Kotak AMC’s Nilesh Shah on real estate sector, internet stocks and more
Nilesh Shah, managing director at Kotak Asset Management Company, is bullish on the Indian real estate market and thinks that investors should pump their monies into stocks of such companies.
Shah says a number of factors bode well for the sector, including that home loan rates remain lowand home prices have stagnated, making buying a house affordable for many.
In addition, the Real Estate Regulatory Authority is customer-friendly and has also been looking after developers’ interests, he says.
In an interview with The Economic Times newspaper, Shah said that all these factors together mean that housing is a longer-term trend and the way to play it is through real estate stocks directly as the home improvement sector is connected to real estate. But he also adds a note of caution.
“When you are investing in real estate, be sure that you are backing the right promoters because this sector has lots of issues related to governance. Within real estate, I believe the big is becoming bigger; the better governed companies are becoming bigger. That is going to be the trend,” he said.
On commodity prices
Talking about commodity price cycles, Shah thinks that the unprecedented rise in prices of commodities like gold or crude oil that has happened in the last six months is unlikely to sustain.
“That is the nature of the commodity cycle; at higher prices, supply emerges from dormant capacities and demand starts tapering off, eventually bringing equilibrium which results in commodity prices coming down. This is the nature of the commodity cycle over hundreds of years and this time is no exception,” he said.
Having said that, Shah does believe that some commodities like copper and aluminium will remain buoyant, as demand and supply imbalances are likely to persist for a while.
Gainers and losers
Shah believes that as prices of aluminium and copper remain tight, companies in sectors like real estate and construction, wires and cables and electrical appliances will be better off, as they will be able to fully pass on the higher costs to their customers without seeing an adverse impact on demand.
On the other hand, companies in highly competitive and price-sensitive sectors like automobiles could see a dent in demand as prices rise.
Blindmen and the elephant
Talking about digital companies like Zomato listing at steep premiums, Shah says that when it comes to the Internet economy, Indian investors are like “blindmen trying to figure out the elephant”.
He says that over the past few decades, investors have become comfortable when it comes to valuing companies with physical assets, but Internet-based businesses present a new set of challenges.
He said companies create digital assets, in addition to physical assets, but don’t currently capitalise these virtual assets such as the values of the online platform or the employee and customer base. Instead, they write it off.
“This is all spending which is not capitalised but which is likely to give benefit over a period of time,” he said. “We have to develop expertise on valuing digital assets.”
Shah says that investors like Kotak AMC have developed new models on how to value such companies. “If the quarterly results are indicating movement in that direction, I am sure investors will continue to stay with digital companies. If there is a deviation in that path, the prices will eventually reflect that,” he said.
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Sansera Engineering lists at 9% premium after mixed IPO show
Sansera Engineering Ltd, which makes components for automotive and aerospace companies, made a positive stock market debut on Friday as its shares listed at a 9% premium to its initial public offering (IPO) price.
The company’s shares listed on the BSE at Rs 811.35 apiece, up from the issue price of Rs 744. The shares touched a high of Rs 842 apiece before paring the gains to trade around Rs 829.65 around 10:30 AM.
The company now commands a market valuation of around Rs 4,262 crore.
The BSE’s 30-stock benchmark was up 0.5% in morning trade and crossed the 60,000-mark.
Sansera is the third company to list on the bourses this month, after the September 14 debut of speciality chemicals maker Ami Organics Ltd and Vijaya Diagnostic Centre Ltd.
Ami Organics had listed at a 48% premium and while the Hyderabad-based pathology chain’s shares had begun trading at a premium of barely 2%. However, both have charted different paths since then. While Vijaya Diagnostic’s shares are up 9% from the IPO price, shares of Ami Organics have jumped 117% in just eight trading sessions.
Sansera’s debut comes after its IPO received a lukewarm response from retail investors even though the overall issue sailed through easily. The IPO was covered 11.5 times, thanks mainly to strong interest from qualified institutional buyers (QIBs).
The QIB portion was subscribed 26.5 times, as they bid for more than 9 crore shares. Non-institutional investors, which include corporate houses and high-net-worth individuals, bid for 11.4 times the shares reserved for them.
The quota reserved for retail investors was covered only about 3.15 times.
Sansera’s IPO involved a sale of 1.7 crore shares by its promoters and Rohatyn, a private equity firm. This included about 51 lakh shares that anchor investors bought a day before the IPO opened for public bidding.
The overall IPO size is Rs 1,280 crore at the upper end of the Rs 734-744 price band.
