Dalal Street Voice: Even if there is a 5-10% dip in SAMVAT 2078, don’t be afraid to buy: Nikhil Kamath, Co-founder of Zerodha

Nikhil Kamath, Co-founder, True Beacon and Zerodha, said the correction has been par for the course, and even after the correction at 17,800, the markets still seem frothy and expensive. Considering the magnitude of the rally he witnessed, 1000 points was nothing.

True Beacon, an alternative investment fund, has grown to over Rs 1,300 crore fund within a span of two years. Nikhil Kamath, along with his elder brother Nithin Kamath, founded True Beacon, while they were already running a successful, stock-brokering firm Zerodha.

In an interview with Zeebiz's Kshitij Anand, Kamath said even if there's a 5-10% correction going forward, long term, it's probably good for the market. Edited Excerpts:

Q) The market seems to have given an opportunity to investors, who are waiting on sidelines to enter. The Nifty is down by about 1000 points. What would be your advice to investors on Diwali 2021?

A) I think the correction has been par for the course, and even after the correction at 17,800, the markets still seem frothy and expensive. Considering the magnitude of the rally we just witnessed, 1000 points is nothing.

Even if you look at October alone, we ended the month up by about one per cent. So, there is some slowdown or checks in the market, which is good.

And, I would even go to the extent by saying, even if there's a 5-10% correction going forward, long term it's probably good for the market.

Q) A flurry of IPOs hits the street ahead of Diwali, and plenty are lined up for post festive season, especially Paytm, which plans to raise around Rs 16,000 crore. And retail investors are aggressive in IPOs. That's what we have seen, especially with respect to the subscription levels. So how do you see this behavior?

A) Well, honestly, most of the IPOs, I don't understand. These are companies, which do not have any visible path to profitability. I hope this is not the case.

But many people seem to take advantage of the excessive hubris in the market right now and the kind of timing their IPOs with the market frenzy.

Generally, I believe that smart money getting out to retail money. IPOs should be carefully timed so there is enough room for retail to make money over the long run.

But, coming out with these IPOs at exorbitant valuations today, you're risking the retail, which in many cases, entering the market for the first time.

No one wants to get them stuck with something that has high multiple, which might not be warranted. I would advise caution, some amount of skepticism.

Don't buy an IPO just because other people are buying it, actually research the business, see if it makes sense for you and only then apply.

Q) What are your views on the September quarter earnings?

A) Well, I think earnings will see a slowdown. If you look at the economy, we have barely gone back to a place, where we were pre-pandemic.

The numbers in the short term look better because all the numbers coming out now are comparable to when we had a complete lockdown during the pandemic, and they do look good based on that.

But, if you compare the numbers to two years prior, or a year and a half prior, earnings are not really looking that good.

I don't see too much earnings growth, either in the mid-cap, or the large-cap companies. If you leave the larger companies aside, there is a huge sector in the market, and that is the MSME sector, which is a big employer in India, where the earnings are bad and there is a crisis on many levels.

I'm not too optimistic about the earning numbers that are coming out today. It'd be interesting to watch what happens not in this quarter maybe, but what will happen in the next quarter when things will normalize a bit more.

Q) And there's another trend that we are seeing apart from the flurry of money coming from retail investors. Well, foreign investors seem to be taking the South road. So, how are they viewing India? In fact, they pulled out more than Rs 12,000 crore from the Indian markets in October.

A) Yeah, so foreign money, there is no real way to predict trends there. It is opportunistic money that comes in when they have excessive liquidity.

I think, India as a market will largely remain attractive to foreign investors. Considering what has happened with China, and also a hedge to their (FIIs) own internal inflation, they can't really keep liquidity onshore without doing too much with it.

Also, it makes sense to invest in the emerging markets. The trend will largely continue, notwithstanding the withdrawals we saw in October.

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Q) Right. And what are your recommendations to investors for Samvat 2078? Which sectors are likely to hog the limelight?

A) Real estate has been the flavour of the season. It is definitely in news. And, you see a lot of on-ground activity as well.

But I would like to take a contrarian view here and say shy away from the real estate. It seems fairly valued, if not excessively valued.

Manufacturing, IT, Pharma, a lot has been said about these sectors, but they are fairly priced too today. I would assume that IT and Pharma, amidst all the sectors that are overpriced today, are probably the most reasonable, because they have a longer-term.

They have a longer runway and longer-term contracts and more scope and potential to do well, at least over the next three or four quarters.

Q) We just recently read that at just 35, you're the youngest in the EdelGive Hurun India Philanthropy List 2021. So, what are you planning to do, and where did you get this inspiration from?

A) The disparity in wealth, not just in India, but across the world has become really stark. It is evident for everyone to see what the pandemic has done, and that has exaggerated the difference quickly.

The trend is not sustainable, and more people need to come out of that lower-income bracket. Everybody has to help out in any way they can.

But I think systemically there are many policy changes that need to be implemented in India to make that happen.

I have spoken about this before, but things like inheritance tax, property tax, taxing the wealthy in a more efficient manner are the needs of the hour. And I hope the government moves in this direction.

There is a problem when you tax income that discourages investment. I don't think the entrepreneurs, who are going out today and working hard, think the income should be taxed. But at the end of their life when they're passing on their money to the next generation, I think inheritance tax is a huge case to be made for it.

There is a lot of precedents: America has inheritance taxes, the UK has estate taxes, all-around 30-40%, so no reason why India should not start off with a 10-20% inheritance tax.

Q) Talking about global, some of the global investment banks such as Morgan Stanley and UBS have sort of downgraded the Indian markets recently, and that could be one of the reasons why we saw the sell-off in the week gone by, so what are your views on that?

A) I don't understand how these foreign banks rate India as a country. I think we have a much better view of what is going on in the economy.

There are many green shoots in the economy today, and there are many industries that are doing well. I think the problem for India right now is the growth, which is not inclusive.

There are a few large conglomerates that are continuing to grow, whereas a larger section of society and smaller companies are struggling with the pandemic.

We note what their view is about India, but I think we should pay more attention to the local views, which are in front of our eyes, to make up our mind about what direction the markets might take next.

Q) What are your expectations from the small and the mid-cap space for Samvat 2078?

A) I think the rally has been substantial. I would be happy if the markets were to stop rallying and remain range-bound in a 10-15% range over the next 12 months.

I think that would be good for everybody in the market to take a breather and look back at how the madness around the pandemic has been and get back to normalcy in a way.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)