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BW Businessworld

The New High In The Market – Stocks

Never before has the disconnect been more stark, between the fundamentals of the current-economic state and the stock market valuations – and the increased euphoric investor participation, is often mistaken as tacit understanding or approval of the valuations

Photo Credit :

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The word “high” is colloquially used to denote a temporary feeling of euphoria, brought on by the ingestion of a not-so-stable ingredient. Are the Indian stock markets on a similar hysterical high? Valuations are the present value of anticipated earnings and profits. Stock prices are supposedly based on such rational calculations and not on belligerent sentiments or perceived financial rewards.

During the past many months, we have seen a rise in short-term profits on the back of companies curtailing costs sharply and trimming payroll. The point is, once the lockdown eases fully and the economy steers towards normalcy, are these profits sustainable?

The current stock market valuation surely does not represent the health of our economy in its truer sense. The economic stability would need the strong foundation of a majority of our population to be vaccinated and to be productively employed for livelihood. With Covid, both working capital impairment as well as demand-side issues are still seen, across most business sectors.

The debt markets have been subdued and with lower returns and higher risk perception, investors have been staying away. Fixed deposits are giving low returns. Realty, as an asset class is worrying the investors, due to project completion concerns. These worries have pushed newer investors to take their punt on stocks!

Within 130 crore Indian citizens, only 3.7 per cent invest in equities. In the United States over 55 per cent of the population invests in equities (directly or through mutual funds). China has over 12 per cent of its population investing in equities. Equities as an asset class comprise only four per cent of Indian household assets, as of December 2020. Yet it gathers more attention daily than other asset classes.

Are Equities Earnings - Beginners Luck ?
The Indian stock market has a large presence of individual investors. Especially since the Covid lockdown, a large number of new individual investors have been added to this count. National Stock Exchange (NSE) data shows that it has brought nearly 90 lakh new investors to the trading platform during FY 2021, while the BSE has added 1.78 crore new investors between May 2020 till now.

Data also shows that millennials have come into the market as new investors. The economic slowdown since last year added the sentiment of potential loss of livelihood. This acted as an incentive for the need for an additional source of income - Stock trading !

Data from NSE shows that individual investors have slowlymoved up from a market share of 33 per cent (of trading turnover) since 2016, to 45 per cent in 2021. If you look at non-promoter holdings (“floating stock”) of the market, individual investors who had 18 per cent share of it, now have only nine per cent.

The First Intoxication 
In a nutshell, institutional investors are “Holding the stake”, while the “trading movement and most of the price volatility” is by individual investors. Most first-time investors have been experimenting with their trades.

Not all of them have an investment-theme in mind. More individual trades seem to be pushing up market prices. What if many of them are viewing the stock market investment as a thrill or entertainment? What happens when the beginners’ luck runs out?

With limited expenses during the lockdown phase, surplus funds could have been put into stock markets. As the economic slowdown continues and worries around unemployment and business sustainability linger, investors might become cautious and exit their investments to book profits. This markets’ intoxication with stocks and the initial public offering (IPO) boom is best summed up by the hit song from the Hindi screen blockbuster Joh Jeeta Wahi Sikandar: “Pehla nasha, pehla khumaar…” The first intoxication, and the first hangover will either get investors further hooked or drive them away. It just needs only one major market slowdown or downward correction, to scar(e) retail investors away!

Different Investors & Differing Boundaries

There are different categories of investors with their own understanding of the investing space, research capability and risk appetite, and more importantly, their (in)ability to time the markets.

Institutional investors have the resources and capability for research on companies or industries they invest in, or track. They also have deep pockets to take an “influential” position on a stock, to effect any business decisions or behaviour. Treasuries of banks and insurance companies, financing institutions (who are doing business with the firms going IPO) are also expected to invest in the upcoming IPOs, to increase their treasury returns. That would mean that they would have to soon offload their investments to book profits!

High Networth Individuals (HNIs) have sufficient liquidity parked with them, since the Covid lockdown. Non-banking financial companies (NBFCs) and wealth managers will want to make a killing in this IPO mela. Even with well-meaning RBI regulations around the tightening of lending for IPO investing, investors, especially the HNIs, will find sufficient liquidity (leverage) made available by NBFCs and wealth managers.

Many a HNI client values a wealth managers’ ability to arrange leverage, as a key component of their relationship. At some time, HNI investors will exit those IPO stocks to book profits. The nature of the stocks being held will depend on the terms of the IPO financing, the way the IPO stock value moves in subsequent months.