The company had earlier attempted an IPO in 2018-19. It had filed its draft proposal in August 2018 and received regulatory nod in November that year. However, it deferred its IPO owing to stock market volatility.
Sansera began operations almost 40 years ago. It makes components for automotive and aerospace clients that include Bajaj Auto, Yamaha, Honda Motorcycle and Maruti Suzuki.
Freshworks gains 32% on Nasdaq debut after $1-bn IPO
Indian software-as-a-service company Freshworks Inc made a spectacular debut on the Nasdaq stock market in the US with its shares clocking a gain of 32% on the first day of trading.
The company’s shares listed at $43.5 apiece, up almost 21% from the initial public offering (IPO) price of $36 and then inched higher. The shares ended at $47.55 apiece, giving the company a valuation of $13.4 billion.
Freshworks’ current market capitalisation is far greater than the $3.5 billion valuation at which it had last raised funding from private investment firms less than two years ago.
The blockbuster debut came after the company raised about $1 billion by selling 28.5 million shares in the IPO. Freshworks may raise an additional amount if its underwriters exercise an overallotment option.
The company’s IPO price was higher than its indicative range of $32-34 and the initial band of $28-32 apiece.
Freshworks joins a number of Indian companies to list on US bourses. These include Infosys and Wipro, India’s second- and third-largest software services exporters.
However, Freshworks is the first Indian SaaS firm to hit the milestone. It is also among a number of Indian tech startups that are going public, as they mature and expand their operations.
Already, food delivery giant Zomato, gaming company Nazara Technologies and used-car platform CarTrade have listed on Indian stock exchanges. Several others such as hospitality company Oyo as well as digital payments companies Paytm and Mobikwik are also looking to go public in coming months.
Freshworks was started by Girish Mathrubootham a decade ago in Chennai. The company’s main investors include Accel, Tiger Global, Sequoia Capital and Google parent Alphabet Inc’s investment arm CapitalG.
The company is now headquartered in San Mateo, California. Mathrubootham is now worth almost $790 million after the listing pop.
“I feel like an Indian athlete who has won a gold medal at the Olympics,” he said during the bell ringing ceremony on the Nasdaq, accompanied by his wife, two sons and colleagues.
“We are showing the world what a global product company from India can achieve. The fact that we are doing it first in the US markets is truly amazing. Today is day zero for Freshworks all over again and the beginning of so much more,” he added.
Electronics Mart submits draft papers for Rs 500-crore IPO
Consumer durables and electronics retail chain Electronics Mart India Ltd has filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India for an initial public offering.
The Hyderabad-based company aims to raise Rs 500 crore by selling fresh shares in the IPO. The IPO doesn’t include any offer for sale by existing shareholders.
The company intends to use the net proceeds to finance its capital expenditure and meet its working capital requirements to the tune of Rs 133.8 crore and Rs 200 crore, respectively.
In addition, it plans to use Rs 50 crore to pay off its debt. It will use the remaining money for general corporate purposes.
IIFL Securities, JM Financial and Anand Rathi Advisors are arranging the IPO.
Electronics Mart’s business
The company was founded by Pavan Kumar Bajaj and Karan Bajaj in 1980 as a proprietary concern. It began as a consumer durables and electronics store under the name of ‘Bajaj Electronics’.
It is now the fourth-largest consumer durable and electronics retailer in India and largest player in the southern region in revenue terms as of financial year 2019-20. It is especially dominant in Telangana and Andhra Pradesh.
EMIL has 7.5 lakh square feet of retail space across more than 90 stores. It has a workforce of over 2,600 people.
Its multi-brand outlets operate under the Bajaj Electronics brand. It also runs two specialized stores under the name of ‘Kitchen Stories’ catering to kitchen-specific requirements.
The company is also setting up another niche outlet under the name of ‘Audio & Beyond’ for high-end audio and home automation products.
It plans to deepen its store network in Andhra Pradesh and Telangana and gradually expand in the national capital region, the DRHP showed.
EMIL displays more than 6,000 stock keeping units (SKUs) ranging from large appliances such as air conditioners, washing machines, televisions and refrigerators as well as mobiles and small appliances, besides other IT peripherals. It houses products from more than 70 consumer durables and electronic brands.
The company’s total income for the year through 2020-21 inched up to Rs 3,207.37 crore from Rs 3,179 crore the year before despite the restrictions related to the coronavirus pandemic.
Its net profit for 2020-21, however, declined to Rs 58.62 crore from Rs 81.61 crore as consumer spending fell because of the pandemic.
