At what point in time you would start booking profits from the traditional IT companies?
I don’t even think in terms of booking profits and no investor also should think like that in terms of booking profits. In fact, you should think in terms of how you can deploy more capital into the equity markets. Even within the technology space, these are companies which are providing talent to the industry, to the world at large and there is a great demand for talent globally as companies become bigger from digital projects. There is a great demand for software services and that is where Indian IT companies are playing a crucial role.
We keep talking about the oil prices going up because of higher demand and restricted supply. Something similar is likely to play out in software services as well. Today all Indian software service companies are looking at huge order book positions to the extent that they can pick and choose which projects they want to do. Their biggest headache is managing the talent and not getting the business and when we are in such a situation, why would I think in terms of booking profits?
The thought process has to be that so long as there is growth, do not get too perturbed about higher PE multiples and ride this particular growth. Do not think in terms of booking profits and trying to buy them at corrections;all the skew trade, skew strategies do not work out in the long term. Stay invested. You never know when the price will turn, when the correction will reverse itself and again these stocks will start going bullish all the way up.
Going by that logic, mid-tier IT companies and maybe the top five, six of them have given a return of about 150% till the start of this month. Would you then not go with the rotation from the midcap IT stocks to the largecaps because that kind of return will not be sustainable from that perspective?
Certainly savvy investors can indulge in that kind of rotation. If they find that there is value in largecap IT, then they can go over there, if they find value in midcap IT, they can sell largecaps and go into midcaps. But booking profits in the entire sector is something which I do not agree with. At this point, largecaps are still slightly undervalued compared to midcap companies and my sense is that the largecap companies will be better able to manage the talent crunch and be able to deliver to their clients in terms of the projects and the order wins which they have got in some of the midcap IT companies that may have execution challenges.
Given the valuation in largecap IT, some of the midcap IT may offer some amount of outperformance but it is going to be marginal. If one is not too concerned about booking the absolute smallest bit of profit, then you may remain invested where you are — in largecap or midcap or smallcap. All of these companies in the IT sector will do exceedingly well.
On ’s prospects in the light of what is happening to Chinese gaming companies and the US FAANG stocks.
We are invested in Nazara and maybe you could take our views with a bit of prejudice. It is shaping up to be like another InfoEdge, where it is investing in smaller companies, growth companies and diversifying its risk on that count. As and when the subsidiaries grow, value will get accumulated in Nazara Technologies. It is a very sensible strategy. It is a completely de-risked business model. Because of its valuations and its track record it is able to raise capital very easily and if they are getting opportunity to deploy it, it will only add long term valuation to the company.
The developments on the China front or the hiccups in global tech businesses will benefit Indian new age companies. That explains why we are seeing increased private equity flows into new age business. We are seeing an increase in the number of unicorns trying to go public in India and after Zomato’s example, many more promoters are really enthused to list their stocks on the Indian markets.
There are certain funds which focus on investing in new age digital businesses and if they find that opportunities in India are far better than that in the US and China and though problems over there are more to do with regulation rather than there being any question marks about their growth, these funds are there to invest in Indian tech companies once they get listed and they reach scale.
So we are very positive on companies like Nazara, Zomato or the new listings which are coming into play. It is just that one needs to have a slightly patient view and not get too bogged down by looking at the earnings all the time.
