Reallocate, do not exit in panic as there has been no big change in market fundamentals: Deepak Shenoy

The Nykaa IPO price is much higher than we expected it to be. It was a very highly valued stock even at Rs 50,000 or 60,000 crore market cap levels. Now it is a bit higher than that. So at best, I am looking at a very small tracking allocation, says Deepak Shenoy, Founder, Capital Mind

What have you sold and bought in the last one week?
Not that much. Mostly, we add to what we already hold if there is a better opportunity and if something is over allocated, we probably reduce that allocation and so on. So nothing spectacular has happened. The fall is over-exaggerated in the smallcaps and midcaps which have corrected but even the midcaps have not fallen to a great level and October is still positive for midcap indices and for the Nifty. Of course, the smallcap has just turned negative. So it is not that big a fall that would warrant a complete change in strategy.

It is important to understand that liquidity has dried up somewhat. We will see a lot of correction in the frothy valuation in some of the stocks which anyway was a concern earlier. So, perhaps more opportunities are opening up. I am not taking specific names but the market is starting to look interesting now.

How do the retail investors position themselves in the weeks to come? Do you expect a correction of more than 5% this time?
To be honest, retail investors positioning themselves for a 5% or 10% fall is useless as a phenomenon because how many times do you do this? There should be 5% or 10% corrections every year. Just because we have not had them for the last one-and-a-half years does not mean things have changed and in any case, if a person cannot take a 5% or 10% fall, it would be difficult for them to participate in markets anyhow because that is fairly normal in a market.

At a portfolio level, one should expect a minimum of a 10% move against you at any point in time and perhaps it is more important to expect a higher move as well because in the long term, markets correct 30-40%, then come back and so on. So if you are a long-term investor who is over-allocated in equities simply because markets have gone up, then you might consider rebalancing that allocation down to where you are comfortable. So if you are comfortable with a 70% equity, 30% debt allocation and that becomes 90% equity, then you can consider bringing that down.

But nobody should take action on expectations of a 5% fall. At best, we can make guesses but half the time, those guesses do not come out right. So there is no point betting on the guess of someone else as well. But even if it were to be so, I do not think getting out now and getting back in 10% down and then going up again and doing that stuff is a trader’s job because this is more full time in nature. A long term investor would probably not want to take drastic action.

Of course, if something fundamentally has changed very negatively, one wants to take action but I do not see that in at least most of the portfolio companies that we have. Fundamentally there has been degradation and at this point, we are just saying reallocate, do not exit in a panic as nothing fundamental has majorly changed yet.

Would you be a subscriber in Nykaa the price band of Rs 1,025-1,125?
The price is much higher than we expected it to be. It was a very highly valued stock even at Rs 50,000 or 60,000 crore market cap levels. Now it is a bit higher than that. So at best, I am looking at a very small tracking allocation on this because from here the price point of it going 4X or 5X looks relatively difficult. We might be more on the lines of saying we will build a position over time rather than something because we like the business. The business is fantastic. I think they do have a very attractive niche which has been serviced by a lot of players including online players; they have competition but cosmetics itself is a very large, fragmented market and has enough margins for people to be able to give a lot more service than they currently do.

It attracts small towns as well because cosmetic purchases can be done in privacy. So I think going forward this is a great business to be. Now the price you pay has a very big bearing on what kind of returns you will make in the longer term. I think this is a very high price and so I would only do a tracking allocation to start with. i think they are already acquiring another company right now. We might pay more than this in the future if their execution is right but then at least I will have a better idea of how things are going than we have right now.

How would you play the metals basket as a whole, what is your reading of the valuations as they currently stand?
Some of the metal players have managed to reduce debt quite substantially. Their enterprise values therefore have come down because enterprise value is equity plus debt. Equity is made a portion of it so EV/EBITDA ratio — which is how you would measure a lot of metal companies — still remains in seven to 10 range. Now this is more or less long term averages. However, there will be a point at which demand from the perspective of total price that they can charge for this will come down.

Metals in general play in cycles and these cycles tend to over exaggerate on the upside and on the downside as well. We have seen the downside earlier, we are seeing the upside right now. Whether the prices halt over here or continue to move up is a question which will help steel companies but at this point I think the bet is unfavourable. The cycle may turn in the next six months or so and we are seeing stock prices already talking about that and metal prices in certain areas are starting to slow down their rise or actually turning negative on a relative basis to the top.

I would say this is not a favourable bet to make in cyclical at this point today. One might get better points to participate in a steel rally than there is now. Trading bets of course are off. They are probably going to be based more on shorter term charts where many of these counters may still have a small bit of steam but from an investor point of view, this is a bad part of the cycle to get in. So while prices may continue to rise I am not betting too much on that right now.

Would you be tempted to add IT names in the current decline?
Some of the smallcap and midcap names had run up a little bit faster than expected. The larger cap names seem to be more stable so we are probably adding more in the larger caps. We continue to keep smallcaps or the midcaps at least that we own roughly flat or slightly trimming them.

The point over here is whether IT will continue to succeed? There are margin pressures because of salary increases, lack of availability, we are hearing a lot of projects they are signing on but the implementation is getting delayed because there is a lack of available talent to execute. A lot of project closures have happened but they have not started execution for long periods of time because of lack of supply so there is going to be a little bit of shock in terms of margins, in terms of projected revenue. Some of this is just froth coming out but overall I still like the IT sector.

In the next five years, we are going to see the overall IT index much higher than it is right now. I just feel that maybe temporarily we are going to see 10-15-20% as a cut and then start to come back. So we should expect or brace for at least that much of a cut. This entire quarter and the next may be a little bit tough on IT but I am okay with that, my exposure is relatively limited. I do not think I am going to over expose in this sector until the margin pressure starts to ease out, which will probably be early next year.

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