We have seen PSUs make a comeback. Air India returns to the Tatas. The finance minister has told the United States that she is trying to get the LIC IPO through even before March 2022. How hot is this space for Kotak AMC?
We have been very selective buyers of power supplies. The real challenge with RSUs is administrative flexibility and compensation. Many PSUs have excellent manpower and resources, but they do not necessarily have the administrative freedom with which to compete with the private sector. For example, if you look at a private sector bank, a lot of people continue to do the same function for a long time and develop expertise and in public sector banks you have a rotation every three years.
If you look at the compensation policy, the average pay scale in PSU banks is higher than the average pay scale in private sector banks. In PSUs, the low end gets paid a lot more while being paid a lot lower at the high end. In private sector banks, it is the opposite. So how do you retain talent? It is the challenges of administrative freedom and the compensation philosophy that have made us very selective about PSUs. They were available at a very low price and therefore there was some revaluation thanks to the policy of strategic divestment followed by the government. One of India’s growth stories is where the government wanted to be in business to government having nothing to do in business.
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This whole argument about the existence of a bubble and quality stocks have started again. Should we take a serious look at the valuation proposition that some of the companies in India are priced to perfection and shareholders are unlikely to generate good returns?
I have a very simple common sense philosophy: silver, gold and diamonds are precious and of good quality. You’re not going to buy silver at the price of gold, you’re not going to buy gold at the price of diamonds. Gold is quality without a doubt, but you are not paying the price of diamonds for it. When you buy quality at any price, you are compromising on your future returns. You assume that these evaluations will go on forever. They are definitely quality companies, but is this company rated because of this quality company or because the free float is limited? We have to make a very critical judgment on this. We believe growth at any cost is not good for investor returns, growth at a reasonable price is good enough for investor returns.
Do you think the dilemma for an investor or a fund manager is that there is more money and less ideas? Are we going through such a patch?
Fortunately, a lot of IPOs are coming. There is a good supply from promoters, including private equity funds, and I don’t think there is a shortage of ideas. The real challenge is to come up with ideas where you think the valuations are reasonable and you have a reasonable trade-off between risk and return. We can’t be lucky like in March 2020 where everything you bought had a good advantage and a limited disadvantage from a valuation perspective. No question that in March 2020, we thought that Sensex would reach 62,000 people in October 2021! But it is clear that there was less of the decline and more of the rise over a period of time, but we had no idea that the rise would materialize so quickly.
Today, we struggle to find companies with reasonably balanced risk and return. There are stocks that go up a lot, probably way ahead of their fundamentals as floating stocks are limited and cornered by some strong hands.
Given that we have bundled the IPOs over the next three to six weeks and they are important, Nykaa, hopefully Paytm, policybazaar and Star Insurance, could this be the turning point for the market in terms of the way the money can suddenly come out of the old dynamic stocks on the retail side, the HNI side and into some of these IPOs?
Sebi has done a great job of ensuring that only good companies come out with IPOs. The second thing concerns evaluation. As long as there are benefits for investors, the IPO market will invariably attract capital. The 2003 bear market ended with the
IPO. It was a great deal available at a good price, giving investors an edge. It attracted investors who had burned their fingers in the technology, media and telecom bubble and from 2003 to 2008, we saw a good recovery in the market. Much can be contributed to the positive investor experience during the Maruti Suzuki IPO. So IPOs can bring capital to the market as long as they are good companies and are reasonably priced.
Gold imports nearly tripled in the first six months of the year, reaching $ 24 billion in the April-September quarter. What does this tell you about the nature of investments and investors right now and their rush for a safer haven?
When gold lending rose, critics said it showed desperation. Now I hope they will accept that when gold imports increase it shows prosperity. But from my point of view, gold imports mostly show capital flowing out of India. On the one hand, we get all the foreign direct investment and the foreign portfolio investment, and then we go out and import gold and put those dollars back. Obviously, we are the biggest holders of gold in the world. We don’t even know how much gold we have because most of that gold is locked in tijoris and bank lockers. It is in a parallel economy, in the underground economy.
Such financial misallocation is one of the reasons why India’s growth rate has not accelerated as much as it should have. Our economies are unevenly distributed in the import of gold and this gold entering the country does not create economic activity. From an investor perspective, it is obvious that gold offers them diversification away from concentration in India, it gives them global exposure and we need to tackle this in such a way that financial investing is as easy as buying gold. Today you can walk into a jewelry store and buy gold. Buying financial products is not that easy.
In addition, we need to inform clients that they already own a large amount of gold and therefore it will be more appropriate to make financial investments. It will also help the country create better opportunities for growth.
In addition, we must provide offshore investment opportunities through fund of fund offers or offshore equity programs offered by mutual funds. It gives the same diversification that gold will provide. Gold is therefore a hundred-year-old habit of the Indians. We need to deal with it in a gradual manner and by facilitating financial investment, offering offshore investment opportunities and also providing financial education to investors.