Gopal Kavalireddi, Head of Research at FYERS says that it is a watershed moment for the Indian startup ecosystem with Zomato, Paytm, Policy Bazaar, Nykaa, Mobikwik, Delhivery and many other internet startups looking to list on the Indian stock exchanges.
Kavalireddi is a market veteran with over 15 years of diversified work experience in the energy and environment sector. Gopal is adept at information mining and data research for providing financial, marketing, and strategic inputs to core management in critical decision making.
Here are the edited excerpts from his interview with Moneycontrol’s Kshitij Anand:
Q) The latest US Federal Reserve minutes led to some volatility in equity markets across the globe. What is your take on markets for the near future?
A) The recent US Fed minutes indicate that the policymakers are contemplating the tapering of $ 120 billion monthly bond purchases and taking cognizance of the rising inflation going ahead.
Issues related to supplies and labor which were considered transitory a little while ago could last for a longer time than expected.
While bond yields saw a vicious decline from 1.6% levels to 1.3%, as investors worry about the economic growth due to resurging Covid cases once again, any concrete action might not be taken in the near future.
The stock market does seem to climb the wall of worries persisting at this time. The interest rate cycle is not expected to reverse at least in CY22 and could start only after Q1CY23.
Central banks all over the world have made one point extremely clear: economic growth takes precedence over inflation at this point, and any knee-jerk reaction on interest rates would hamper the revival of the fragile economies.
The scorching returns from the stock markets are more or less done and from now, it would come down to earnings growth.
Valuations across many sectors and stocks have crossed over the expensive territory and are hovering close to exuberance. A healthy correction, followed by an up move backed by economic growth, would be the ideal way for markets ahead.
On the other hand, the resurgence of covid cases due to delta and other variants might delay the much sought out economic growth and prolong the recovery in earnings.
Q) The much-talked-about Zomato IPO is here. What is your view on tech-based companies like Zomato, and how should one value it considering it is still making losses?
A) Investing as a concept has been upgrading itself over the decades. From value investing that prevailed over many decades, to growth investing over the last two decades, investors have adapted to the changing dynamics.
We are ushering in an era of investing where standard metrics like price-to-earnings, price-to-book, enterprise-value-to-EBITDA and other such measures may not be useful anymore.
The new-age internet-based businesses are to be looked at from a different perspective altogether.
Rising internet penetration, availability of smartphones, diversified demographics with various levels of disposable incomes spread across Tier II/III cities and towns have and will contribute to the rise and performance of these businesses.
The focus would be on unit economics including market spends, cash burn, market cap-to-sales, gross order value, active delivery partners, increase in suppliers and customer retention etc.
India is still an underserved and underpenetrated market across many business segments, the food delivery business being one of those.
As per reports, the contribution of restaurant food in relation to the food consumption market size in India is around 10%, with only 8% of people having internet access for ordering food online.
In comparison, the contribution of restaurant food, as well as online ordering, is around 50% in developed markets. This offers a lot of scope for growth, not just for Zomato but for its competitors too.
The scope of the pie is large and will expand continuously, offering opportunities for the betterment of the business metrics over time.
Q) A follow-up question on Zomato like IPO as Paytm and policy bazaar will also be listing soon. What are customers buying – a stock or a concept?
A) This is a watershed moment for the Indian start-up ecosystem, with Zomato, Paytm, Policy Bazaar, Nykaa, Mobikwik, Delhivery, and many other internet startups looking to list on the Indian stock exchanges.
With SEBI providing the necessary impetus for startups to list, most of these companies are ready to reap the fruits of their labour that has gone into identifying the need, envisaging an idea, putting the thought to work, and making the best use of the conducive regulatory and business environment.
It is no more just about owning a part of the business as a shareholder, but being a part of conceptual investing. A myriad of factors – younger population, internet connectivity, ease of use, time and effort conservation, flexible payment options – have resulted in the meteoric rise of new-age online businesses.
Investors will need to adapt to the changing scenario, to be part of the economic future. However, one thing remains constant – earnings growth.
It is only a matter of time when the ideators of these businesses get to know if their businesses can/will be able to survive the growing pressure of positive earnings growth from their shareholders.
Q) Inflows declined in equity mutual funds in June while the SIPs continue to grow. Does it reflect that the newest investors prefer to go by the disciplined way of investing?
A) The stock market has been a mad house over the last 15 months. With Nifty50 at a new high in Jan 2020 at 12,400 levels, to a vicious crash to 7500 levels in March 2020, to 16,000 levels in just 15 months, it was an exhilarating rollercoaster ride.
During these 15 months, the number of new Demat accounts openings were clocking at a monstrous run rate of 1 million-plus on a monthly basis.
This has never been witnessed before and the Covid induced lockdowns have probably created an inflection point for financial asset holding in India.
Even with all these new accounts, we are not seeing the haphazard investing of the earlier past. These new age investors are smart and extremely focused while deploying their funds.
Even though the direct equity participation of the retail investors has increased from 33% a couple of years ago to 45% currently, they are also using other investment avenues like mutual funds.
