People more worried about global newsflow rather than Indian newsflow: Dharmesh Mehta

Anuj: What is the mood among investors towards investors because earnings are not catching up and valuations look a bit stretched?

A: I believe people are still more worried about the global newsflow rather than India newsflow and literally trying to struggle to understand what is going to happen globally and then the India call comes.

Obviously the India excitement is still on. People are looking at a lot of companies and are interested subject to the valuations are reasonable. They know there is paper coming in and good quality paper coming in, so there will be a lot more opportunity to invest in. But, the bigger call is what happens globally and does that have a big impact on India and the nervousness is out there on the global front rather than India front.

Surabhi: So when you say nervousness on the global front, what are the key concerns? Are people taking all this North Korea-US rhetoric seriously, is there something else, is it a tightening by the Federal Reserve? What is the biggest concern?

A: Globally, people are definitely concerned on the valuations and if you look at any single article, globally if you pick up a newspaper, I have not seen a more consensus view which is so negative globally and people have been virtually telling people to get out of equities. So we are in almost a global consensus view saying that get out of equities and that is what is scaring people. Obviously the geopolitical risks are also playing on everybody's mind and people are just trying to sense what can go wrong globally which can impact the country and which can also impact India in that sense.

Anuj: The global worries are taken on board but Indian market seems to be outperforming a bit also because of the domestic liquidity. From a domestic point of view, do you think this kind of trend will continue and will support the market on the downside?

A: Yes, because if you see in the domestic mutual funds, the inflow which they are getting, they are more in the form of systematic investment plans (SIP). That is a large portion which now comes into every domestic mutual fund which is that way good for the country because when the markets fall, that kind of money starts pumping into the markets which actually stabilises it. That is exactly what happened during the demonetisation time that the SIPs saved the market. And smartly enough, that SIP flow also is reducing as the market is going higher.

So when the fall comes, I am sure, people will be looking at an SIP and start investing much more when the market corrects. So there is some kind of a safety in India in that sense. But also, do not forget, you do not have any other investment option today in the country because real estate, gold, all of them do not look like great options. So equities is, right now, the most favourite spot to be in. So any large correction or decent correction, people may look at it as an opportunity to buy rather than sell into.

Surabhi: You spoke about a strong pipeline of initial public offers (IPO) and lots of fund raising that we have seen on the street despite the concerns that we have discussed. Is there at all, any sign of euphoria you think, in the primary market?

A: I do not see that great kind of euphoria. You have seen euphoria post listing where people are buying 50 percent higher or 100 percent higher, but the IPO valuations have been attractive so far. So if that is maintained, which I believe it should be, the quality of paper which is going to come in the next 3-5 months is top quality and people actually want newer companies to list so they can invest more money instead of the same old companies which are now very richly valued.

So the host of insurance companies are going to get listed, there are large corporate groups like Mahindra, Godrej coming in, means this is the kind of paper which everybody is waiting for it to come. So if that paper is priced correctly, it will be lapped up in a very big way. So I do not believe there is any froth outside in the IPO scheme. Yes, post listing sometimes, few stocks go up, but that is not the benchmark. Majority of the IPOs have done well so far.

Anuj: So, in that context, your view on the government paper?

A: That you have seen with Cochin Shipyard IPO which got a great success and you have seen many more companies like GIC is coming in, the New India Assurance (NIA) is coming in, so you are going to see a lot of those kind of quality paper also coming in and if they are priced rightly, as they did in the Cochin Shipyard, I think they will also be lapped up very immediately. And people need this kind of paper to come in. So retail investors can participate more.

You should always remember, any IPO coming in in India, the majority of the investors are domestic investors because almost 60-70 percent of the IPO is allotted to domestic investors and mutual funds. So it is Indian money which gets parked more into those IPOs than foreign money and it is foreign money which buys on the listing day. So for an Indian investor, this is a great opportunity to buy into good paper and sit on it subject to the price correctly. And I believe managements are smart enough right now to understand that their valuations have to be attractive to get a great response.

