 "IPOs are over-priced, overhyped; rarely make money: Shankar Sharma")
With the markets staging a smart recovery after the Brexit referendum, Shankar Sharma, vice-chairman and joint managing director of First Global, the Mumbai-based international securities house, talks to Puneet Wadhwa on how they are likely to play out over the next few months. Edited excerpts:
As regards Brexit, is the worst behind the markets? Can the world slip into recession?
Markets are full of mystery and intrigue. They have recovered, yes, from the day of the shock exit. But it’s too early to declare victory. When markets start acting as if there is no problem at all, is when I start to get a tad worried. It’s been eerily similar this time too. Let’s only hope they don’t flatter to deceive like they did in 2007.
Overall, it’s our view that in this post-Brexit world, emerging markets will outperform developed markets, and India always does well in troubled times because of a solid market composition. So, while I believe equity markets will be see rocky times ahead globally, commodities will do well, and so will emerging markets, relatively speaking.
How are the valuations looking in the backdrop of recent macro-economic data?
I pay zero attention to market aggregate valuations. A single PE (price-to-equity ratio), derived artificially for a basket of disparate stocks, ranging from high PE sectors like consumers, pharma, information technology (IT), to low PE ones like cyclicals, averaging them out, and then opining that the market is cheap/expensive is absolute nonsense.
Further, no adjustment is made to levels of interest rates, inflation and growth. It’s always simply “20x is expensive” and “12 x is cheap”. This ratio is garbage and if one uses it, one will only get garbage.
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India is a so-so market, but looking good relative to other major markets, simply on the “Land of The Blind” theory of Dr. Raghuram Rajan. There is nothing very noteworthy about India in terms of absolute level of growth – be it gross domestic product (GDP), or earnings growth. In any event, when nominal GDP growth is three – five per cent, how can one expect earnings growth of 17 per cent - 20 per cent? It is beyond my analytical skills.
What are your expectations from the upcoming results season?
I don’t look at sectors as much as I look at stocks, and I do believe small-caps will generally deliver very good numbers, pretty much across sectors, be it financials, chemicals, infra, cement, etc.
You have been bullish on the mid-and small-cap space since quite some time now. Does it still offer potential winners?
I continue to believe, as I have for the past two years, that Indian small-caps are the best equity class in the world. And that faith has been handsomely rewarded. I continue to be very bullish on this space, across many sectors. I see several companies improving their balance sheets, governance, business models, risk assessment, common-sense capex – all augur very well for sustainable return on equity (RoE), with moderate risk. Of course, this is a volatile space, and in a bad week, stocks can lose 20 per cent - 30 per cent. So no place for the faint-hearted! Small cap cement, infra, chemicals, some pharma and financials look good.
Are state-owned banks (SOB) a good contrarian bet from one - two year's perspective?
I think there will huge calls on capital by these banks, as bad debt issues still exist. Any business that requires equity capital of this kind is not something I am interested in. May be they are good, may be they aren’t. But I have better things to spend my time and money on, than Banks.
By when do you foresee a meaningful growth in credit offtake by India Inc?
I am convinced that meaningful credit growth is years away. No promoter I know has any interest in capital intensive growth anymore. They are shell shocked, with what’s been happening. People who have recovered from a high debt issue have sworn-off taking debt ever to fund growth. I have seen debt devastate family lives, deepen divides among family members. Which promoter in his right senses will go to a bank and ask for a loan?
And then, as a country and society, we are scaring off risk-taking by persecuting (Vijay) Mallya. A man who has made us proud as an Indian to have built one of the largest spirits companies in the world. And we chase this man away to London, on zero evidence of any fraud. Business is about risk taking. If a society discourages risk-taking by persecuting entrepreneurs, then we simply won’t get growth.
Here is a man who took a risk. It went bad. And lost almost everything he had. Still wants to pay back principal plus some interest. But we don’t want that. We want his blood, not money. What kind of lynch-mob perversity is this? I fear for genuine risk-taking in our society if this is going to be our attitude towards entrepreneurs.
What is your view on the telecom sector in the backdrop of earnings potential, talk of net neutrality and the impending launch of Reliance Jio? Do any stocks offer a good entry point now from a 12 - 24 month horizon?
I stopped looking at telecom from 2007-end onwards, and have had no occasion to regret it. Every sector has a ‘Best Before’ date, and telecom’s is well past that. This isn’t a sector where you can make returns that beat a fixed deposit (FD) return, so why waste time.
A lot of policy related stocks from the aviation, healthcare/pharma, retail and defence have been in the limelight recently. What is your view on the initiatives announced? Should investors buy these stocks given the run up?
Aviation is a good, but not great sector. There is traffic growth, but oil remains a worry. The other sectors are also so-so. The announcements made are okay for a short bounce.
The markets seem to be liking niche plays like Mahanagar Gas, Thyrocare, Dr Lal PathLabs and Equitas Holdings. What is your view for these players in terms of earnings growth potential?
Some of these are good, but in general, I prefer seeing new listings perform for at least three – four quarters before getting too excited over them, because most companies doing initial public offers (IPOs) have sand-bagged profits for at least two quarters of listed life. It is post that the real core earnings picture starts emerging. In any case, our belief is that IPOs rarely make money for investors, in aggregate. A few do well, but most are so over-priced and over-hyped that all the juice has been sucked away in the IPO pricing itself.
How much headroom do you see in monsoon and consumption related plays from here on given the run-up we have seen over the past few months?
There could be some headroom given monsoons and the 7th Pay Commission recommendations. Overall, it’s our view that in this post-Brexit world, emerging markets will outperform developed markets, and India always does well in troubled times because of a solid market composition. So, while I believe equity markets will be see rocky times ahead globally, commodities will do well, and so will Emerging Markets, relatively speaking.