Mega IPOs of Goi / Non-Tech Firms
While the Government of India (GoI) is planning the mega IPO of LIC, its timing won’t be anytime soon. Since a lot of capital unlocking is expected to be done for its owner - the GoI, they would rather receive higher valuations, than just hurry up the liquidity generation. It would be a positive indicator, if the actual investors in this public offer are non-GoI entities and non-state owned banks. That would be evidence of actual market interest !

Some private sector non-tech firms will benefit from the current market run. Conventional industries have templates with which to benchmark their performance and valuations. As long as the listing issue size is not large, it will continue to find takers.

Understanding Tech & Digital Stocks The Indian private investing story is a very old one. They are the ones who have funded the growth (despite heavy operating and accumulated losses) of new-age-economy companies.

Risks on Both Sides of the Coin Of late, the private investing space is seeing heavy concentration of risk on both sides of the coin – cap table as well as the invested-entities. For privately funded entity founders, giving exit to their strategic / financial investors is a must.

“Passing the parcel” or the “musical chair” scenario of ever-increasing-valuation and stage changing hands from one set of private investors to another will not solve long-term capital investment needs of those firms.

It is the public markets which will give such a liquidity cushion. And yet one needs to keep in mind that it is the same “musical chair” run-up of valuation that would get passed onto the stock market during stock market listing!

In this endeavour, accessing wider public markets preparedness is a priority for startup founders. There are many decently-scaled digital companies in India, which have the potential to grow much larger (not sure of when they would be profitable).

They deserve the credit for having dared to find a market opportunity and to have built a business from scratch. This credit for young Indians building made-for-India-in-India with digital India as the backbone is commendable.

The Valuation Bubble
No wonder, we are seeing a meteoric rise of tech companies in their run up to the IPO market. Rightfully, the securities regulator SEBI has restricted the proportion of retail investors who can participate in the IPO of a certain category of such firms who have not been profitable so far.

But what happens in a hypothetical situation of the valuation bubble increasing after listing, and suddenly in a downturn the non-retail investors exit, leaving retail investors holding the bucket? After all, it can be an easily misplaced perception to confuse the popularity of one’s favourite ECom brand, with that of well-run and governed listed stock to invest into.

Business Metrics
Public (capital) markets demand high governance, and do not like highly volatile business performance. Most firms now prepping for IPO do not have the consistency of business metrics so far. Public markets will demand granular data / information disclosures to the table.

The ability of these firms to provide consistent and palatable answers would prove their mettle, over time. Digital platforms will also need to constantly invest in innovation, as the market adopts more of such products and services.

Evolving Laws
As the concept of laws and regulations around technology, digital and platformisation are still evolving rapidly, these firms are susceptible to either regulatory advantages, arbitrage or even claws that they might encounter. More importantly, privacy and data protection of consumer data is critical. Any hiccup around these would make these firms vulnerable to volatility of consumer trust and the consequent business viability.

Renaissance Moment
There are many equities research platforms in India now. If we don’t count those which are involved in the investment banking of the upcoming IPO clients, and also those who are busy doing Pre-IPO equities sales of those entities, there are hardly a few left in this market. And very few of them have hands-on tracked digital or new-age economy stocks before. Remember this is the first time that the Indian market is launching these stocks in the capital markets.

In that sense, it is also a renaissance moment for the Indian equities research practice. Borrowed learnings from tracking FANG stocks would have added some knowledge; but neither is the Indian capital markets that deep yet nor the size of retail investors markets that high as a proportion of the population.

It is hence a “hope & faith” that any one advising their client in investing into these new-age stocks, would do true research and highlight the risks that their clients don’t know or have the appetite to face.

Millennial Moment
If the post-Covid economy, over the next eight to ten quarters stabilises and these upcoming IPO firms don’t have any market volatility scare, hopefully the Indian market will mature with learnings about what it means to invest in the 21st century-born companies and millennial founder-CEOs! It would also be the first time that the market will deal with promoter-founder-CEOs, (who might be declassified as promoters due to regulations), as they have less skin-in-the-game, than what a band-aid even typically covers!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Srinath Sridharan

Independent markets commentator. Media columnist. Board member. Corporate & Startup Advisor / Mentor. CEO coach. Strategic counsel for 25 years, with leading corporates across diverse sectors including automobile, e-commerce, advertising, consumer and financial services. Works with leaders in enabling transformation of organisations which have complexities of rapid-scale-up, talent-culture conflict, generational-change of promoters / key leadership, M&A cultural issues, issues of business scale & size. Understands & ideates on intersection of BFSI, digital, ‘contextual-finance’, consumer, mobility, GEMZ (Gig Economy, Millennials, gen Z), ESG. Well-versed with contours of governance, board-level strategic expectations, regulations & nuances across BFSI & associated stakeholder value-chain, challenges of organisational redesign and related business, culture & communication imperatives.

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