Dear Reader,
The Paytm listing fiasco looms large on investors’ minds. Unfavourable comparisons are being made with the Reliance Power IPO, which marked the top for the Indian markets back in 2008. Questions are being raised about what it will mean for the line-up of IPOs of other so-called ‘new-age’ companies. The investment bankers to the IPO and mutual fund managers who invested in it are being hauled over the coals. Schadenfreude is in the air.
For the record, we had listed in detail all the negatives and warned about the humongous risks in the IPO here and here.
This is what Aswath Damodaran, valuation guru and professor of finance at the Stern School of Business at New York University, had written about Paytm: “The picture that emerges of Paytm is that of a management that is too focused on racking up user numbers, and too distracted to care about converting those into revenues and profits, while making grandiose statements about its future.” He added, “Needless to say, if I invested in Paytm, it would not only have to be at the right price, i.e., trading at less than ?1,500 billion, but also with the acceptance that this cannot be a passive (buy and hold) investment, but one that will require active engagement and monitoring of the company’s actions and performance.” Well, its market cap is much less than Damodaran’s benchmark now.
There’s no question that fintechs are hugely disruptive and will force change in the stodgy Indian financial sector, most likely for the better. Bank credit is anyway no longer the main source of funding for the commercial sector. Our Start-up Street section this week said that while the tsunami of funds into the fintech sector will continue, “the unprecedented acceleration in funding — including companies with no meaningful revenues suddenly being accorded unicorn valuations — makes one wonder whether all of them will be able to meet the heightened expectations of the investors”.
Of course, not all new-age companies are created equal. On Thursday, while Policybazaar’s share price fell in sympathy with Paytm, the damage to Zomato and Nykaa was minimal. We pondered what investors should do after the rally in Nykaa shares. It may be wise to remember these are heady times and it’s not only among new-age companies that surprising narratives are being spun.
Unnerved by the froth in the IPO market, SEBI is proposing to tighten some norms. This week, we analysed the Tarsons Products IPO and the Go Fashion India IPO.
Talking of asset price bubbles, McKinsey Global Institute pointed out that while GDP growth in the advanced nations has been sluggish in the past two decades, wealth has soared, thanks to rising asset prices. The RBI’s state of the economy report said that in India, the yield gap, or the difference between the 10-year G-Sec yield and the 12-month forward earnings yield of the BSE Sensex, at 2.47 percent, has far outstripped its historical long-term average of 1.65 percent. That raises a question mark on equity valuations.
The good news is that our recovery tracker is showing that the festival-linked upturn persists. Growth is accelerating, although that is likely to lead to higher core inflation. This FT piece (free to read for MC Pro subscribers) says that high shipping costs will push up inflation. Higher inflation, in turn, will stiffen bond yields, but on the other hand, the strengthening economy will lead to higher earnings, so the gap between bond and earnings yield may not widen. That happy state could support equities. The Bank of America survey of global fund managers found that emerging markets were seen to give the best returns next year, in spite of the spectre of a strong dollar.
Indeed, Morgan Stanley has said 2022 will be all about better growth squaring off against high valuations, tightening policy, rambunctious investor activity, and inflation being higher than most investors are used to. As we said in our analysis of US corporate earnings, earnings growth will be a key factor because it acts as an inflation hedge. But much depends on the course of monetary policy in the US and on who will be the new Fed chairperson.
Our stock recommendations reflect the tension between these diverse forces. For instance, we found that inflation continues to weigh on Berger Paints’ margins; that higher coking coal prices could affect Tata Steel’s margins in the current quarter, while we also looked at some strategic moves available to the company. We said Hindalco will benefit from aluminium prices likely to remain elevated; and we found the valuations of Bharat Forge, Hero MotoCorp, Ashok Leyland, VA Tech Wabag, Ipca Labs and Mas Financial to be reasonable for the long-term investor, although we did advise investors to wait for a correction for some of them. On the other hand, some valuations may be low for a reason while in others it’s best to wait for a better entry opportunity.
This piece compares the prospects and the valuations of gold financing companies. In this interview, LIC chairman MR Kumar told us that the behemoth remains a net buyer in the market, reiterating that it continues to focus on long-term rather than short-term gains.
The Motherson Sumi management told us that supply chain disruptions are likely to continue in the next quarter. And Info Edge should continue to see robust growth momentum.
We continued our focus on the greening of business. This week, we took a look at Thermax’s bet on green energy, although its valuations are daunting. Post COP26, we looked at the prospects for Coal India and whether its biggest concern is existential in nature. And we brought out the challenges to Indian agriculture.
On our pesky Northern neighbour, our Eastern Window said India needs to be prepared for a more aggressive Xi Jinping. We also rooted for President Biden to keep up the pressure on China, especially in the alarming context of China’s nuclear build-up being one of the largest shifts in geo-strategic power ever.
Among policy initiatives, we looked at a working group’s report on tweaking the insolvency rules. We considered the benefits of opening up the G-Sec market to retail investors.
Crypto is perhaps the poster child of market excess. But as Chuck Prince famously said, “As long as the music is playing, you’ve got to get up and dance.” In our Crypto Learn series, we told the tale of why cryptocurrencies were invented and tried to shed light on the mysteries of how they work. In Crypto Conversations this week, we told investors how to safeguard their investments —dancing near the door, so to speak. We cast a sceptical eye on how many people had cryptocurrencies within their circle of competence, invoking the hallowed Warren Buffett in the process. And we wondered if SEBI had jumped the gun by okaying a blockchain fund.
Whatever be the verdict on Paytm, in the Wonderland that we inhabit, unicorns are here to stay. As Lewis Carroll wrote in ‘Through the Looking Glass’:
“The Unicorn looked dreamily at Alice, and said “Talk, child.”
Alice could not help her lips curling up into a smile as she began: “Do you know, I always thought Unicorns were fabulous monsters, too? I never saw one alive before!”
“Well, now that we have seen each other,” said the Unicorn, “If you’ll believe in me, I’ll believe in you. Is that a bargain?”
Cheers,
Manas Chakravarty
