Dear Investor,
Two of the most common things currently discussed in India are,
My 25 year's learning in financial markets suggests that when everyone makes money easily, we should be mindful and do our groundwork carefully. But when learning is not working in the short run, it does frustrate us sometimes, but over three cycles, I have seen that this pays beautifully in the long term but at the cost of that, we sometimes miss smart money-making opportunities. IPOs in 2021 has been in vogue, whether it's Nasdaq or India. Nasdaq raised over $ 50bn in the first six months of 2021, which is 2.5x higher than last year. At the same time, Indian companies raised $ 5 BN till June 2021. Then comes Zomato, which alone raised $ 1.3 BN last month and has an outstanding debut on the Indian stock exchange. Here the most contrasting point is that 25 years experienced Fund managers like us debated whether this IPO was worth it or not, but at the same time, 27% of Zomato IPO applicants were under the age of 25. This is just unheard of in Indian markets.
Despite being a loss-making business, the valuation looks very expensive as it is almost 32x of FY21 sales and EV/Sales ratio of 25xFY21. The global peers trade at average EV/Sales of 9.6 times and domestic QSRs at 11.6 times. But the Market welcomed it.
What drives this young generation to apply to this IPO or trade-in markets is whether it is a full-time career for them? This is a long debate but the conclusion is that work from home and Lower funding rates, and lack of other investment avenues lead to investment in equities.
It will be interesting to see, once the Economy fully opens up and spending on leisure & travel starts. Then will the same interest in equity continue or not? The Musical chair is on; nobody can guess when it will stop, but definitely, it will end.
On the other hand, I was looking at our home-grown PSU company NTPC, which has three years EBIDTA expected of $16 BN (as per consensus), equal to the current market cap with a dividend yield of 6%, beating the 10-year govt bond yield in most of the world, trade at a price to book value of 0.8 and PE of less than 8 for the current year. It is also the best ESG Energy Company in India. This disorder may continue, but finally, the value will find its way into an Investor’s portfolio. Turning to ESG, NASA recently released a report about ‘How Industrial Revolution has damaged the global environment and climate.’ The costs of these calamities will be much higher in the form of overall insurance.
I was reading ’Beautiful note on ESG’ by CSFB about the IRR of planting a tree, and it quotes like this “A US$50 Carbon Price implies planting a tree could yield a return over 11%, while its NPV could be at least 7x that of most traditional farming activities. (Attaching CSFB report with this investment communiqué I will advise its must-read for all of us).
Coming back to IPO and listings, this debate of value to growth will last until the valuation lasts. I have seen two other similar cycles. During the 2000 Tech bubble, every company which had name technology or software used to trade at 10x sales. During the 2007 CAPEX cycle where companies used to trade a few times of order book multiples (at least 50% of order book in that cycle wasn't even executed).
I will conclude with two things; first a disclaimer that we have invested in NTPC, second with my Favourite quote on productivity; it goes like this "The most efficient Calendar in the world – one where every minute is packed with Productivity, it comes at the expense of curious wondering and uninterrupted thinking, which eventually becomes the biggest contributors to success.
In current times, I am tempted to check with you, are you vaccinated? And are your family, friends, and staff also vaccinated? If not, please do so at the earliest.
Stay Safe, Take Care.