Surabhi: So as long as the pricing is good, as you say, the question is how much can the market absorb? How much from the government's side do you think will come in by way of divestment and a figure that the market will be able to digest easily? Is there a ballpark number that you think will make it through?

A: I do not want to get to the exact numbers because this is all subjective when they file and when they want decide it, but it is definitely going to be a large number and that is the kind of paper which people are waiting to get into. So please understand, now the size of the deals is going to change. You are going to see a lot of billion dollar deal size coming into IPO market. And that actually is a bigger game to be played now.

Anuj: You have good mix of midcap companies participating in your conference and that is the set which has done well, the midcaps. From investor’s point of view, are they concerned about valuations in midcaps?

A: They are always concerned on the valuation on midcaps but the kind of mix of the companies which we have, the valuations are not that atrocious. So clearly people want to understand them more, understand what is the growth forecast for next two to three years. There are a lot of different businesses, we have retail, we have media, it is a mix of everything, we have auto ancillaries, one is Mahindra Lifespace which is real estate, so it is a good mix of companies. So, they actually get an overall India view, rather than a company specific view. This kind of companies are reasonably valued, that is why they are in our conference and that is very exciting for them to look into and all those meetings have been lapped up by investors.

Surabhi: It is a fact, everybody seems to be quite concerned about valuations here in India right now and whether the overweight stance can continue on this market. So, is there any key concern on India per se that you are hearing in the conference?

A: As I said, it is a global concern and India is an overweight for everybody as you mentioned. So, obviously when something goes wrong, that is the first market which will correct. However, then we have to see whether the domestic liquidity then absorbs that kind of flow. So, if that happens, then I don’t believe there is a huge downside in the Indian market. I think every fall in the market may be a good opportunity for people to buy into who are still sitting on cash. Mind you there is still a lot of cash in the system, so, every single day when I meet people, they are still asking me where to invest in. So I don’t believe it is an over invested market domestically, but globally yes, it is high weightage. You will find some correction in this kind of volatile environment so people should be ready for some kind of a correction and wait for that opportunity to buy into.

Anuj: With this kind of price action, and with this kind of earnings backdrop, do you think the market is creating a bit of a bubble?

A: I don’t think we are anywhere close to a bubble zone. Markets are fairly valued. Definitely people are paying a lot of growth value in this market, but we are nowhere close to the bubble zone. We are not seeing some atrocious valuations of any companies and it is not a price to vision or price to expectation kind of a market, it is a reasonably, fairly priced market rightly so because things are much better in India. As far as oil markets, oil is down, India is the biggest beneficiary and that is running in our favour. Global view is still that oil should remain in a very small range and that is the reason why India is outperforming everyone. So, I would not say anywhere we are close to the bubble zone so far.

Surabhi: On individual sectors, specifically financials, NBFCs, housing finance companies, the market’s darling area, is there a bit of a risk in terms of very high steep valuations?

A: Definitely there is a valuation risk and the quality of asset risk more rather than valuation because end of the day you have priced it to perfection and if anything goes wrong on the quality of the assets, and the NPAs which we have seen earlier in the banking sector, that can be a big risk to this whole sector and maybe some part of it to Indian markets. So, yes, definitely I will be cautious on that front, but as I said, people are paying for a lot of growth right now in that sector and that is what worries me.

Anuj: Now about the two underperforming sectors, IT and pharmaceutical. Are investors seeking any investment opportunity in these sectors?

A: IT is going through difficult phase and specially the events happening in India. So people are still confused where to enter and what is the right time to enter. You will see some portfolio changes happening also in the IT space. Pharmaceutical, definitely there is a regulatory risk going out right in India and you don’t know what is going to get impacted. So, both of these sectors are in a very confusing state. So people are still not able to be very clear whether it is a good time to invest or not and that is why you are seeing the current nervousness in both the sectors which are both heavyweights and underperforming today.