Dear Reader,
A 10-year-old creepy monster plush toy collectible is currently the obsession among children and adults everywhere. Labubus, as they are called, are sold by Chinese retailer Pop Mart and the anchor of the burgeoning sales is to sell them in blind boxes -- a type of packaging that conceals its contents. Needless to say, the craze for Labubus has made Pop Mart’s founder the youngest billionaire in Beijing and the company’s profits have skyrocketed.
From being limited edition collectibles to mass production, Labubus can easily represent the obsession of companies with growth. Pop Mart’s ascent mimics many other Chinese brands and there are several examples in other nations as well. From companies to nations, everyone loves growth, and the markets love rocketing growth.
This seduction of growth drove the Indian start-up industry over the past decade till the music stopped after the pandemic. The poster boy of startup success and eventual disappointment, One97 Communication (Paytm) offers a lesson that peddling high double-digit growth may take you to profit eroding paths and eventual comeuppance. Another case in point is edtech startup Byju’s whose pursuit of growth eventually led to a bust.
Public markets have brought some discipline, but are in no way rational. Private markets, though, are certifiably prone to outsized valuation mistakes.
This affliction has now caught companies in the Artificial Intelligence space. AI is attracting investments like never before and valuations are surging to unseen levels. For instance, Perplexity AI is now valued at $18 billion after the latest round of funding, a neat increase of $4 billion within a matter of a few months. A lot of this is being fuelled by private credit too, an opaque market that is giving concerns to policymakers and market watchdogs now. In this FT piece, free to read for Moneycontrol subscribers, Gillian Tett explains how private credit can mask excessive leverage which is a sure recipe for a crisis. Tett leaves us with an unsettling realisation “when other sectors have been forced to clean up their standards in the past, this has almost invariably occurred after, not before, a big crisis hits”.
Private credit in India is still not a big beast. That said, the deals may be few, but are sizeable and are edging out traditional bankers. For instance, Shapoorji Pallonji’s restructuring that involved $3.4 billion financing was spearheaded by private credit. KKR Inc financed $600 million for Manipal Group’s expansion plans. A decade ago, such large transactions would involve a hodgepodge of the biggest banks. With private credit holding the hands of executives looking for the next big growth expansion, the seduction of growth is even more.
Regulators have already begun to take some measures, with the Reserve Bank of India (RBI) untangling the network between non-bank lenders and alternative funds some months back. That hasn’t stopped overseas funds from shopping.
There may be caution among investors, but there is also a potent spark called liquidity. So far, the surplus liquidity is flowing into the traditional bond market and firing up corporate bonds. It is also flowing to capital markets and keeping valuations afloat where it can. Fund houses have only so many choices to park money and domestic institutions have been behind the Indian equity market’s resilience in the face of global uncertainties. Foreign funds are busy scouring primary markets hoping to pick promising firms at a bargain. Initial public offers (IPO) have been a resounding success this year despite the overall capital market sentiment being wary.
A heap of liquidity during times of a cyclical slowdown has the potential to lure investors into deals that misprice risk. India’s firms, big and small, do not want to create capacity now since consumption growth doesn’t look promising. A lot of the money raised is going towards lightening the debt load and swapping assets. Private credit is facilitating a boom in asset prices even when new assets aren’t being created at all.
A blind box such as private credit may give a thrill on valuations. But unlike those that contain Labubus, there are bound to be big disappointments down the road.
Investing insights from our research team
UK-India FTA opens up export opportunity for Indian manufacturing
Mas Financial Q1: Steady show in challenging times
Weekly Tactical Pick: Why this IT service major deserves a look, post correction
Shanti Gold International IPO: Will it glitter on the bourses?
Nestle Q1 FY26: Look past the margin blip to spot the promising underlying growth
Bajaj Finance Q1 FY26 – Performance stable, but catalysts missing for stock upside
Bikaji Q1 FY26: Slow but steady margin comeback
Cyient Q1 FY26: Misses the mark again
What else are we reading?
Can the India-UK trade deal take businesses to a new high?
Green shoots or false hopes? What headline Q1 IT numbers don’t tell you
Chart of the Day: Why the rupee is losing even when the dollar is weak
Let the Dragon breathe energy into India’s manufacturing!
India should lead climate change fight after US U-turn
The contrasting fortunes of ultra-luxury housing sales in Singapore and India have a message
Why is it so hard to replace HSBC’s Mark Tucker? (republished from the FT)
Why is it so hard to replace HSBC’s Mark Tucker? (republished from the FT)
Unlocking the power of India’s 470-million women
How rural India can power the next trillion-dollar growth
When a Catholic priest called RSS the ‘true heir of Mahatma Gandhi’
Man with Machine: AI and the future of law in India
Markets
10 stocks from textile, auto, pharma, and seafood sectors to gain from India-UK trade pact
Technical Picks: TORNTPHARM, APOLLOHOSP, SAIL
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