These are exciting and interesting times. On one hand, we have got a loud and visible inflation concern and on the other hand, earnings continue to surprise us. Sectors like IT, banking are all surprising us with an uptrend. How does one find balance in this kind of market where inflation and rich valuations are going to be a deterrent while growth as well as PE expansion could be the order of the day?
There are worries like inflation and supply chain issues. A lot of the companies are faced with raw material cost inflation but most of the companies are also extremely bullish. In fact, if you see the earnings, it is extremely positive and in a lot of places, we are seeing a lot of surprises. So it is very normal. Historically, there are periods of inflation concerns. But markets are slave to numbers and we have not seen a time where there is more visibility in earnings in every sector than today. So it is very clear. Of course, one can see minor corrections but we do not see a large fall in Nifty. In terms of EPS, we are expecting about Rs 850 EPS for next year and that is about 22 times, 23 times on the Nifty.
If 10-15% correction comes, it will be a great long-term opportunity to add to the positions. Of course, the broader markets could have sharper corrections but as a Nifty index, we do not see much corrections but if there is any, it is going to be a golden opportunity because the earnings visibility is very clear.
Could the Nykaa stock go the Zomato way which is fantastic listing and then the stock plateaus or could it go the DMart way which is after an excellent listing, the stock keeps on making new highs?
It will be more the Zomato way. DMart, Zomato, Nykaa are all phenomenal companies. It is amazing what they have done in the last few years. But it is about how much you are paying for growth. In the case of DMart, it looked expensive on the face of it but the growth was very visible and probably one was paying for two-three years of growth.
Here it depends on what it lists at and then where it goes but one has to ask the question how many years of growth are we paying for? If it is five, seven, ten years then the IRR really falls down because you one cannot pay for 10 years of growth. You have to because there will be times in the middle where companies will see hiccups, there will be times when markets will see hiccups. It is a great company but is it a great stock? That time will tell and there’s a lot of FOMO where everybody wants to get into IPOs like these. But that was the case in case of DMart. When DMart listed, everybody said it is very expensive, we cannot buy it and people asked us whether we are really buying DMart. In the case of Nykaa it is more like why haven’t you bought it?. So phenomenal company, great business. In terms of what price you pay for it I think one has to do more work and take a smart decision.
Tata Motors has made a comeback in the portfolio. Is this about the cyclical or the capex revival theme or the economic recovery theme that you are betting on here?
It is all three things. Of course, one cannot really evaluate what is going to happen in the EV space but the CV cycle is clearly turning and that is one part of the business which will turn around. The other part is passenger vehicles. We are very excited on the PV side of the India business. We really think that they have a lot of growth there, they have made a lot of effort there and they are gaining market share and they are giving competitors a tough fight. So that could be a business that could surprise in a big way and of course what they are doing on the EV side and aligning that with the passenger vehicle business could be extremely exciting.
Since you have Zomato as part of your portfolio, how are you valuing some of the internet companies? PharmEasy has filed for an IPO draft. Two-three more unicorns will go public before March ends. What is the best way of analysing some of these high growth businesses?
If one is looking for leaders, one needs to see how big a leader it is. Is it a one- player or two-player market? How many people can enter the market and has it established its leadership? Companies like Nykaa have established leadership. Zomato, Swiggy have established their leadership and the first step is defining whether it is a leader or not. Once you do that, the second step is understanding how large the market is and how long this company can grow at a fast pace.
There are times where you see the company is currently x but the size of the market is 100x. That gives a lot of comfort that yes it is a leader and the size of the market is very, very large like in the case of Zomato or Nykaa or Policybazaar. Once you understand the size of the market, there is some kind of visibility that over the next five, 10 or 20 years, this is what the company can get to and then one can create a bull and bear case, that is the best and the worst case in the next 5-10 years. After five or seven years, you want to see some cash flows, earnings and it will come. Many of these companies’ earnings will come when the acquisition engine, the cost they are spending to acquire their customers, goes down and that will happen once the leadership is completely established and once they have captured enough customers so that the incremental cost of acquiring a new customer will go down.
That is where most of these companies are spending a lot of their money and that is when operating leverage will start kicking in and slowly one will start seeing profitability and cash flows. The idea is that how quickly that can happen and whether it is going to happen in 3-5-7 or 10 years and how large it is going to be. We have seen that in the case of Jio. It was not profitable for the longest time but today we have the visibility of Jio earning Rs 40,000-50,000 crore of net profit over the next three to four years. One needs to see how large the profits can be when they come and put a multiple to that and discount it to the present value. That is the way to do that.
