Moneycontrol PRO
Open App

Moneycontrol Pro Weekender | Finding true value 

In the season of corporate earnings and IPOs, the flavour is valuation

October 30, 2021 / 11:38 AM IST

Dear Reader,

All eyes are on the COP26 UN Climate Change Conference, which will take place from 31st October to 12th November at Glasgow. It is, we argue, literally the last chance for humanity to save itself from climate catastrophe. India, in particular, says a US Intelligence report, will be among the eleven countries that will be worst affected. To be sure, there’s also hope—a carbon tax, pegged at the right level, might just do the trick and raise the necessary resources. The well-known economist Jeffrey Sachs, for instance, sees no financial obstacles for the world reaching net zero on carbon emissions by 2050. But we have to keep our fingers crossed---there is an undeniable trade-off between decarbonising and growth.

Moving on to less weighty topics, the entertainment of the week was undoubtedly provided by the extraordinary lengths to which one brokerage house went to justify Nykaa’s sky-high valuations---it projected the company’s financials twenty years ahead, till FY2041. It’s perhaps the most egregious example of the trend, fuelled by the weight of money, of turning analysts into soothsayers.

In an age of hugely disruptive digital transformation, where the Metaverse is the new frontier and climate change is already upon us, looking beyond a few years ahead is hubris and is inviting nemesis. This is a time for crossing the river by feeling the stones.

We found less embarrassing reasons to endorse the Nykaa IPO, an approach vindicated by the support the issue has got among investors.


There was righteous outrage at the Indian Railway’s inane decision to derail IRCTC, although the damage was swiftly contained by the Department of Investment and Public Asset Management reversing the silly diktat. It’s good to know that saner voices finally prevailed, not only in the government, but also among investors who took profits after the stock’s extraordinary run-up. The dismal track record of the government as promoter, though, doesn’t seem to have dented the public’s new-found appetite for PSU bank stocks.

Among the reasons for the newly discovered love for PSU banks is the hope that the economic recovery under way will push up their low valuations and that credit growth will pick up soon. Indeed, the strength of the recovery can be gauged by the fact that, so far, the Return on Capital Employed for non-financial companies for the July-September quarter is the highest in a decade, according to CMIE data.

The September quarter results season is in full flow and the results from several banks have been outstanding. These include ICICI Bank, which is now giving HDFC Bank a run for its money; Federal Bank, on track for a re-rating; Axis Bank, whose valuation gap with its peers is narrowing; Kotak Mahindra, which we recommended investors add on every dip and Bajaj Finance, whose valuations are steep, but whose digital operations could add that extra zing, especially now that Paytm will be listed soon, at stratospheric valuations.

IPOs these days are priced to perfection, such as that for Fino Payments. Foreign brokerages are turning cautious on India, although the rising tide of retail investors continues to support the Indian markets. As Jefferies’ Chris Wood points out in his Greed & Fear newsletter, ‘Indian stocks remain supported, for now, by the continuing reality that real interest rates have been negative in India since late 2019 though the real 10-year Indian government bond yield has turned positive this year.’ For most domestic investors, Indian equities are supported by the TINA (There Is No Alternative) factor.

In tune with the times, we expanded our MC Pro offering this week to begin a Start-up Street series, as well as our explainer on Cryptocurrencies and their comparison with gold as an asset.

Among non-financial firms, Marico, Titan, Adani Ports, Ambuja Cements, Tech Mahindra, Crompton Consumer and Concor have shown solid growth in their September quarter results. L&T has shown strong order inflows, while it also provides a margin of safety, so important in these times. Even ITC is seeing a broad-based recovery, though it still can’t make investors happy.

We were deterred by the valuations of Yes Bank, Hindustan Zinc, IEX, SRF, Tata Power and Lupin and recommended buying on corrections for Indigo, Polycab, Dalmia Bharat, Maruti and Tata Consumer Products. On the other hand, we found valuations are now at reasonable levels for the long-term for stocks such as Bajaj Auto, Gland Pharma and Cipla.

Since start-up valuations loom so large these days, we seized the opportunity to look at valuations in cricket and found that the days of an IPL team emerging as a unicorn are round the corner. With CSK just shy of unicorn status, we wondered whether N Srinivasan would have been better off (and had immensely more fun) by buying more cricket teams rather than worry about his cement business.

During the week, we looked at IRB Infra’s fund raise and why it peeved investors, the Dr Lal Path Lab-Suburban Diagnostic deal and Hikal’s China plus opportunity.

There is little doubt that the Indian economy is now in better shape than it has been in a long time. As our interview with Venu Nuguri (MD & CEO of Hitachi Energy—India & South Asia) indicates, green shoots in private sector capex too are becoming visible.

At the same time, there are some warning signals. The energy crisis is one obvious headwind, with this story grimly warning that high energy prices will be with us for years. The impact of China’s energy crisis could spill over to India, with consequences for several industries, including steel. And our herd immunity tracker unfortunately finds that, ‘going by the current rate of vaccination, it may now take at least 5 months to fully vaccinate the adult population.’

Thankfully, though, the pace of new infections has dropped drastically. Also, companies have proved during the pandemic they can find innovative ways of doing business. A similar fresh approach is needed to tackle the supply crunch.

Going back to the Jeffrey Sachs interview, the economist said that digital transformation will improve our lives enormously, in the spirit of John Maynard Keynes’ essay, written in 1930, titled ‘Economic Possibilities for our grandchildren’. Keynes believed that, in a hundred years, ‘man will be faced with his real, his permanent problem---how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.’ That could be an appropriate thought for Diwali.

Happy Diwali,

Manas Chakravarty
Manas Chakravarty
ISO 27001 - BSI Assurance Mark