People should always be focused on high quality companies, but the opportunities that present themselves will be very different from what we saw in 2018 and 2019 when the markets at the top got very tight. I see a much wider range of industries starting to add to the overall profit pool, says Hiren Ved, Co-founder and full-time director, Capital of alchemy
The rising tide lifts everything and many people are now advocating that the focus should be narrowed. They also say the need to focus on the companies that can withstand the pressures of rising commodity prices. So should one focus on the top companies in each sector?
In fact, I believe that while there has been very strong consolidation in every sector and the big ones getting bigger and the strong getting stronger, the breadth of the market is likely to stay much wider and the opportunities will remain much bigger.
People should always be focused on high quality companies, but the opportunities that present themselves will be very different from what we saw in 2018 and 2019 when the markets at the top got very tight. That should change significantly in the future. There are two trends that will play out at the same time. One is that in several sectors where there is a large disorganized market and it is fragmented, the market leaders continue to consolidate and have a larger share of the profit pool that will not stop, but at the same time there are new sectors or sectors entering the haven’t done anything in the last few years.
Capital goods, manufacturing, automobiles, auto accessories – there are so many sectors that have made very tepid profits over the past 10 years. Commodities and metals will also contribute to earnings growth. What we’ve had over the past three to four years has just been an extreme concentration of profitability at the top. As the top players continue to consolidate the profit cycle this time around, I see a much wider range of industries starting to add to the overall profit pool and we shouldn’t miss that.
Also read: The result could be 28-30% in the next three years: Hiren Ved
Both trends are likely to play out simultaneously over the next few years. For example there are new growth stories like specialty chemicals. Look at the total profits of these companies three to four years ago and what could happen to that cohort three to four years later. The sector is likely to grow much larger in terms of both market cap and profitability.
I don’t expect the width to shrink. I assume that the breadth will expand and that this time, unlike in recent years, both medium-sized and small companies will also contribute to profitability.
Can this pool of profitability be disrupted by the new age corporations going on Dalal Street? Before Diwali we might get a Paytm, a Nykaa, a Policybazar, a Mobikwik; soon after there is an oyo and the list goes on.
There is definitely a long line of new economy IPOs out there. These will expand the opportunities for investors in the market. Investors need to see these companies very differently than they have traditionally seen. The path to profitability for these companies will likely be longer. It may take the next two to four to five years for these businesses, like some of the great franchises of today, to become hugely profitable. But you have to be very picky and picky about which of these New Age companies to choose.
Since capital is also growing in the capital markets, I am not worried that the IPOs, as in the past, will drain all of the liquidity. Much more capital is coming into the financial markets and the depth and participation increases. The new IPOs can easily be absorbed with our liquidity.
There are even more discerning investors willing to take these bets and wait before these companies become profitable. There will be volatility at times and we are willing to accept it then this is the game for you. Otherwise just stick with the traditional matrix and it’s fine, options are everywhere.