5 Global Stock Market Tips by Gaurab Parija
Invest in global stock markets to give your portfolio an international edge
The alarm on your Apple phone diligently wakes you up every morning, not getting offending even after you hit ‘snooze’ multiple times. Once you are up, your day is filled with Zoom meetings and Google Meetups. In your busy day, you also find time to go online and purchase a fantastic study table from the Ikea online store for your daughter. In the evening, once your day has almost come to an end, you sit back on your couch and watch your favourite Netflix series. It has been a good day. However, have you realised your extensive use of global products and services? Probably not!
Also Read: - How to invest in stock market for beginners
The fact of the matter is that the world is shrinking – you can now travel almost anywhere in the world, interact with people across the globe, and use products and services of companies located in different countries. Just like your daily life has become global, why can’t your investment portfolio as well. Investing in global stock markets, especially through international mutual funds can give a definite edge to your portfolio.
Guest: Mr. Gaurab Parija, Head – Sales & Marketing, IDFC Asset Management Company.
With over 22 years of retail sales and distribution experience, Gaurab has spent considerable time in breaking down investment products for investors and making them more palatable.
1. What is international investing?
Investing in asset classes and global stock markets, or markets outside India, or your domestic market, is termed as international investing. People usually invest widely in their home countries and prefer such investments because of the inherent country bias. Country bias involves two aspects – since investment requires money, people are wary of investing it in a landscape not known to them.
Additionally, they also find it easier to understand and track the records of home-based companies. Investing in global stock markets takes your portfolio to the next level. In the US, Sir John Templeton showed residents that there is life and investment opportunities beyond their own country, bringing about the concept of international investing. The progress in India has been fairly good – there is a long way to go but we are seeing increasing interest in the segment.
2. Why should investors consider investing in international stocks and, more importantly, who should consider investing in international stocks?
People are now increasingly aware that asset allocation is an important part of wealth creation. Parking funds in diverse asset classes, be it gold, stocks, debt, real estate, etc., reduces risk. Further, as markets are getting more and more linked, optimal asset allocation should also include geographical diversification via investment in global stock markets.
The reasons behind this include:
i. Other countries might be doing relatively better when your country is facing volatility. Find countries with little or no correlation to your own country.
ii. If you know foreign companies which are doing very well, invest in them. The aim is to participate in growth opportunities across geographies. We are already helping foreign companies like Uber and Apple grow by consuming their products, so why not participate in their growth stories by investing in US stock markets?
iii. From a global GDP perspective, India only comprises 3%. Limiting investment to India leaves out 97% of the global GDP.
iv. Exposure to developed markets like the US stock market can reduce portfolio volatility.
Given the fact that the ease of investment has increased over the years, anyone with a reasonable amount of wealth should consider investing in global stock markets, based on their personal risk profiles and financial goals. Also, families that have dollar or other currency liabilities due to their children studying abroad should create dollar assets, by investing in US stock markets, to balance it out. Investments in global stock markets can help you create dollar assets. But it is important for you to remember that you are not just investing for the dollar edge but also for strong returns and diversification.
3. As an Indian investor, there are basically two ways by which I can invest in international stocks – either directly or through international mutual funds. In your opinion, which option would be better and why? – Can we also define international mutual funds here?
In a person’s life, there are two sources of wealth creation – salary or income and investment. Your focus should be on enhancing income by improving your career and the investment part should be managed by professionals or mutual funds. If you are a part of the investment industry and know all the underlying aspects, you can invest directly. However, if you don’t really know about underlying stocks, it is better not to attempt direct investing in global stock markets. Further, when it comes to international investing, you may not know the inherent vagaries. Therefore, it might be better to invest via international mutual funds.
International mutual funds invest in foreign companies that are listed on global stock exchanges. Such funds now offer access to all asset classes, making it better to invest via these schemes. Opportunities available through international mutual funds include investing in US stock markets like the NASDAQ and S&P 500, FAANG companies, ESG companies, consumption oriented funds, gold/mining funds, global funds, emerging market funds, and Chinese funds. However, from an Indian perspective, international investment should be a complement, not the core of your portfolio. It is best to invest 15-20% of your corpus in such funds. Choose international mutual funds following broad foreign markets and you can potentially add good value to your portfolio.
4. What are the risks in international investing ?
The risks inherent in international investing include:
i. Inability to track what the underlying company does, if you are investing on your own.
ii. Currency risk as we never know what might happen in the future. All currencies have a potential for depreciation.
iii. Choice of underlying stock
iv. The normal risk in equities, layered with currency depreciation, is the risk you take when investing in international mutual funds.
Investing via international mutual funds is more secure as they make a full assessment of the stocks, reducing the underlying risk considerably.
