What do you think of the recent wave of IPOs that have hit the markets? A number of unconventional names have entered the market playing the global game of digitization. Is there anything in particular that catches your eye?
There are two issues embedded here and let me separate them; one is the demand and supply of paper. Typically, when markets are very strong, the supply of paper increases, and usually market highs are accompanied by a withdrawal of buyers and an increase in substandard quality issues. This is a typical development at the top of the market. This time around, most of the issues are unique. Some of them are in areas that were not open or available in the public investment space. A lot of them are very good companies, very well run with high rates of return, with responsible management in place and so on.
The quality of the issues floated on the stock exchange was very strong and investors exercised judgment. There have been attempts or IPOs that were unsuccessful because investors pulled out because the asking price was too high or the business outlook was unclear.
So yes, the supply of paper has increased and the demand has decreased. At the same time, you have to be a little careful if the IPO price is aggressive and there is no money on the table. But on the other hand, if there are some unique companies with unique opportunities, they can still offer an advantage, but you have to be careful about the prices because I don’t think this is the time to be very cavalier. on ratings. I don’t think we can throw it to the winds.
Like many issues that have happened in the recent past, we have certainly been involved in some of them and I hope these companies will be very successful as they go along. A good quality problem always raises the bar and raises the level of play for other listed companies. It is always a welcome thing in my opinion.
Some of the Covids have hit businesses; airlines, multiplexes and restaurants will not close. Indian hotels, IndiGo are backed by strong groups with strong cash flow. But the markets feel that this is the end of the franchise value and the terminal value and this is how inventory drops. What is your opinion?
It really is a value investing and value investing is never fun, it is very painful. There are companies in retail, entertainment, travel and tourism, hospitality that will survive and come out stronger because the competition will be weaker. These are the times when you buy those stocks. You buy them now knowing that you could see an additional 20% drop before the stock falls and you may have to wait a year to make money. This is the patience that comes with value investing.
Unfortunately, what happens in the short term, the immediate returns or the prospect of immediate losses outweighs the upside potential in the long term and people say what’s the rush? Let the data points emerge and we’ll look at them next. So it’s a very different ball game, it’s very difficult to look past the immediate problems, the immediate risks at hand and focus on the long term. But the crisis is always a good time to buy a good business.
Whenever a strong, solid business goes through a crisis, history tells us that now has been a great time to make a long-term commitment to that investment, but be prepared to see some red ink and be prepared to keep it. . That’s what I would say to investors. It is not something that you should try to negotiate for sure.
What is this pocket of contra value according to you? Nifty is at 14,000. What’s the deep counter bet where the drop could be 15-20%, but three years from now, a rise is coming?
In the financial basket. All of these stocks trade at their book value. Let us leave aside the first three four banks. We will come back to this later. Otherwise, all of the loan space trades at book value to book value. There is a large part of the credit world that will not be able to participate in growth because it does not have the capital. I’m talking about PSU banks banning
and maybe the Bank of Baroda. The growth opportunity is phenomenal for all of these lenders. All of them have climbed the technology curve, most of them have climbed the technology curve, most have the capital to grow. It is an absolutely simple investable place for someone looking for value.
Now the problem is that Bank Nifty or bank stocks as a basket is the preferred playground for short-term speculation and has a high beta. So if you are negative about India you are saying that well India is seeing these Covid cases and foreign investors are going to be scared and the rupee will go down. So, let me find something too short. Here’s a place where there’s liquidity, there’s high beta, and you’re selling it. And that’s what we see.
But from a medium-term perspective, these stocks are very well positioned for growth. Is the only long-term risk that technology can completely disrupt these businesses? We will see how it goes. We will have to see how this plays out as India is also heavily regulated and it is not easy for many fintechs to do exactly what they want.
That risk is there in the back of my mind, and we’re watching it very carefully, but I don’t think it’s a big enough disruption that we’re moving away from the area entirely. Since you said that what is a place you would like to highlight, this is a place.
If you’re a market leader in, say, airlines or a hotel company or even retail chains that are financially strong, you can make long-term commitments to these names in environments like this. This and you will come out on top because now is the time to commit and expect a 30-40% return over the next year, a year and a half and that’s not a bad turnaround. But yes, be prepared for a potential 10-15% loss and be prepared to hold on during that time.