“We are in a bubble of epic proportions,” warns Siddhartha Bhaiya, Managing Director & Chief Investment Officer of Aequitas Investment Consultancy, during a candid conversation about the markets with Moneycontrol.com. The markets are highly overpriced if you exclude a few, and promoters are taking advantage of this to offload their stake. According to him, “India is not a healthy bull market at all.”
The Nifty is trading at a very high valuation. Currently, the Nifty is trading at a PE of 20x, and most of it is contributed by State Bank of India, NTPC, Coal India, and Power Grid Corporation of India. “The choking point is that nobody has these stocks in their portfolio,” said Bhaiya. If these stocks are excluded, then Nifty’s PE rises to more than 40, he pointed out.
Small and midcaps: Are the PE multiples justified?
With respect to the small and the midcaps, he raised the red flag, given that the P/E multiples are in excess of 50. What does 50 PE mean? He explained that, “first and foremost, one needs to get returns right. If a stock goes from Rs 100 to Rs 150, the returns are not Rs 50. The return is the inverse of the P/E multiple.” Elaborating on the point, he used an example to reiterate his concerns- “If you buy a stock at 4 PE multiple, then you’re expecting to get your capital back in four years. This brings down your return expectation to typically 25%. So, if you’re buying a stock at a 50 PE multiple, your return expectations are only 2%,” he added.
He emphasised why these valuations pose a risk for an average investor – “investors need to understand that at 50 PE, it’s the promoter who comes and sells.” Bhaiya added, “I’m going to say this in public. It is not SIP. It is SWT. It is a Systematic Wealth Transfer from India’s middle class to the rich.”
‘India not a healthy bull market’: Bhaiya
Alluding to his absence from the media for a while now, he said, ” There’s one reason why I’ve been off the media for the last one year. And I was warned by my team that please control your emotions today. What I’m seeing is not a healthy bull market. It’s not a healthy capital market.”
According to him, the narrative of India’s growth story has been around for the last 18 months. But everybody still complains about the last one year’s returns, because maximum money came in the past 18 months.
Corporate governance still a worry
The recent IPO rush is another aspect that’s been debated across the investment circles. Raising questions over the corporate governance issue in the context of promoter offloading, Bhaiya said that many IPOs came between 1991 and 1995, somewhere around 5,000, maybe another 10,000 have come since then. How many stocks are listed on NSE? Only 3,000 stocks trade on that exchange.
“What happened to the rest of them?” he asked. Corporate governance issues. Forget growth. Those companies sold promises of growth, and behind that, the stocks got delisted after some time.
Overall, Bhaiya is concerned about the overvaluation of Nifty along with issues in corporate governance, as the IPO rush continues across Indian markets.