Systematic Investment Plan continues to be their mainstay, with an average inflow of Rs.8200 crore. At the same time, when unsure of the market direction, they have opted for index mutual funds, ETFs as well as gold, where almost Rs.79,500 crore of inflows were seen in the last 15 months.
This is in stark contrast to the net outflows of Rs.6500 crore seen in equity mutual funds. Hybrid funds is another category where large inflow is seen, with investors continuously opting for them, based on their risk profile.
Overall, this disciplined way of investing bodes well for new investors.
Q) What are your expectations from the June quarter earnings season?
A) After a good closeout of FY21, the expectations from FY22 are on the higher side. However, Q1FY22 didn’t start out well with the second wave of Corona Virus pandemic sweeping the nation once again.
Unlike Q1FY21, the lockdowns were non-restrictive, vaccination drives were at full swing, and commercial establishments continued their operations within the stated guidelines.Hence, a severe impact on earnings in not expected in the June quarter. The impacting factors would be higher inflation and commodity prices, which could eat into the profit margins of companies in certain sectors.
The reopening of consumption-oriented establishments, brisk sales for realty companies, better price realizations for metal, steel, automotive, chemicals, pharma companies would be the positives to watch out for, in the earnings season.
Overall, the expectations are the quarter would be robust earnings, with decent year-on-year performance.
Q) What according to you could pose as the biggest risk for Indian markets? Is it inflation resulting in rise in interest rates or earnings which may not be as rosy what was estimates? Fitch also downgraded India GDP forecast to 10%.
A) Continued rise in commodity prices resulting in higher inflation, the possibility of a third wave of coronavirus spread, muted credit growth, restrictive supplies, and subdued demand in the coming quarters are some of the factors that could upset the fragile yet recovering economic situation.
While RBI has clearly stated its preference for growth rather than to tame inflation in the present period, it is imperative that the growth recovers at a faster pace. Interest rates are not expected to rise in the current calendar year and can probably come into focus only by the last quarter of the current financial year.
This leaves us with at least 2-3 quarters of benign interest rates, high latent demand, continued support from the government through various initiatives. Consensus places Nifty FY22E EPS estimates between Rs.730 to Rs.750, while FY23 EPS continue to be steady between Rs.855 to Rs.870.
Once these earnings estimates start looking to turn into a reality, India’s GDP forecasts would be upgraded to a more robust and healthy double-digit mark.
Q) Which sectors are looking attractive for the second half of 2021?
A) Sector rotation in terms of returns has been an ongoing activity for more than 15 months now. While metals, pharma, financials, autos, PSUs did well earlier, realty, textiles, cement, and capital goods are the flavor of the quarter.
BFSI as a set of segments has underperformed owing to muted credit growth but had stayed steady due to a downtick in NPA provisioning.
The resolution of many IBC bound companies augurs well for many banks and this could be one of the focus sectors for the second half of the year.
With small and midcap indices showing outperformance over the recent quarters, the expectation of a catch up from large caps stocks is palpable and definitely so.
The festive season in the second half of the year should definitely look towards increased consumer spends – durables, discretionary – and as well as big-ticket items including automotive sales.
Overall, there are optimistic vibes to the economic recovery with leading high-frequency indicators showing higher positivity.
Q) When hunting for wealth creators — which should investors track? Is it Free Cash flows, top line, margins etc.?
A) Wealth creators are not built in a day but evolve over a period of time. A wealth creator is the result of the substantial efforts that have gone into building and making it efficient and effective in terms of quantitative and qualitative parameters.
The starting point is always the management – a quality-oriented one, laying out a mission and vision for the company, setting the ground rules for ethics and corporate governance, performance standards, understanding the evolving business environment, and with an ability to adapt/steer the firm through difficult times.
A simple analysis will show that companies like Asian Paints, Dabur, HCL Technologies, and Pidilite have doubled investor wealth every 4 years.
The underlying traits of all these companies would surely have a common ground – in terms of objective and subjective parameters.
Similarly, a filter of Nifty500 stocks for simple returns shows these 14 stocks giving the most positive yearly returns, for the last 11 years.
If we eliminate the 8 stocks which ended up with negative returns in FY20 (a vicious stock market correction in March 2020), then we find that – Alkyl Amines, Asian Paints, Atul Ltd, Berger Paints, Relaxo Footwear, and Sanofi India – 6 stocks have given positive returns in all those 11 years.
Strong management, sustainable business models, diverse product portfolio, clean & strong balance sheets are hallmarks of these companies.
Excellent top-line growth, well-controlled costs, expanding margins, and good bottom-line growth are the results of these efforts.
These companies have grown with decent cash flows, continued & periodic CAPEX, and built themselves to withstand adversities. A quarterly miss on earnings estimates or a sudden market crash will not dent the performance of such well-built companies.
A business is established with the aim of running for perpetuity while creating shareholder wealth. Not many companies accomplish this successfully.
The ones which do, have always come to the fore with exceptional financials, and quality-oriented management behind them. Always look at any company from a 360-degree perspective – it reveals a lot more.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
