D-Street Talk: Mcap might have hit $3 trn but Zerodha’s Nikhil Kamath remain 60% hedged; here’s why

Q) We are on the verge of crossing previous record highs, and the star performers are mid & smallcaps which touched record highs. BSE Mcap touched $ 3 trn mark. Does the euphoria make you cautious or bullish at current levels?

A) We continue to remain cautious. As a fund, we have in fact increased our hedging component from 50% to 60%. There is a lot of pain on the ground, and stock prices have not been reflecting the actual pain for a long time.

We have continued to remain hedged. But, we continue with our conviction of prices being expensive, and we will retain hedges of 50% to 60% in the foreseeable future as well.

Q) What is the kind of COVID impact you have seen on the AIF industry?

A) Last month was bad. April, March was very slow, but May seems to be a lot better for us. Investors are not keen on investing at this point in time.

Investors are coming in May, but they didn't come in April as well as March. But, if you were to look at the market activity and how the rally has continued, people are bullish.

I think they're (investors) are looking beyond the pandemic. They are considering a scenario where we are Corona-free.

And, if we were to mimic the West in a certain way, where they're seeing increased consumption after opening up, investors could be playing that theme.

Q) Tell us more about First Operational Hedge Fund for Strategic Global Investors in India.

A) It went live about a fortnight ago now. True Beacon Global, it's a fund based out of GIFT City in Gujarat. It has favorable taxation and is very attractive for foreign investors looking to invest in India.

It removes the middlemen in many ways such as countries that are generally sitting in between like Singapore or Mauritius or Luxembourg.

Traditionally, foreign investors picked to come into the country through these feeder vehicles, which were these countries. But, now the government has done away with the inefficiencies around them coming in directly.

Going forward, they should bring a lot more foreign institutional money into India, and directly.
Q) Any ballpark number that you have in mind?

A) In our fund, we're expecting say Rs 1,000 crores to start off within the next 6 to 12 months. But, as an industry, we are the first fund to be operational in GIFT City.

Slowly more people will come in there and replicate and start their own funds. So, as a jurisdiction, I think it will bring many billions of dollars into the public equity ecosystem in India.
Q) Re-opening of economies in western countries are lifting hopes of global economic recovery. In India as well, fall in cases has also lifted sentiment of gradual opening up of states. How should one play the unlock trade?

A) If you were to follow patterns globally, hotels are doing very well, travel is doing well, restaurants are doing well. Consumer spending is doing well.

I would expect a lot of the same to be mimicked in India. So, buying domestic businesses which are in these sectors could be a good idea.

Consumer spending which has artificially stayed low because of the pandemic and stores being shut -- I think there will be a significant spike.

So, you could think of anything from a PVR because people will want to go to the movies more. In the restaurant chain, people might go back and favor auto companies and buy a lot of automobiles. So, all of these sectors I think can be played in a post-pandemic trade.

Q) What is your investment mantra during turbulent times like these? What is the secret formulae which you use while picking stocks even when there is uncertainty?

A) Well, we continue to hold a capital preservation outlook. We are focused on the fact that even today, even with the pain on the ground markets are frothy at 40 times multiples.

We are not adding significant long positions at this point in time. We are ensuring that we have sufficient hedges at play each time we add a longer build on our Long's.

And, I guess for us as a fund where capital preservation is the most important criteria we will continue to invest in that manner.

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