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.

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.