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  • Writer's pictureFirst Water

IPO's - Don't believe the hype

Updated: Dec 17, 2021

This could be the Golden Decade for India, Arun Chulani, Research Analyst with First Water – said in an interview with Zee Business’s Kshitij Anand. Edited excerpts

The market remained volatile throughout last week, but it looks like there is selling pressure at highs. Is the Street factoring in a sooner than expected rate hike from US Fed as well as commentary from RBI also hinted that?

I don’t believe that this is the only factor that markets are reacting to. The markets have come off a blistering run aided by the reactions to the pandemic, so some profit-taking is expected. Today, and as always, you have a myriad of reasons on why the market could become jittery.

We have the China slowdown, both voluntary in terms of green-belting manufacturing capacity and involuntary in terms of its energy crisis and the Evergrande/Real Estate slow down. It has been reported that real estate and related industries account for 29% of China’s GDP, so this is not good for commodities both in terms of demand and prices given the weightage that China has on the global economy.

The Fed also faces inflationary pressure to which as you mentioned it may be forced to react through tapering or increasing rates. This essentially takes liquidity out of the system as they reverse their stimulus measures creating a possible re-allocation of capital away from Emerging Markets and impacting FX rates as it did in 2013’s Taper Tantrum.

There is also the cloud of a 3rd wave of the pandemic, which is currently impacting Europe and that gives doubt whether f the world is really in an endemic or still in the middle of a pandemic

However, with all this in mind, I don’t believe that in the short-run that the market directly reacts in tandem with news. A case in point is the 2nd wave earlier this year when the market hardly reacted and eventually went on to reach new highs.

What are your takeaways from the September quarter results? And your outlook for the rest of FY22 earnings?

This needs to be viewed by sector and there are a lot of them. At a broad-brush level, the results season was mixed. Looking at some select areas, it seems that for the most part tech continued to perform well. The metals pack were beneficiaries of the supply chain issues and governments counter-cyclical measures. Pharma faced some pricing pressure on US generics.

Going forward, metals and commodities are likely to be negatively impacted in terms of price and demand from China. Some analysts believe that Indian tech should continue growing its top line, though it does have some pressure on its margins due to attrition, hiring and wage hikes. While pharma should continue to see elevated raw material prices due to the lag effect and margins maybe under pressure, with some possible improvement in Q4.

However, all this is still subject to wave 3 being contained.

What are your views on the new age IPOs and what factors one should keep in mind before pressing buy or a sell button?

IPO’s are not really my game and for the most part, I would keep my finger well away from the buy button. Why?

The question to ask is, who is looking to sell in an IPO? For the most part it is the current shareholders/ promoter. They know what it has taken to build this business and are looking for an exit at a premium. Given no one wants to sell their ownership cheaply, they prefer to IPO into frothy bull markets such as now, where multiples can be rich and there is an air of – ‘is this as good as it gets’, in terms of valuations.

Since it will be first time that a company is coming to market, there is also an asymmetry of information of what the current shareholders have to hand and what the public are provided. There is also a limited amount of long-term data on the financials as well as the business model.

Additionally, there’s an amount of storytelling that goes with these IPO’s and a slew of media on the strengths of the company. But in the words of the seminal rap group, Public Enemy, “Don’t believe the Hype”.

Multiple academics such as Hendrik Bessembinder of Arizona State University and Jay Ritter of Florida University have done research that provides data which reflects that IPO investments tend to underperform as a group.

It is said that maximum wealth was created by tech-based companies especially in the US – can Paytm, Zomato, Nykaa or Policybazaar remain relevant in near future and turn out to be next big wealth creators?

Yes of course, these are great names and success stories for India Inc. The more successes and unicorns our country has, the more on the map we will be for the global investment community. It is a true demonstration of the potential that India has and companies like these will be a true multipliers for the country.

However, while tech companies maybe great wealth creators, investing in growth stories often means buying into high multiples and hoping that a number of assumptions play out. These tech companies are often disrupters and they themselves may well be disrupted if they fail to adapt. Today’s Apple maybe tomorrows Kodak.

Yahoo, Nokia, Blackberry, all tech giants of the past, are as good as names in the history books. While Apple is on top of the game today, in 1997 it was almost bankrupt and had lost its way. It was its main competitor, Microsoft that came in with a USD 150m injection to save the company and allow it to become the company that it is.

