Mayur Patel, principal fund manager – listed equities, at IIFL Asset Management, said Zomato’s successful initial public offering may be the first of many from the new-generation digital business segment. Over the next few years, there could be IPOs from companies in fintech, foodtech, edtech, ecommerce, mobility, gaming and media, Patel told Moneycontrol’s Sunil Shankar Matkar in an interview.
These would be attractive investment opportunities in India’s digital economy, which is expected to scale about 9x over the next decade, contributing 9 percent of GDP in 2030, he said. Edited excerpts:
Q: Do we need to worry if the Federal Reserve starts to taper bond purchases sooner than later? Do you expect a sharp rally in US bond yields this time?
The quantum and timing of tapering of bond purchases by the Fed is more significant than whether the Fed does it or not. A pick-up in employment, besides the rise in inflation, is the key monitorable. The impact on US bond yields would depend on the quantum of tapering and to what extent the tapering is implemented upfront. Inflation remains the most critical factor in the Fed’s decision-making. It is also the most unpredictable indicator and latest data suggest inflation has hit a decade-high level of 5.4 percent in the US.
Central banks across the US and Europe struggled to achieve a healthy inflation rate despite all the easing and lowering of rates for so many years. Similarly, the Fed may find it difficult to keep inflation under check in the near term, given the reopening of the economy, shortage of supply and more money chasing goods. While most commentaries indicate a very benign approach of tapering going forward, the key risk revolves around the trajectory of inflation.
Q: Many companies are lined up for fundraising. Do you expect record fundraising via IPOs in 2021 and is there any possibility of the Life Insurance Corporation and National Stock Exchange IPOs this year?
The Indian equity market has seen a massive surge of IPOs this year. We have already seen IPO offerings aggregating more than $ 4 billion this year. Given the line-up for the second half, it seems we may easily cross the previous peak of $ 10 billion seen in 2017. We would not really be able to comment on the timing of IPOs for LIC and NSE.
Q: A majority of IPOs get fully subscribed either in the initial hour or on the first day of opening. What factors are driving this optimism and why are retail investors so excited about every issue?
On the institutional side, strong flows have increased appetite to participate in IPOs. FII flows this year (to date $ 6.8 billion) have been reasonably good after recording robust flows of $ 23 billion in the previous calendar year. Domestic funds are also witnessing a pick-up in flows after outflows in CY20. The rising market has also brought in enthusiasm among retail investors. The surge here is reflected in the number of demat accounts in the country almost doubling in recent years.
Robust participation by institutional investors in a specific IPO also enhances the confidence of retail investors to ride the wave. The low rate environment has reduced options for retail investors to get attractive returns in other investment avenues, triggering an increased exposure to the equity market.
Q: Among the IPOs so far or those getting launched in the coming months, have you spotted any wealth-creating ideas?
We have just seen one large-ticket IPO in the new generation digital business segment and it is just the beginning. Over the next few years, the Indian equity market is likely to be flush with eminent IPOs in new-generation digital sectors such as fintech, foodtech, edtech, ecommerce, mobility, gaming and media. The India internet economy is expected to scale around 9x over the next decade, contributing 9 percent of GDP in 2030. These IPOs would offer attractive investment opportunities to play this multi-year growth story in our digital economy. We would be keen to pick sector leaders with strong business models in this space.
Q: A majority of experts consistently talk about the risk of a third Covid wave. Do you agree and what are the other risks that one should consider before investing in equity now?
After a few turbulent months, the second wave seems to have almost come to an end. However, the fear of a third wave continues to rattle everyone. The most important takeaway from the case of the UK’s third wave is that vaccination is the key. Since the time (July 19) the UK lifted all Covid restrictions, the daily new cases have declined, while hospitalisation and deaths remained under control. This was possible due to their extensive vaccination coverage. In India, based on the current rate of 5 million jabs a day, we can aim to vaccinate around two-thirds of the adult population with the first dose by September. This reduces the severity of subsequent waves and related implications on the markets.
The other most critical factor for the equity market is the risk of a liquidity squeeze, which may emanate from earlier-than-expected tapering by the US Fed. As mentioned earlier, the global risk of sustained increase in US inflation may force the Fed to upfront tapering.
Q: The market continued its fresh record-high journey in the second half of 2021. What are the driving factors – are they FOMO, TINA or plain liquidity?
The Indian equity market has shown significant resilience, especially during the second Covid wave. Stringent steps taken by states have helped control the wave and moderated the lockdown-related impact on the economy. As the second wave has almost ended, the government’s thrust on infrastructure spending would resume, which in a way would kickstart the Indian economy. The market is responding to the uptick in corporate earnings growth driven by the reopening of the economy. Also, liquidity continues to remain strong, driven by steady institutional inflows as well as robust retail participation.
Q: Do you think it’s time to be cautious considering the outperformance of mid-caps and small-caps over large-caps? What should investors do now?
Valuations of the small- and mid-cap indices bottomed out in December 2019 when these indices were trading at a 40-50 percent discount to large-cap indices (Nifty/Sensex). However, small-caps and mid-caps have outperformed large-caps significantly, more than covering the gap. Hence, currently it is prudent to focus on a bottom-up approach without any size bias.
Q. Which investment themes are you keeping an eye on as the pandemic shows early signs of abating in India?
We see interesting opportunities in private sector financials, consumer discretionary and industrials to play this reopening theme. However, some defensive sectors like Indian healthcare and Indian IT services would continue to perform, irrespective of the reopening of the economy. Global pharmaceutical giants have started to reduce dependence on China for supply of key starting materials and increase the share of Indian players. This is widely known as the China+1 phenomenon. Also, the Indian IT services sector is in a sweet spot owing to the acceleration of digital transformation spending by global clients, quick adoption of work from home, and increased offshoring. Hence, it is advisable to have a balanced mix – the defensive plays where new growth drivers have emerged due to pandemic and cyclical sectors to play the reopening theme.
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