Atanuu Agarrwal, Co-founder of Upside AI, sees a strong uptick in the markets for the long term in sync with the economic growth.
Referring to the host of new-age companies floating their public issues, Agarrwal suggests that before investing, one must make sure that the unit economics of the business makes sense. “If they do, at scale (whatever that means in context of the specific company), the company will be able to generate a superior return on capital. Only then can valuations that look out of whack with prevailing metrics make sense,” she says in an interview with Moneycontrol. Excerpts from the interaction:
Most of the key corporate earnings for the September quarter are out. What’s your broad view on the figures?
I think there were two major themes – restart and inflation. If you look at the Nifty50 companies that have declared results so far, they seem to be recording a robust 25-percent-plus topline growth driven by post-lockdown demand. However, operating profit growth seems to be less than half that, indicative of shrinking margins.
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In particular, consumer companies seem to be reeling under the input cost pressure as a result of both wage inflation and commodity prices. Whether it’s global or local, the story to track at the moment is inflation with a focus on supply chains.
What are the key pockets where you can find value now?
Cement is a key part of our current portfolio. The post-monsoon demand outlook for cement seems to be robust, with optimism on capacity utilisation and pricing. Of course, raw material costs are a concern, but those to an extent are priced-in and could be absorbed given the demand from infrastructure spends (especially at the national level) and rural demand.
Do you think the bull run in India has a long way to go?
The more you zoom into the market, the more volatile it looks. In the long term, the market trend is up. This is because the stock market is a proxy for a country’s GDP which trends up over the long periods. The average bear market lasts around 10 months and happens once every five years. In fact, in real terms, the longest bear market on record is five years during the Great Depression.
Further, more money is lost trying to time the market than actually riding a downcycle. We analysed the Nifty data for the last 20 years. For any given year, the entire year’s returns are made in 10 days on average (out of 252 trading days). It is impossible to figure out what those 10 days are and therefore critical to stay invested through the cycles.
Another example is data in two parts: (1) Apple increased more than 6,000 percent from 2002 to 2012 (2) Apple stock declined on 48 percent of all trading days. Lesson: it is never a straight path up.
Therefore, the long-term (1) value is driven by fundamentals, and (2) markets tend to rise. Hence, we do not try and time the market.
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Do you think this flood of IPO will continue? What’s your suggestion for investors putting money into the public issues?
I think it’s healthy that the IPO market is deepening. It is important for all stakeholders (existing shareholders, public investors, management teams and competitors) that new-age companies are able to list, despite being loss making. In general (of course each specific case needs deeper analysis), tech companies are loss-making because they are focusing on evangelisation and deepening their market penetration.
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Before you invest, it is important to make sure that the unit economics of the business make sense. If they do, at scale (whatever that means in context of the specific company), the company will be able to generate a superior return on capital. Only then can valuations that look out of whack with prevailing metrics make sense. Investing in a ‘hot’ IPO just on the back of FOMO (fear of missing out) can be harmful to your portfolio’s health.
What does the current market cap to GDP ratio and PAT to GDP ratio indicate? Do you think the private capex to pick up in the coming months?
I am not a big fan of looking at ratios in isolation. For example, if you divide the two ratios mentioned, you will go back to PE (price-to-earnings) levels. Sure, one could argue that PE levels are higher than historical standards, but then with discount rates /cost of capital at historic lows, age-old standards for PE may not be appropriate.
Don't get me wrong, I am not saying that markets are fairly valued (or undervalued or overvalued). All I am saying is that looking at other metrics such as return on capital and cash flow yields in conjunction with the PE is important. A market can be made to look expensive (or cheap) at any given point of time by cherry picking standalone metrics.
In general, I am also very sceptical of forward-looking macros. In fact, I would encourage everyone to read Howard Mark’s memo Thinking About Macro for an insightful look on the unknowability/unreliability of forward-looking macro metrics.
Do you think the central banks’ action (including that of the Federal Reserve) and inflation worries can cause consolidation in the Indian equity markets?
The tapering is already here, so is inflation. At this point, one could argue a certain amount of tightening and inflation is already priced-in. The Fed is talking about rate increases next year. Stating the obvious, sharp reactions (positive or negative) will be to surprises beyond all of this. I don’t think you can reliably predict surprises, that's why they are called surprises.
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