The recent correction has given enough opportunities to investors to get into markets or buy stocks. What will be your advice to retail investors especially the one who have not seen many market cycles?

If I was talking to my younger self, some initial thoughts might be:

1. Don’t stock pick but choose a reliable mutual fund or equivalent who are looking at the markets. Many people already have a full-time job and are not really following a proper philosophy. So it is better to pick a few proper funds, which have an established manager and a full-time team dedicated to investing.

2. Stick with those with a 10 year plus track record with good houses. Everyone this year speaks like a rockstar, but its “only when the tide goes out do you discover who’s been swimming naked.” - W. Buffett. It is better to do some research who’s been able to succeed through the bulls, the bears and the stags over a longer time period.

3. Be cautious, only invest what you don’t need for at least the next 10 years and more. Do not leverage or risk anything that you can’t afford to lose.

4. Stagger –average your investments into the market. This allows you to average both your time in the market and should this be the current top of the market, then your loss in the market will reduce. Be disciplined to continue averaging, even through down cycles.

5. Be counter-cyclical, develop a good, steady temperament and patience. When you feel yourself getting excited about the thrill of the market, it’s probably a good time to start taking a bit of money off the table. When you feel a bit of fear when looking at the red on your screen, it might be the time to average in a bit more than usual.

6. For those who want a better understanding of dealing with the market, I cannot recommend enough “The Intelligent Investor” by Ben Graham, one of the Bibles of the investing.

Real estate seems to be making a comeback. What are your views on the sector?

Yes, we are optimistic on the sector. It’s been in a down cycle for most part of the last decade, that was aided by a number of deflationary measures, positive regulatory ones plus the impact of the pandemic on confidence, especially since is for most people the largest investment that they will make.

However, it seems that we are entering into a new upward cycle for several residential segments resulting from the stimulus measures, pent-up demand that was held back during the lockdowns against the delays in construction/ supply, one of the best ratios of house in recent history and low mortgage rates. RERA has also given a sense of greater confidence in real estate. Also this sector has benefited from the wealth affect and confidence that has resulted from gains in the stock market.

Additionally, I would imagine that there is an added incentive to have one’s own space resulting from the last year. The idea of the joint family would’ve been adjusted because of the lockdowns, with multiple people working from home coupled with home schooling. It’s not been an easy period. Thus, while we hope to return to normality and offices, there is a likely shift in the mind set.

We are hopeful that the worst of the pandemic is behind us, and further confidence returns to the sector.

UBS revised GDP estimates to 9.5% from 8.9% earlier for FY22. Many other agencies also revised their estimates upwards. What are your views? Do you think we are slowly coming back on track of high growth but Street has more or less factored that in the recent run up?

I think that these adjustments are all at the margin and shouldn’t make a different to the overall story. While I reserve the right to be wrong, I believe that this is India’s Golden Decade due to the well documented macros of the increase in discretionary income, the larger base effect of the economy, the growing, aspirational middle class etc. But also, the baton of growth being handed over to us by China.

Each major economy gets its day in the sun with a period of high growth rates. From the UK to the US to Japan to West Germany to China and now it should be India. China with its GDP per capita is around USD 11,800 and can be considered closer to an emerged economy rather than emerging. Hence, the reason why they are looking to move up the value chain with a focus on developing its domestic economy reducing capacity in uncompetitive, industries with excess capacity and are polluting.

When the guerrilla in the room starts voluntarily shutting down its industry, it will be good for India especially in the sectors of steel, chemicals and others as our local houses look to take advantage of this.

Where is the smart money moving? Although FIIs might be selling in Indian markets but they are putting money in IPOs?

This is an interesting but subjective question. I don’t believe that hot money is necessarily smart money. As mentioned earlier, I am not a fan of the IPO bandwagon, but do believe that there are still decently valued stocks out there for the long-term investor.

How is the investment world shaping up in India especially after the pandemic?

This is a good summary question. Essentially, we are hopeful that this is the dawning of our Golden Decade for beliefs mentioned above. Given the spotlight on the India tech space, the handing over of the baton in the manufacturing and our own domestic engine, we hope that that the investment community will recognise this in terms of capital allocation.


This article expresses the views of the author as of the date indicated and such views are subject to change without notice. The author and First Water has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.

This article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, he cannot guarantee the accuracy of any of the information provided above and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Use information provided above at your own risk.

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