Markets are heated, caution is in order, but staying away is not: CA Chandan Agarwal

Investors are not wrong to be cautious in the market, but these are not enough reasons to abstain, said Chandan Agarwal, chartered accountant and head of a private investment group in Kolkata.

In an interview ahead of an investor summit, Agarwal spoke about his investment philosophy and new age companies, among others. Edited excerpts:

Many seasoned investors have become cautious in the market. Do you share this feeling?

We do not understand why there is so much caution. While people remained cautious the Sensex hit 60,000. We are not saying it is bad to be cautious but let me tell you market timing is impossible. There could be a 10% correction. So what? Let’s not forget that there was also a 20% increase.

So how should investors manage the risks of their personal portfolio?

You need to be very clear about the allocation of stocks and then stay focused. We’re not saying don’t shuffle your portfolio, but just do it to get out of an expensive stock and buy a cheaper one. Participation in retail changes the dynamics of the market. The change in the character of the market is becoming difficult to analyze, but it is a great time of transition where retail money comes into the picture.

But, aren’t the spike in retail participation and rising valuations generally signs of a market spike?

Yes. High valuations and this kind of influx of retail investors are certainly signs that the market is heated. If you are an investor, you should be ready for a 10-20% correction. But who knows when this will happen? What if the market rose another 20% after the correction?

There are individual actions that seem expensive. You can sell them, but you can’t dump everything. It is important that you stay invested. Otherwise, you will lose the best. We are in uncharted territory and the economy is recovering. At one level, not all of the analysis of valuations is accurate.

One is business profits and the second is discounting (valuations). Profits look very good as the government and central bank support growth. On the valuation side, since interest rates are so low and earnings are picking up, no one knows if valuations should be 25x, 45x, or even 50x. The positives are manifold and while investors are not wrong to be cautious on some points, these are not sufficient reasons to stay out of the market.

How do you feel from foreign fund managers about India?

Foreign investors synchronize the market much more than even retail investors. At the moment, they are not very optimistic about India. They are not very happy with the type of activity in the IPO market and the appetite of retailers either. When Indians sell, they want to buy. But the retail money was so big that they overwhelmed the REIT flows this time around. This is clear from the fact that the market is on the rise despite the sale of REITs. REITs worried about the third wave (Covid). So once the picture is clearer, you might see huge REIT buys.

How will the markets react if there is a third wave?

Now we spend a lot of time forecasting the third wave. Many people say it will peak in October. How can we do this when the third wave hasn’t even started? But what people don’t realize is that if there is a third wave, central banks could expand their accommodative monetary policies.

Where do you bet your money these days?

We spend a lot of time researching and reviewing digital companies like Zomato and many others looking to make the list. For us, this is counterintuitive because these are businesses that are not profitable. It is important to understand how to value them based on experiences abroad.

Orthodox investors are struggling to value these companies.

In these companies, growth investments go through the P&L (profit & loss) and not through the balance sheet.

For example, if a cement company earns Rs 2,000 crore and puts up an additional Rs 4,000 crore in capital goods, it will be capitalized on the balance sheet. So the profit looks like Rs 2,000 crore and when they order the plant worth Rs 4,000 crore next year they would earn another Rs 1,000 crore and this is how the Rs 2,000 crore of profit goes at Rs 3,000 crore.

In digital businesses, if they spend Rs 2,000 crore to acquire new customers, that money is immediately debited to the income statement. So, they show profit of Rs 1,000 crore and loss of Rs 2,000 crore. So the net loss is Rs 1,000 crore. Thus, one has to understand how much of the operating expenses relate to the growth investments that occur in the income statement. Does the company have good gross margins? Is it inherently profitable? Does it have a ladder? Does he have a great opportunity? Does it have a good network and a good client connection? These are the questions we try to find answers to by looking at these companies.

But aren’t the valuations of these companies high?

Yes, valuations are high. But you should only buy that business that you understand. The challenge is that every business is unique. Understanding digital mainstream businesses requires a different mindset. When digital businesses fail, they fail horribly. They go up and down very quickly. So, an understanding of the business, management and valuations is just as important.

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Posted on: Thursday September 30th, 2021 4:33 PM IST


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