Dear Reader,
The week marked a watershed for the Indian equity market, with the Zomato IPO sailing through with massive oversubscription. The issue was a trailblazer, the first pure platform company to be listed in India.
Being the first of its kind, there was no dearth of questions about the issue. Value investors deplored its losses and wondered at its price, while the more conservative among them fulminated that start-ups like Zomato didn’t belong to the public markets at all.
But perhaps the time for such doubts is behind us. The Zomato IPO is a sign of the times.
Many such companies have been listed abroad. Indeed, digital platform companies are the markers of 21st century capitalism. According to the UN Conference on Trade and Development’s (UNCTAD) 2019 Digital Economy report, in 2009, companies in the technology and consumer services sector, which include digital platforms, made up only 16 per cent of the top 20 companies by market capitalisation. In 2018, that number surged to 56 per cent. Companies built as platforms now sit on top of the global economy. Their business model places a premium on growth, rather than profits, because growth is essential to realise the network effects that enable them to erect entry barriers for competitors. It is, as many people have pointed out, a winner-takes-all model.
Abundant liquidity, aided and abetted by central banks, has led to private funds flooding into such start-ups, bankrolling their strategies of long-term market dominance, including helping them buy out potential rivals. Long-established companies now want to be platforms, even in India, as we had said in this article on the battle of the super-apps.
That doesn’t mean all such companies will reward investors. The stratospheric prices of some of them are being compared to the dotcom mania, when novel measures of valuation were used to sell euphoric stories of unlimited growth potential. We know how that ended. This time too, what with SPACs and meme stocks, there is plenty of reason for discomfort.
But there is little doubt that platform companies are the future. Their focus on capital and scale has the potential to earn them monopoly rents and they will sorely disrupt traditional businesses. That is why we called them New Generation companies. The Zomato IPO has opened the floodgates for other such listings — Paytm is already next in line with a blockbuster issue.
It’s no wonder then that Zomato loomed large on our radar this week. We analysed how it should be valued and whether it would deliver a good meal for investors. We looked at the numbers to track in the food delivery business and we wrote about how similar listed companies had fared in foreign markets. And we took a look at the other side of the tracks, at how food apps are disrupting the restaurant business in India.
With markets at all-time highs, companies are racing for IPOs — here’s our take on Tatva Chintan Pharma Chem. New issues are welcome — raising capital is what the stock markets are for and the elevated valuations lower the cost of capital. The funds raised will be spent, spurring investment demand and job creation.
That will provide a boost to the recovery, at a time when the RBI says the economy is struggling to gain momentum. Our recovery tracker endorses that conclusion. The dry patch in the monsoons continues, while our herd immunity tracker urges the government to speed up the daily vaccination run rate.
Among other worries, crude oil prices remain high and they are now joined by LNG prices. SBI Chairman Dinesh Kumar Khara told us in this video interview that while the economy will regain momentum once the second wave ebbs, we may not see the same pace of growth as was seen post the first wave until people are vaccinated. The consolation is that month-on-month inflation in June moderated.
The Q1, FY22 corporate results season has started and Wipro, Infosys and Mindtree have delivered stellar performances. L&T’s IT bets have paid off. We also took a look at the June quarter results of Tata Metaliks and Avenue Supermarts.
We believe Finolex Industries’ long-term prospects look solid, while the demand recovery should support Emmbi Industries’ volumes and realisations. Despite a likely setback in the June quarter, Wabco deserves a place in investors’ long-term portfolios. The same goes for Shyam Metalics & Energy.
Rich valuations tempered our enthusiasm for Grauer & Weil and for Astra Microwave. On the other hand, reasonable valuations led us to take a close look at PSU shipbuilders.
During the week, we pondered why Rakesh Jhunjhunwala wanted to invest in the beleaguered airline industry and why Patanjali Ayurved’s listing may not be an easy affair.
Under The Green Pivot rubric, we cast a beady eye on Ola Electric, on which Bhavish Aggarwal is staking his entrepreneurial future. We wrote about how ESG considerations are playing a role in choosing IT vendors and the pros and cons of an Indian carbon tax.
The tug of war in the markets between those who bet on inflation and those who worry about growth continues. Lower bond yields are no longer seen as good for stocks. US inflation has gone up again in June, but the Fed insists that it is transitory.
Russell Napier, economist and advisor to global institutional investors for three decades, has a different take. While he agrees that the current bout of supply-bottlenecks driven inflation is temporary, he says inflation will happen because money supply growth is up in the developed economies. That will be a major change, he says, from the deflationary environment of the past few decades. Central banks will, however, deliberately keep interest rates low to pare high debt levels. That will provide a leg-up for assets such as equities, real estate and gold, at least initially.
The twist in Napier’s tale is that he forecasts both high unemployment and high inflation, after a few years. You can read the entire interview here.
Cheers,
Manas Chakravarty
