Will the listing of Zomato change the way the market values companies based on cash flow, dividend yield and intrinsic value?
Zomato’s launch is an interesting one. From a traditional perspective, managers have been looking at cash flows and profits to value companies. But this is a new game altogether. We have also evolved to create our own models to evaluate companies where near-term cash flows are not going to be there. You have to look much deeper, take a 10-20 years kind of view and then take a call on some of these names. We are also changing the way we look at these companies. While we are positive on some of these companies because of long-term growth prospects, it is difficult to peg a value on them in the near-term.
It is important to have some exposure there. As you get more comfort and understand the company, it is more about looking at the winners. Ultimately, it is going to be the top one or two companies which will take up the bulk of the value in each of the segments. There could be more IPOs coming in the space. From an analyst’s perspective, we are trying to build that expertise. Normally, you will see those capabilities in PE funds betting on companies where the future could be there but the near-term earnings are not there. We are building our capabilities over there and we are okay at looking at some of these names with a small exposure.
How comfortable are you about valuations in the market at present?
The broader market is quoting at valuations which are much above the long-term average. That has been the nature of the market, not only over here but also globally. There are two factors – easy liquidity and low interest rates. In some sectors, earnings are more depressed and so the market is willing to look beyond current earnings.
In sectors like specialty chemicals there has been a material increase in valuations, considering the valuations of the last 4-5 years. It gives some kind of a discomfort over there. While we have seen a good tailwind in the sector and the numbers have also been good across the board, but the sector can see some volatility depending on how the pricing environment moves. That is one sector where the valuations are at probably two standard deviation above the long-term averages. Apart from that, valuations in most of the sectors are slightly above but not really above the zone where one would be too uncomfortable.
What is your outlook in the midcap IT space?
The IT sector has seen tailwinds. The move towards digital has been beneficial across the board, not only for large companies but also midcaps and smallcaps, especially those focussed on the digital side. And that has led to a larger rerating in midcap IT names. Traditionally, midcap IT stocks have quoted at a significant discount to largecap IT names. That discount has narrowed down significantly. Now one should be more company specific in midcap IT.
