In the last couple of days, some very influential global brokerages have come out with their own analysis on where the Indian markets are headed and there seems to be unanimity and the fact that the straight line rally may not be as sharp as before. What is it going to mean for retail investors?
From a retail investor perspective, it is very clear that one cannot sustain the kind of straight line rally that we have seen and one never sees that happening over extended periods of time. The fact that there was a lack of alternatives to investment and the fact that a lot of people were working from home, a lot of small traders or retailers whose businesses had shut down, had seen huge amounts of flows coming into the markets. Some of them have only seen one-way markets and they seem to believe that the markets are a great place where they can sustain livelihoods and make their money.
The fundamental fact is that the market is a place where you generate long-term wealth and it is not a place where you can necessarily get your income on a regular basis. So as volatility returns, we will see a lot of these small marginal retail players taking hits on their portfolio because volatility hits momentum stocks and it is the momentum stocks that are being played out over this last one, one-and-a-half year.
A very interesting narrative is if one picks up the CNX 500 index and looks at all the constituents of the index, we will see that 350 out of the CNX 500 stocks, that is 70% of the index constituents, have corrected 10% plus from their 52-weeks high. So, an in-born correction is starting to take place which is masked by the fact that due to sector rotation, the index has not really corrected as much.
The pain is already visible over the last two months and if this persists for some time, which due to all the reasons have been enumerated and more so if the market turns flattish, then internal corrections are taking place. The easy money is out of the market, the unidirectional rise is out of the market and that is where some of the retail froth will be seen dissipating and a bit of normalcy returning to the market.
If I then see what is happening with gold prices which is always considered to be a safe haven and the fact that the property market is also making a comeback, how should we juxtapose it and put it all together?
Gold has been touted to make a comeback and in some sense, gold also got affected as a safe asset due to speculative plays where people started diversifying some of their gold into crypto currency and so on and so forth. Even that will see some impact. So gold is a safe place to be when there is inflation, when so much of currency is sloshing around that the currency eventually starts losing its value.
Real estate coming back is a good sign for the Indian economy because it is one of the largest employment generators across the entire value chain and it is being driven by cheap credit and mortgage rates and all-time lows and it has had a 10-year cycle where it has seen pain. In that sense, real estate coming back is good from an economic perspective. However, if inflation remains high and there is a tightening happening and from next year onwards, interest rates start seeing an uptick, then the thrill of cheap mortgages will cease.
I personally believe that you are not going to see great appreciation in your property prices if you are a property buyer. It is more of a user market and it is a great time to own real estate.
Is it time to bet on pure play pharma or do you think this time around, after some amount of consolidation, one needs to bet on ancillaries?
The ancillaries will do well. Whether it is the diagnostic businesses or whether it is the hospital businesses, a sense of normalcy is coming back post Covid and these are businesses which are not really dependent on generic prices or other retail B2C oriented business plays as such and in the last few years, a lot of the larger hospital chains had moved to an asset light model ans had pared down debt.
As far as diagnostic business is concerned, it is a great place to be in, although the valuations have been high and that was more due to scarcity value. But in the recent months, we have seen some more diagnostic businesses get listed. But these are businesses which will generate very high ROCs. On the traditional pharma side, our view is that right now one has to play it stock specific. Some of the generic plays or API plays are doing extremely well and larger pharma has also started to show signs of coming back. So I would not be surprised if a few months down the road, you start seeing a lot more interest in larger pharma.
Given the kind of margin compression because of the raw material costs, if the price hikes continue, perhaps the volume also will eventually get dampened for FMCG stocks. Should one not read too much into a price action like today’s?
One should not really read too much into one day price action. Inflation at the present moment is being looked at as transitory and hopefully it is, because if it continues at this pace and at some stage, we will find resistance and that will impact demand. But at the present levels, we have seen very little impact of inflation on consumer demand. These are plays which have demonstrated resilience over years and the ability to take price hikes and meet initial demand resistance and then see demand once again come back.
The reason the FMCG business enjoys these kinds of valuations is their ability to price themselves over long periods of time. So the space is more of a steady state space to be in, it is not going to give great outperformance numbers over short periods of time but if prices remain elevated for far longer, then demand will eventually be impacted, but for FMCG businesses that is a short-term phenomena because of the nature of the products.
The recent IPOs from Nykaa saw its net profit contracting to Rs 1 crore a quarter; Policybazaar is seeing a bumper listing; Paytm listing is coming up. After that, Delhivery, Mobikwik, PharmEasy IPOs would be coming.
It is pretty smart from a perspective. The main shareholders are the PE firms. They are clearly seeing the hunger and craze that seems to be existing among the retail public and among the HNIs for these companies. My own view is that clearly the listing of these companies is an entirely new paradigm in this market but being a traditionalist, I continue to believe that ultimately a lot of these businesses will have to show real profitability over extended periods of time.
If one looks back to the 2000 era, where we had seen the earlier dotcom bubble, a lot of the companies such as the Amazons of the world were babies of that time who actually evolved business models and have grown to where they are. Similarly, some of these companies are also going to be large companies of the future. However, right now, it is a virtuous money cycle.
Capital is available cheap and key funds have sort of derisked themselves by getting these companies listed so that they can have alternate access to money from the capital markets. Once the whole capital cycle turns and monetary tightening starts place or interest rates start going up, some of these companies will be called into to demonstrate the resilience of their business model.
A lot of them going public is creating more accountability. They can no longer go on spending money forever. The public markets like to see profitability. Even though it does not seem so in the short term, but over long periods of time, public markets want to see profitability and some of them will have to move in that direction. Which of them is going to be a winner is tough to answer at the present moment but it is great from an entrepreneur perspective in terms of what is happening today.
These companies going forward with their disruptive business models, is causing even existing legacy companies to evaluate their business models and adapt using technology. I think it is a great trend and a good momentum generator. For serious investors or value investors it is not a great place to be at the present moment. Some of these companies will see very sharp corrections. I do not think any of them have any valuation comfort at the prices they are trading.
