What could take markets down now? Could it be inflation which would impact the rate sensitives or could it be the rupee sensitives that would be hit given that there could be a reversal in the dollar trade?
My assessment is that such a flood of IPOs coming into the market is bound to affect at least domestic liquidity to some extent and that may be the cause for the markets to flatten out or even give a mild correction. Apart from that, if any global factor comes through in terms of correction in the US markets, then we will follow suit over there. But I am getting a bit concerned about the way paper is being issued in the primary market and the valuations at which it is coming through.
Typically that is one of the signs of frothiness in the capital markets. I will be a bit cautious at this point of time, at least in terms of strategising for fresh investments, there may be a correction around the corner.
Are you a bit surprised with what is happening in or even Happiest Minds? Do you think this kind of outperformance and overbought positions in midcap IT stocks is a matter of concern?
I am not worried about that aspect. If the market corrects, then midcap IT will also correct with it but I feel that technology per se will be an outperforming sector and within that midcaps will outperform the larger cap purely on account of base effect as also the fact that even relatively smaller order wins will tend to drive their profitability higher. They also benefit from higher operating leverages.
The biggest problem for midcap IT is just managing their talent and some of the quality midcap IT companies which have a good HR practices and are able to contain their attrition rate, will have no problem when it comes to order wins or business on hand and they should be able to grow quite steadily and at a rate significantly higher than the large cap IT over the next few quarters or so. Therefore, although valuations are on the premium side or the higher side historically as compared to large cap, it seems to be fully justified because at the end of the day, their growth rates are higher than largecap IT and some of the midcap IT companies in niche areas where the growth rates are even higher.
There is not so much of a concern as far as the valuations are concerned that market sentiment may turn negative and that will affect all sectors, midcap IT included.
Are the large IPOs sucking out liquidity from the secondary market into the primary market? If I look at the Zomato subscription figures or some of the recent IPOs or even the ICICI Pru Flexi Cap NFO, it does not seem like there is a problem of appetite in this market?
But look at the kind of slate which is there as far as the primary market is concerned. After Zomato, we will have Paytm and all the way to LIC. So there is a lot of fresh paper coming into the market and the valuations at which they are coming is what the concern is about. Typically, when markets tend to reach a top, the primary markets are in hyperactive mode. And that is what I see happening at this point of time and that usually is a signal that maybe froth is being formed. Nifty could go another 200-300 points up before we start seeing a correction but the deluge of IPOs coming at these valuations and the kind of oversubscriptions which we are seeing is a warning sign and one needs to be a bit cautious at this point of time.
