If one has to look at the absolute performance for some of the fintech and consumer stocks, first there was a one-sided selling and now it is a one-sided rally. Where will they settle?
Let us just go back a little in time. Post Covid, the period that we were looking at was an illusionary period which had favourable conditions like low interest rates, excess liquidity in the system and benign inflation – which all led to the belief that this will continue forever and that is where the illusion was with complete disregard of history.
I think that is when we saw valuations jump to where they were, mistakes were forgiven, mishaps were forgiven and people were just pumping in money. Then we saw a period where interest rates started to rise and that is where we started seeing focus coming back to reality. Some of that started percolating down towards the new age tech firms and we started seeing the pressure build up.
Today we have reached a stage where some of the issues that we were looking at are tapering down. For example, inflation is now more or less coming under control. We already saw the statement from the US Fed in terms of how they are looking at the interest rate hikes. Some of those factors are, of course, the growth being there in all of the new age tech companies both globally and in India, it is time to relook at allocation into this section.
This is because a large part of investors had stayed away because these are high beta stocks and that is what we saw happening in the last few months. Today, many of the stocks, even in the US markets, are up 30-50% from the lows, but way away from their all-time highs which will take some time because the period of illusion is gone. But yes fundamentally, these continue to remain long-term bets. Change is inevitable and I will continue to look at them favourably for the long-term.
What is the outlook for some of these companies in light of the fact that we have seen a global tech meltdown? We have seen mass layoffs as well. Is that an underlying or a lingering worry that things could reverse as quickly as they did?
One of the things that I said earlier was mistakes and mishaps were forgiven. I think one of the most important roles of a founder who is raising money is basically capital allocation. One needs to allocate the capital in the right manner while in an investing mode, a high growth company mode. Most of the capital that was being allocated in the past in that period was for growth of customers and that is what we used to see across the board, which would lead to business growth and ultimately will monetise in the future.
However, the period of this normalcy, the period of what I think Mark Zuckerberg just mentioned last week, is going to be a year of efficiency. We would see capital allocation being done in the right way and by the right way, I mean in the way a businessman would do so allocating it for growth of business, allocating it for growth of customers. Also, one needs allocation for new business and innovations because these are very innovative companies and at the end of it, need strategic growth. That leads to capital efficiency and that is where we are seeing layoffs coming in because in euphoric times, we would chase growth at any cost and that is where they were investing huge amounts.
So, capital efficiency will come, which ultimately leads to P&L positivity and that is why we are seeing the rerating of stocks in the Indian market as well. These factors and again external factors are also favourable. So, I would look at them positively now with a traditional business sense prevailing over new age tech companies. It is a mix of traditional and new age coming together and sustainability and scalability prevailing.
Considering the IPO prices for , , , should they average it?
That is one thing. If I am a long-term investor, I would invest in this market no matter where the stocks are or which stock one is looking at because ultimately when some of these stocks got listed and got very good promoters, very good founders, good governance, when all of those tick marks are done, of course growth will come but we have to be patient.
You cannot expect 100% growth quarter on quarter and the stock price to just go in one direction. As a long-term investor, I would invest, which is very unlike what we see in the retail market in India. So it is for a patient investor’s game. As a patient investor, I will definitely invest.
What are the parameters that you look at to know that a business model can deliver exponential growth?
The most talked about one is the path to profitability but that again is balanced with the right amount of growth in the right businesses at the right cost. That is something we need to deep dive into the numbers where the growth of business should not be at the cost of profit. We were used to a time when cash burn was a currency. Today cash burn is no more a currency. People want to see scalability and at the same time sustainability.
So of course it all boils down to the profits you will be making. At the end of the day, once you are out of the high growth phase, go into normal growth and that is when you will be valued on a price to earning basis which will eventually happen. You will no longer continue to get valuation that a tech company gets forever.
Even if you look at any of the names globally, ultimately it boils down to the business they are in so Facebook, Google at the end of the day would command a large valuation based on their advertisement revenues and where your money comes from so I think that is what we would look at. Of course, the founders’ vision is very important in terms of where the business will grow, where innovation is coming from because ultimately there is only a point up to which one can grow a business that you started.
One needs to keep on innovating. One needs to keep on adding and going deeper into the wallet of customers. Is that something that any of these companies are doing or do we got a first mover advantage? We started a business, we replicated something from the West and that is where we are. I would look at innovations and growth in terms of business profitably a lot more in detail.
Where within this entire space is your own positive bias? Any names?
So I will stay away from giving names because I have invested in some of them.
