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  • Mega e-comm IPOs likely soon, but watch valuations: Rajeev Thakkar, PPFAS MF

    Mr. Rajeev Thakkar's interview by The Economic Times, April 14, 2016

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    Mega e-comm IPOs likely soon, but watch valuations: Rajeev Thakkar, PPFAS MF
    "Some e-commerce companies will continue operating and may go for listing but it remains to be seen how investors will value them in the absence of profits."

    While domestic macro indicators are looking up fast, equities can still offer only moderate returns of 10-15 per cent in the coming years, says Rajeev Thakkar, CIO and Director at PPFAS Mutual Fund. In an interview with Amit Mudgill of, he said one may expect mega ecommerce IPOs in the coming days, but believes valuing them could be a major challenge. Excerpts: FII flows are back on stabilising crude prices, receding China fears and recent dovish commentary from the US Fed. Where is the market heading? What is the CAGR return that you are looking at for equities, say Sensex or Nifty50, over the next three to five years?
    Rajeev Thakkar: Currently, we are in a low-inflation, low-interest rates and low growth environment globally. Given that nominal sales and profit growth could be muted in a low inflation environment, one should moderate return expectations. We could possibly see the equity indices giving around 10% - 15% CAGR over the coming years. It is however by no means certain. In the interim, we could see pressures from low commodity prices impacting commodity related sectors and financial stocks feeling the pain of elevated NPAs. What is the biggest fear that the market faces? What is the biggest hope? Mutual funds have seen massive outflows last month. Is it a sign that retail investors are turning cautious on equities post a year-long poor show?
    Rajeev Thakkar: The biggest fear in the Indian context would be the banking system hobbled by bad loans. The biggest hope is the longer-term reforms and initiatives being undertaken by the government (ease of doing business, make in India, power reforms, infrastructure build up and so on) resulting in Indian moving to a higher growth plane. Mutual fund outflows from what I am hearing were related to dividend payments, tax planning etc. and one should not read too much in a month's flows. There are many value investing principles. Which are the ones that you stress on the most?
    Rajeev Thakkar: There are broadly two styles of value investing. One is a pure Grahamian approach where stock are bought at rock bottom valuations and not much attention is paid to quality. These work out well in a market with activist investors, M&A activity and so on since the asset values / excess cash gets unlocked.
    In the Indian context, it may be better to go with the Buffett / Munger approach of buying quality businesses at a fair price. We place a lot of emphasis on management quality, business quality, and capital allocation. The earnings season is around the corner. What sales and profit growth numbers do you expect the financial year to end up with? Which are the pockets where one could see positive/negative surprises? Which are the pockets where you are finding a margin of safety?
    Rajeev Thakkar: We do not track all the companies and our approach is more bottom-up in terms of company selection. However given the kind of results so far, I would think that broadly FY 16 will show flattish profits over the previous year on an average.

    Much Indian consumption-related stocks (FMCG etc.) have been priced to perfection and any earnings disappointment there could lead to sell-offs. Selectively choosing private sector banks could offer value. Even though the secondary market has not performed well, we are seeing a flood of IPOs hitting the market. We recently saw the first e-commerce company getting listed on the stock exchanges. Can we see some mega e-commerce IPOs in the coming years that may change the way Sensex or Nifty50 composition looks?
    Rajeev Thakkar: One will have to wait and watch. Overall, people are wising up to the fact that one cannot have stratospheric valuations for companies showing sales growth only on the basis of discounts. There may be shake outs. Some well-established e-commerce companies will continue operating and may go for listing but it remains to be seen how investors will value them in the absence of profits. The recent RBI money policy, including a 25bps cut in reverse repo rate, is clearly seen as an attempt by the central bank to push lenders to pass on the recent rate cuts to end users. Will it help revive consumption demand? What are the consumption themes that you are pinning hopes on?
    Rajeev Thakkar: Consumption demand could anyway pick up due to pay commission, OROP etc. A 25 bp cut will only affect consumption at the margin. We are not investing on themes, rather than that we are looking at individual companies and businesses and buying wherever the business prospects are good and there is an adequate margin of safety.

    The original article could be seen here.

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