Startups IPO valuations are stretched: IIFL Chairman Nirmal Jain

Discussing the IPOs of startups like Mamaearth, the IIFL Chairman shared that he had a sombre view of such firms due to their vertiginous valuations.

Honasa Consumer, which runs the popular skincare brand Mamaearth, recently filed its Draft Red Herring Prospectus (DRHP) in order to raise funds via an initial public offering (IPO). Last June, a Reuters report had said that the Sequoia- and Sofina-backed company was valued at $3 billion (roughly Rs 24,000 crore),  and commanded a PE multiple of 1,714.3.

“A lot of capital is chasing these startups and valuations have reached a point where a meaningful return is unlikely, so one has to be very selective,” said Jain.

Asked about new-age brokerages like Zerodha and Upstox, Jain said that while some will do very well, some will not survive.

He added that those who survive will make a mark, and some of the legacy firms  will also adapt to the technology and grow, leading to a change in the pecking order.

Jain said that the industry has seen significant structural change over the past 20 years thanks to consolidation, technology, regulation, and the entry of large players.

He highlighted that new-age players would have to learn more about risk management and compliance in order to survive,  since regulations were changing at a rapid pace and regulators were becoming very stringent .

Stating that he has no one mentor, the industry veteran acknowledged that he had learned a lot from ace investors like Motilal Oswal, Raamdeo Agrawal, Rakesh Jhunjhunwala, and Ramesh Damani.

Jain also spoke of his love for teaching, taking long walks, and spending time with the family.

Following are the excerpts of an exclusive conversation with Moneycontrol:
Nickey Mirchandani:

You started your career with HUL, worked with Agrawal for a bit, and eventually co-founded IIFL and became its chairman. But if you had not had this career, what would you have done?

Nirmal Jain:

I would have been a teacher maybe, you know, a professor, would have been teaching in some college. Or I might have continued in the corporate sector.

Nickey Mirchandani:

You’ve been an early stage investor in almost 10 startups. What’s your view of startups  with vertiginous valuations, like Mamaearth?

Nirmal Jain:

Startup valuations are stretched. A lot of capital is chasing these startups and valuations have reached a point where a meaningful return is unlikely, so one has to be very selective.

Nickey Mirchandani:

Which sectors do you think will be back in vogue in 2023. Pharma? Or maybe IT?

Nirmal Jain:

In IT, Infosys is a good pick. And auto – Maruti is a good stock. In FMCG, HUL is a good company, and one that I’ve worked with. These are all bellwether stocks in the sector. They're good stocks to own and hold for the long-term.

Nickey Mirchandani:

A week or so before every budget we see a major rally in railway, defence, and agri stocks, right? Anything there, anything attractive?

Nirmal Jain:

In defence, in EMS (electronic manufacturing sector) , there are many new companies that are due to get listed that look interesting over the medium term. They will see good growth.

Nickey Mirchandani:

Any market guru or any mentor that you would like to name?

Nirmal Jain:

When I started working with Motilalji (Motilal Oswal), I learned a lot from him. I also learned a lot from Rakesh Jhunjhunwala and Damaniji (Ramesh Damani). I have interacted with all of them.

Nickey Mirchandani:

One inspirational quote that you keep in mind while managing the wealth of your investors.

Nirmal Jain:

I really like this Warren Buffet quote: "The stock market is a device where money is transferred from impatient investors to patient investors."

Nickey Mirchandani

What about your favourite book?

Nirmal Jain:

My favourite book changes every year. Right now I'm reading one by Carlyle group Co-Founder Rubenstein, called How to Invest. That's a good book. Then there are books by Benjamin Graham.

Nickey:

Any global or Indian CEO you look up to?

Nirmal Jain:

Satya Nadella and Sundar Pichai are Indians running global companies. They are CEOs one can learn a lot from.

Nickey Mirchandani:

What's your stress buster? How do you de-stress?

Nirmal Jain:

Take walks and spend time with family, watch a movie.

Moneycontrol:

What's your take on the broking industry and where it’s headed in terms of volume and structure? How do you see this realigning in terms of the platform companies — the new-age broking companies — which have probably not seen profits, but still are hopeful of making it big?

Nirmal Jain:

Interesting question. The broking industry’s volumes will go up and margins will come down. Technology will play an important role for sure. So, as it always happens, some of the new-age companies will survive and some will not.

Those who survive will make a mark. Some of the legacy firms  will also adapt to the technology and grow, while some may not be able to. So the pecking order may change.

Structurally, the industry has already changed significantly over the past 20 years.  Consolidation, technology, regulation, the entry of large players – all those things are already in place. From here on, I don't see much fundamental change.

Some of the new-age players will have to learn and understand the compliance and risk management part of things because that is integral to survival in this industry. Regulators have become very stringent and regulations keep changing at a rapid pace. So one should keep up and ensure compliance in letter and spirit.