deeply regulated and it is not easy for many fintechs to do exactly everything they want.
That risk is there at the back of my mind and we watch it very carefully but I do not think that is a big enough disruption for us to walk away from the sector completely. Since you said that what is one place that you would like to point out, this is one place.
If you are a market leader in let us say airlines business or a hotels company or even on retail chains which are financially sound, you can make long term commitments to these names in environments like this and you will come out ahead because this is the time to make a commitment and hope for a 30-40% return over the next one, one and a half years and that is not a bad return to make. But yes, be prepared for a 10-15% loss potentially and be prepared to hold for that time period.
