Zerodha is an extraordinary franchise. You have changed the rules of the broking industry and have done to the broking industry what Jio perhaps did to the telecom industry. Do you think we need to understand where the new age tech companies are headed? Can they remain relevant for investors?
I am circumspect about valuations today. A lot of people are pricing in the future like the future has already happened. To make an assumption that the GDP per capita will go from $2,000 to $4,000-5,000, the economy will have to grow at a certain pace over the next 10 years. If one were to make that assumption, then sure discretionary spending power goes up. The money being spent on companies like Nykaa and many of the peers who are coming online right now probably goes up too, but to value these companies like the assumption of the future has already occurred might be a bit of a stretch in my opinion.
I am fairly bearish about the prospects of companies with ridiculous valuations today not just in the listed space but also in the unlisted space. One hears about one new unicorn being formed every week and with all these companies coming in, the one big thing that has changed between now and may be five years ago or 10 years ago is the access to foreign capital; the access to VC money has gone up tremendously and that is skewing market fundamentals, leading to the rise of many companies which were valued at a very high premium to their historical values.
These companies are not great, they are not doing innovative stuff, they are not required. But they definitely have a use case in the ecosystem. What I do not agree with is the valuation multiples that one can attribute to them.
You have been a trader, you are an entrepreneur and you are also an investor. What to your mind is the right way to understand valuations of some of the new tech companies because these businesses would be there. I mean Zerodha as a franchise is here to stay. You also have small investments and seed investments in other startups and you understand the whole way of valuing some of these companies. What is the right way to value them?
I will be a bit candid here. There are many ways to value companies but the way in which companies are valued today and probably have been valued historically at most times is sentiment. If I have Elon Musk buying something, ten other people are buying it and based on that, 100 other people are buying it. Influencers like that exist not just in America, but in India too.
Most often, we are driven by mass sentiment and the psychology of things is why a retail guy applies for an IPO or buys something. If you were to ask me how many people are actually researching these IPOs that they are applying for versus how many are listening to some friend in their own peer group who they think is smart — I would bet on the latter being significantly more important. So valuations are driven by sentiment.
Everything in life is cyclical, as are stock markets. This crazy euphoria will not last like it has not lasted at many times in the past. There will be a cycle of corrections and then maybe we have euphoria again, but the one thing people have to pay heed to is to make sure they do not buy too much and diversify a lot more than they are doing right now, when euphoria is at the level that it is today. When you talk specifically about the IPOs of today, another thing that really worries me is that a lot of this is OFS with promoters and smart money exiting in favour of retail money.
A majority of the money that has come in through the IPOs in the last one year has been towards smart money exiting and not really towards companies raising capital to increase their capex and grow their business. One has to wonder if the promoters and the early investors and backers of the company are exiting, what really has changed and why is retail running behind it in the manner that they are? Also there is not really a very big moat for all of these businesses.
Sure they are first movers in their own industry and they have done spectacularly well. I am a big fan and user of many of these companies myself. For all the critique I might have passed on Nykaa or something like that, I found myself online two days ago buying soap or shampoo on Nykaa. It is genuinely the most convenient way to buy a product today. They ship quickly and the service is great. So the need for these businesses cannot be questioned.
I go back to the initial point I made about valuation and I feel valuation driven by psychology and driven by mass hysteria in today has run up ahead of fundamentally how these companies should be valued. That does not mean I am asking you to look at the profit numbers and value them. It deserves a premium to the profit number based on the 80-90% growth rate and the scope and potential in the sector. But one has to find a middle ground between that and the ridiculous valuations that we are seeing in the market today. I do not know where that middle ground is but I think it is lower than where we sit today.
In your definition, in the current start-up world there is overvaluation, there is euphoria or there is a meltdown?
Tough to answer this question in 30 seconds but I would lean more towards euphoria and mania.
