What are your thoughts on the entire IPO/newly listed universe? Do you think that it is still frothy or do you think the listing episode has been a bit of a neutralising event?
The recent events have been a bit of a neutraliser because honestly the market still does not know how to value these new age companies. The traditional DCF models do not work, the PE ratios do not work. One is only hoping that growth will come somewhere and that one is picking the winner because if two-three companies within fintech, within edtech come in, ultimately there will be one or two winners in that space. So I would argue that the rush to be first is what led to those high valuations because there are no models. It is a question of auction — not quite an IPL auction yet — and the highest bidder takes it. Is that player worth that money? No. It is the shortage of players of that capacity which is causing the frenzy.
I would expect that to cool down and even that had a little role in pricking that bubble. That said, these are all new age companies which are going to definitely benefit from India’s economic growth and the digitalisation and formalisation. I would not write off that space. My best suggestion is to look at it this way. People who came to raise money earlier at a particular price got multiple oversubscriptions. So they hiked their book building prices and hence we saw the effect. Now there will be a reality check. The newer IPOs coming in, will price it more reasonably so that there will be some money on the table for the investors — whether institutional or retail. That will again bring back some kind of sanity to the market that is number one.
Second is when these companies come in,there is an expectation also from the public that I am not going to get 3x, 4x price but it is going to be a growth factor.
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The third and final thing is that a lot of this subscription has come in from the FIIs, through the institutional quota and from new age millennials from all these new demat accounts coming in. Both have confidence in this new age Indian economy and so I do not expect the bottom to fall out of these kind of IPOs and as long as they price at a reasonable price, there will still be interest. They can still deliver wealth creation opportunities. So the trick there is not to try and pick a winner because nobody understands that space yet from a retail investor perspective. It is better to diversify across the range of such stuff. I would say do not run away from this because of what just happened, but be careful, be diversified across these spaces and I am sure the pricing will also be much more reasonable, leaving room for gain for investors.
Along with the entire IPO/new listed universe, where do you think there are still frothy valuations which are bound to correct?
The froth will be there in businesses which are having high promise of the future but the reality is not there today. For example, you take a food delivery company. It is happening on the ground, it is not a new concept but I would say payments there is still a long way to go because we have a banking system and all of that yet at play. So where there is a demonstrated business model which has already kickstarted its approach, has demonstrated on the ground that people are using this and all of that and are not too much dependent on how much new business is going to come in, I would say that the froth will be less.
However, if you are totally in the dark and reading of a blue sky India saying this is India, India is going to be like this and this will come and benefit from that, here a dose of reality check will be needed.
Beyond that, I do not want to take company names because from a sector perspective, I have clearly laid out what I am saying. One final point there is when these issues happen with the existing private equity investors getting their takeout, that is a better bet because they have built the business to a level where they can take it whereas if it is something where the promoter is trying to raise money to build the business, that is the one where there is froth. Believing the promoter’s future is another filter which can be applied.
