How does one ensure that within the mid and the small cap universe, one can hide in the safer pockets? Do you think that this broader market underperformance is going to encapsulate just all and every mid and small cap stock?
Well not all. There will be some pockets of excellence but we have to understand here that a lot of this is a function of liquidity and when liquidity is being pushed out of the mid and small cap universe and going to largecaps, a lot of good companies will get caught in the crossfire. We are going to see companies down 8-9% without much reason. But then, in the last six months they have gone up 25-30% without much reason as well. So there is a bit of correction to bring everything back to a little bit of more normal rise.
I would have expected that if the largecaps were to correct 5-6%, the small and midcaps will correct about 15-20%. Right now, most of the largecaps are not correcting majorly but we are seeing some of the small caps fall 25-30%. I expect a lot of this to happen over the next maybe one or two months, shake off a lot of the weaker hands from these stocks and the large stocks which seem to be more strongly held, will probably fall half as much. I expect the larger cap stocks to fall as well. So one has to brace for it. This is the normal stage of markets unless of course, something really bad happens or something really good happens. This is a normal correction in the markets.
The primary markets were buzzing. But listings have become more subdued. Look at what happened on Friday as well. Does it indicate that it is getting frothy or not leaving enough on the table for investors?
It has been frothy for a while. While there are some companies that perhaps should command the valuation they ask for,a lot of companies have just raised at a time when money has been plentiful. A lot of HNI funding has come in from NBFCs at extreme expectations. We have seen 400 times, 300 times oversubscription at the HNI end, largely financed by very short term borrowing from NBFCs. This is not fundamental. This is more like oh! I want to get out on the listing pop, make my 3% or 4% or 5%. Sometimes we have seen 100% in these listing pops.
So that is possibly going to get corrected very quickly because now we are having listings fall way below expectations. They are still positive, which is a good sign. However, trends like this typically mean that future IPOs may not get the same kind of interest and therefore the same kind of froth as the past. This is also a good thing. People who invest in IPOs also would like to make money in the longer term and not just as a listing pop.
So if you have liked some of the companies that have listed in the past six or seven months, you will see today some of them are trading at lower prices than their IPO. This may be a good time to purchase them. Indications of froth are all over the place. We are still remarkably overvalued compared to our own past in terms of price to earnings ratios. People blame it on liquidity. But it is also the fact that you do not have anything else to invest in. So until that aspect changes, I expect some froth to continue.
I do not think the story is going to move away from the pure play IT names irrespective of the fact that the new age internet companies are coming up with frothy valuations. Your view?
IT is a very interesting bet. We own a lot of IT and so I am very heavily biased here. But what I am hearing from the industry is that there are more deals happening and the deal sizes, the deal counts are increasing quarter by quarter. They actually have a lot of trouble retaining people because there is so much demand for talent because of demand from the project side and the contract side. So we are expecting more than double digit growth and margins upwards of 20-22% for a lot of companies.
The largest ones probably will come up with even better numbers but a company the size of TCS is still viable to grow considerably from where it is simply because of the scale of and the nature of operations growth they see. A disclosure, we own this stock. So I am very positive on this and this will not depend on the rupee-dollar rate any more. It will just primarily be a function of international demand and that is a positive. The big hit will be there, their wage costs will go up considerably in the next year. That is the one thing to watch out for.
