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Next 1.5 years ripe for IPOs; expect larger issues than previous two cycles: Naveen Chandramohan of ITUS Capital

Retail participation increasing is a good trend for the markets, and bodes well for equity penetration in India over the long term.

June 15, 2021 / 09:13 AM IST

Naveen Chandramohan, Founder & Fund Manager of ITUS Capital, expects a lot of companies to launch their initial public offer in the next 1.5 years, with a bigger token size than the previous two cycles.

In an interview with Moneycontrol's Sunil Shankar Matkar, Chandramohan talks about markets, pockets of opportunities and much more. Edited Excerpts:

Q: Market trade at historic highs now. Will the momentum help the equity market report more than 20 percent gain in 2021?

The market returns are a slave to earnings. The returns in the last year were strong because there was a disparity between actual earnings growth and the low base we were in on the index and stock valuations as of March 2020. It's important that investors do not invest today, for momentum or returns over the next 1 year extrapolating last year returns. It's more important than ever, that investors deploying capital today at least look at the tenor of their investments for a minimum of 3 years.

Q: Reliance Industries, BFSI, IT and infra segments started contributing in the recent run-up. What are the drivers for the rally going ahead?

It is only right that we look at structural sectors from a 3-year perspective rather than what could happen next year. I believe we are at a structural inflection point in pharma today – this deserves a construct in investors portfolio, COVID or otherwise. IT will have tailwinds and the digitisation theme will continue to be a driver of portfolio returns.

I also believe that some of the other segments which would do well are AMCs (asset management companies) and financial intermediaries (platforms and exchanges).

Q: With the launch of 4 IPOs after a lull of two months, do you think the primary market activity will remain strong in the coming months and the number of IPOs in 2021 will be much more than 2020?

Supply is a function of sentiment. If you look back over the last 15 years, the highest number of new issuances coincide with the market making new highs. This year and the next will be no different. I would look at the next 1.5 years to be a robust period of new issuances – more importantly, this time, I do think the size of each of the issuances is going to be larger than the previous two cycles. The pipeline for this year is robust, and I think there would be multiple businesses looking to access the primary market if they get good valuations.

Q: With the rising expectations that broader markets will outperform frontliners, what are the sectors among midcap and smallcaps to add to the portfolio?

I have maintained that investors should add businesses, rather than mid and small caps in the portfolio. It's important to have a higher bar in terms of adding smallcaps today at these valuations. You want to ensure that you are compensated for liquidity risk by ensuring you get a higher growth rate in these businesses run by strong management with skin in the game.

You still have such characteristics within pharma, AMCs, well-run hospitals which will fit the above. You do not want to enter a smallcap company today which is in a highly competitive and cyclical business. It's important to increase your prudence today, more than ever.

Q: As the economy reopens and business is usual, do you see the most impacted sectors outperform?

It's important to mention that the second wave affected us emotionally and personally (through loss of lives) than broad sectors, unlike the first wave. You will see this in the next quarter earnings where the worst affected businesses (more so in travel, malls, retail and hospitality) had to deal with 1-2 months of pain in their earnings.

As an investor, our investments through the course of last year did well, because these businesses grew market share and were adept at technology. It would not be prudent to shift your portfolio into high capex, poor RoCE (return on capital employed) kind of businesses because of one wanting to play an opening up trade – this would put pressure on investors if we then have to deal with a third wave. The point I am trying to make is, a portfolio should be constructed for cash flow growth at sensible valuations by owning sound businesses, not so much based on story based themes.

Q: Retail participation has also been increasing which is one of the reasons for the market rally. Do you think the participation will continue in the coming quarters?

Retail participation increasing is a good trend for the markets. One needs to appreciate that technology has democratised the informational edge owned by institutions (which existed for more than 20 years). Retail participation increase bodes well for equity penetration in India over the long term.

I am confident that we will look back at Covid-19 as one of the events that led to the growth of equity ownership as an asset class in India. The doubling of demat accounts over the last 1 year point to the same.

The concern though is the pick up of retail leverage within the system. The average delivery of stocks today for the top 250 stocks over the last 6 months has been at 28 percent. This alongside the pick up of options trading is where I would be more concerned. There has been an increase of 35 percent in the number of traders using options via index or stocks over the last 1 year. I would worry about this trend a lot more as the market continues to go up.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Jun 15, 2021 09:13 am