Vetri Subramaniam, CIO of UTI Mutual Fund, warns investors about the risks associated with platform companies and renewable energy stocks in a Network18 interview. He emphasizes the need for platform companies to stabilize their business models and prevent cash burn amid changing availability of capital. Regarding renewable energy, Subramaniam expresses scepticism due to the lack of indigenously-grown technology and advises caution in considering valuations and future prospects.
Here's the edited excerpt from Subramaniam's interview with Network18:
A lot of these platform companies have come back in a big way be it the likes of PB Fintech or Paytm. But these have also caused investors to burn their fingers quite a bit. What should one do now, avoid or take the plunge?
This has been a full cycle. The stocks listed, in some cases went up 100 percent from their IPO prices, and then they promptly give back 50-80 percent of gains. Maybe they are just trying to find their feet.
Just two points about these businesses. These were always very long-growth opportunity businesses and, in an environment, where capital was abundant and the cost of capital was low, people were willing to pay for the blue-sky scenarios.
I think two things have changed. One is that the cost of capital has gone up quite dramatically, also to the advantage of some of the incumbents who are reasonably well-established in these segments. Capital is no longer as abundantly available for anybody to burn, so it's a question of who's able to stabilize their business model faster and prevent the cash burn. Suddenly, for the first time in maybe six or seven years, there is a constraint which has come upon companies that they can no longer expect capital to be abundantly available, and postpone profitability way into the future. So, I do think for some of these companies, the environment has become slightly more favourable. But these are very early days and I think the business models are evolving.
If I were to look at my own experience, the way we understood these companies before IPO, when they came with the IPO, and how their business model is evolving today, it all has changed quite dramatically in just two years.
Therefore, as investors it is a question of getting to understand them better, but these are not really very high conviction bets at this point of time in our portfolios.
The Government is very focused on renewables as a theme. How do you play some of these stocks?
I am always a bit skeptical when somebody paints a picture of the future without any relationship to valuations, without any context of how regulations might be, without any context of how technology might evolve, and without reference to how cash flows and return on capital in the business will evolve; I am not a great fan of getting carried away with those cycles.
I have been in the market long enough to see some of these stories get very long in the tooth and then see painful periods for a long period of time. I think the biggest challenge that I see in the renewable space in India is a lack of indigenously-grown technology. Companies are trying to make acquisitions, but we are on the back foot simply because we don't have the technology at this point in time.
The government has got a whole raft of skills to support through the PLI and other mechanisms and it is critical for India to pull off and be part of this energy transformation. We need to make sure that we are at the forefront of it. And that we do not create a new import dependency like we had during the carbon era.
From a stock market investment point of view, we are happy to be on the sidelines here as there really is not enough visibility in terms of technology, cash flow and capital.
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