5. What should be our key takeaways and what is your advice to investors?
i. There are several clear benefits to investing in global stock markets, including geographical diversification, which can help you reduce the impact of volatility on your portfolio.
ii. Developed market equities, like US stock markets, are more stable than emerging market equities.
iii. International mutual funds offer a fillip to portfolio returns through participation in themes not available in domestic markets.
iv. Always keep in mind that limiting the downside is as important as cashing in on the upside.
v. If you have recently begun investing in equities, first get a hang of the domestic equities and then move to global stock markets.
My final advice would be to avoid comparing Indian and international funds. Your equation should not be based on choosing between India or international, it should be a combination of Indian and international funds as they complement each other. This is the way to sound investing.
USD/INR: Why rupee may not weaken substantially even when Fed begins tapering
The Indian rupee will likely trade in a stable range over the next year and is unlikely to depreciate substantially against the dollar even when the US Federal Reserve begins to wind down its monetary stimulus, a CLSA report says.
The rupee has gained in recent months to trade around 73.7 to a dollar last week after falling past 75 in April when India was in the grip of a brutal second wave of the Covid-19 pandemic. But talk of the Fed beginning to taper the stimulus it gave to revive the US economy if the pandemic subsides has raised concerns of its adverse impact on emerging economies, similar to the effect the 2013 ‘taper tantrum’ had on many countries including India.
However, CLSA analyst Indranil Sen Gupta said in a report titled ‘A virtuous INR cycle’ that India’s high foreign exchange reserves will guard against any speculative attacks on the rupee this time around.
The brokerage expectsthe rupee to trade in a range of Rs73-76.50 to one dollar in 2022-23 and says large depreciation, as seen in 2011, 2013 and 2018, is unlikely even if the Fed tapers.The brokerage expects rupee depreciation slowing to an average 2% a year from 5.2% in 2013-20.
A stable currency is important for foreign investment flows, both into equities and debt, as investors want to ensure their capital is not eroded by high depreciation. This is where high forex reserves become critical.
Why forex reserves are important to stabilise rupee
The rupee is vulnerable to speculative attacks because of India’s chronic and often large current account deficit. High forex reserves provide the comfort that the RBI will be able to fund any outflow without any runaway depreciation.
Traditionally, RBI has maintained that it intervenes in the forex market only to smoothen volatility. However, RBI governor Shaktikanta Das has shifted to an explicit policy of building forex reserves.
Indeed, the RBI has been building high forex reserves to stabilise rupee expectations. It has seized the opportunity offered by the surge in global liquidity, fall in oil prices and collapse in domestic import demand due to the Covid-19 shock. According to CLSA, the RBI has bought an estimated $180 billion in spot markets as well as in forwards since March 2020. India had forex reserves of about $641 billion as of last week.
“Under uncertain global economic environment, EMEs (emerging market economies) typically remain at the receiving end. In order to mitigate global spill-overs, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in currency manipulators list or monitoring list of the US Treasury,” Das said recently.
CLSA, however, says that while the US has put India on the currency manipulator watch list, it is unlikely the RBI will ever meet the three criteria for being actually marked as a currency manipulator. These parameters are: one, a bilateral trade surplus with the US of more than $20 billion; two, a current account surplus of at least 3% of gross domestic product (GDP); and three, net purchases of foreign currency of 2% of GDP over 12 months.
India has a trade surplus with the US, though not enough to meet the parameter cited above. Also, India has had traditionally a current account deficit, largely because of a high trade deficit, though the country had a surplus in 2020-21 as imports nosedived due to low crude oil prices and pandemic-related restrictions.
CLSA projects India’s current account deficit at -0.8% of GDP in 2021-22 and -1.2% in 2022-23 from a surplus of 0.9% in 2020-21 with the normalization of economic activity.
What will RBI do?
CLSA says it expects the RBI to keep buying dollars when the greenback weakens, but says forex reserves of around $600 billion are adequate for India as this would suffice for 10 months of imports. “We expect RBI Governor Das to continue to build FX reserves to guard against contagion in an uncertain world. The RBI should continue to buy FX reserves when the USD weakens. It will let the INR weaken when the USD strengthens,” the brokerage says.
According to CLSA, the RBI wouldn’t want rupee appreciation even though any appreciation will attract capital flows. This is because the rupee’s appreciation will lead to mark-to-market hits on the RBI balance sheet. Also, a weaker currency supports India’s exports.
However, the RBI wouldn’t want large-scale depreciation either. “We think that the RBI will not favour large-scale depreciation as that will hurt capital flows that are the mainstay of funding a chronic current account deficit,” CLSA says.