What can the repeal of the farm law mean for the markets? Many believe that this is a biggest signal for the markets that with Uttar Pradesh and Punjab going in for election, reforms may take a backseat. Is it back to vote bank politics and bye bye reforms and economics?
In terms of the repealing of farm laws, there are two elements to it. One is it does not make a difference to the underlying businesses and trends. To some extent, it does not because the gains were also expected to be much longer term. But the second bit is whether directionally it is a little bit of a challenge. We were getting a lot of tailwind in terms of reforms, disinvestment and privatisation. To some extent, this does hold things back a little bit.
Quite honestly, a lot of focus and energy are focussed at this point in time in terms of the economic revival that is fundamentally coming through. So to that extent, it is a reality check to some extent but I do not see it having a meaningful impact as far as the market is concerned.
The other big story for the primary markets is what is happening to Paytm. The tech IPOs had proved to be super hot. The next wave of IPOs will come early in 2022 from Delhivery, PharmEasy, Oyo, Ola. What impact will Paytm listing have on the primary markets?
The Paytm listing was more of a reality check for the markets than the farm laws. It is not about losing money on one IPO. It is about the fact that it has become a one-way street and very aggressive investing is happening. The valuations across the board had tended to be a little bit more debatable. At some level, there are going to be losers on the back of this but at a broader level, it is a good thing that has happened at the market level, because it brings in some level of rationality, some level of sanity and much greater scrutiny of what is coming to the market.
Is this something that is going to puncture the IPO cycle? The way it was unfolding, I quite honestly do not believe so. Is it going to make it a little bit more rational and a little bit easier in terms of valuations? I think yes.
So to some extent, there is a little bit of a reality check, some losses but I do not see it changing the trajectory fundamentally. What it will do is it will push the focus a lot to business models. With this company, the challenge really has been that valuations have been high which has been true for a lot of such IPOs but the business model has not been as clear as for some of the other companies. So we will get some sanity in terms of valuations but much greater scrutiny in terms of business models going forward.
We have time and again spoken about real estate and bullish that is. Would you say that easy gains are behind us within realty or would you say that the cycle has just about started?
At the stock level, the quickest and the easy gains are at many levels behind us. Stocks have moved from trading at an average of 30-40% discount to NAVs to anywhere between 0-30% premium to NAVs that have been pushed up slightly from a price perspective, but much greater from a volume perspective.
At some level from a stock perspective, easy pickings have probably been made and an equally big question if not the biggest question is whether the underlying cycle is something that has only started out and that can go on a long way. It is a reasonable expectation to make at this point in time that we are going to see a much stronger and longer cycle. I do not see it accelerating from what has happened in the very recent past.
In the middle to the higher end in the metros, property bookings have skyrocketed. I believe that we will have a cycle that will start broadening a little bit. It is quite narrow at this point in time and so it will broaden a little bit, stretch for a reasonable length of time but the pace will tend to ease off and we might start seeing some support coming in through from prices.
So I would be more comfortable or bullish on the underlying cycle than I would necessarily be in terms of stocks because the easy pickings have probably already been made.
Would you say that the best is behind us in terms of a stock performance or does IT make a case for long term rerating which could push the stocks higher?
I am probably more bullish on IT than I would be on real estate to put it very simplistically because of a couple of elements as far as the demand cycle is concerned. IT is a global sector, it is broad-based and India has been particularly well positioned as far as this space is concerned. I would tend to argue that when the underlying demand cycle is very strong, it is going to be less vulnerable to what happens on global macro.
One needs to back it and you will likely see reasonably decent returns for a sustained period of time. Now there is an element of cost pressure that is accelerating quite clearly. Are those cost pressures as exaggerated as some of the headlines? We would tend to believe not. We also tend to believe that it is a space where supply can come in, particularly from an India company perspective. In fact, supply can come in relatively faster than what people will tend to anticipate. What one theoretically ends up with is that top lines continue to look in line with what people are forecasting and possibly beating them a little bit.
Margins for the next one or two quarters could be a little disappointing and to some extent, we might see a staggering in terms of stocks performances but if there is a cycle and if there is a trend and if there is a sector to back for a three, four, five years period, I would argue that it is the IT space.
Initially, the difference is real estate and a lot of other sectors are being seen in a local context and vulnerable to what happens with global macro space. That does not hold for IT. It is global, it is very hedged and we are going to get demand from all ends and so very positive in the space even though the near term might be a little bit lacklustre.
