3 reasons you can’t do without tech stocks

Who says you can’t participate in US tech companies? Everybody in India is allowed to invest $2,50,000 abroad. Even Indian funds have US funds and you can go and participate in that, says Ajay Srivastava, CEO, Dimensions Corporate Finance.Wish you a very happy and prosperous and healthy 2021.Thank you very much and all the best to you. It is great news that now no one needs to work for themselves. They just need to put money and somebody else works for them. But are you beginning to question that model? Would it be as smooth sailing from the March recovery that we saw in 2020 or do you think it is time to get a little bit cautious?One should always be cautious. When you are buying C grade stocks, then you got to be extra cautious and that goes for whether the market is at a low or a high because that is where the problem comes in most portfolios. C grade stocks trouble the most and that is where you tend to put the larger amount of money. Having said that, if you follow the government policy, you are absolutely fine. It started with the tax cut — GST, LTRO — it is a brilliant way to give money to the corporates. RBI lends at 4% interest to the banks; the banks lend at 4-5-6-7% to the large corporate. Now what could have been better for them? There is a movement of absolute wealth from the account of the public. You tax the petrol but the tax rate for the corporates go down. If you are a stock market guy, you better be sure that these large companies are going to gain, they gain on tax cut, they gain on LTRO and they gain on all the tariffs barriers that are coming up now. Huge tariff barriers are coming up in India at this point of time. There is no reason to believe that these companies will not be supported. PLI is coming in. So the construct is very simple – large domestic companies are there and they will make the kind of profit we have never seen ever. So whether the valuation is right or wrong, who am I to argue? The fact is that these companies will make historically high profits in the next 12 to 24 months and that is a given on the back of a capital structure, the kind of liquidity which has come in. Lots of companies have raised money, lots of companies have done QIPs and there is abundant liquidity in the market. You could not have a better situation for larger corporates. You can take your pick on valuation but they are going to make more money than we ever dreamed of. Would IT be part of the pack? Today’s focus is on TCS’ earnings and then will come Infosys and the rest. But the stocks are very expensive. The beauty of these tech stocks is that tech is a major innovative industry and new players will come. But if you look at India, 20 years back, there were the same three top four players in the country, maybe Tech M came up. The same one exists 25 years later and they have become huge in terms of being size, scale and customer access. Globally also, these companies are now quite large and there are about two or three companies which can compete with TCS or Infosys at this point of time globally. Digital has been embraced totally maybe only in America. Their revenues from Europe or Asia is hardly anything. India is nothing to talk about. The digital revolution is just beginning and these companies are there to deliver. They give cash back to the shareholders, not like ITC where they build monuments for themselves in hotels which make no money. The guys have spent so much money making monuments. TCS gives money every year. Infosys gives dividends. There is no trouble in these companies. How does one understand the pricing in this sector? TCS at best will grow 12-14% and that is the most bullish number on the Street. Does a company growing at 12-14%, deserve a PE multiple of 40?As an investor, obviously you would like to lower the multiple to get in the company. The problem is that today if you look at what is happening globally, a company like Snowflake is running 70 times. US Nasdaq is full of sales multiples — be it Palantir, Snowflake or the biggest poster child Tesla. But that is not the argument. The argument here is that these companies have a moat which is almost insurmountable at this point of time and that lends credence to the fact that you have assured annuity income and revenues coming from them. It is not like Tata Motors where some cars may do well, some cars may do badly. Out here, there are longer term, strategic contracts and their ability with the new technologies to build the moat is very strong. You give them a premium for that, that is one. Number two, the last three years have decisively changed the equation in favour of the companies vis-a-vis the employees. Earlier the biggest cost used to be the attrition of employees. They had to keep giving increases month after month to retain employees. Now that has settled down. Their attrition rates are down, people want to gravitate to larger companies and their biggest cost element for the first time in history is under severe control. They are able to control their people cost compared to what they make out of them. The third is you do not have a competitor and in the global context, how many Indian companies can say that? The last point which is more important is giving money to the shareholders. No more diversification, no more a Videocon, no more an ITC. These are clean, neat companies which do not acquire expensively. They are very prudent and frugal. They do not spend money on acquisition and write off goodwill. Now if you say let us take 30 times, maybe in a year, two years time your multiple will go down to 20 times; maybe if you bought in early, you should buy 30% now and another 20% if it corrects. The point is you cannot live without them in your portfolio. That is the bottom line. If Tesla is megatrend, EV is the future and if that is where the world is migrating, how can an Indian investor benefit from that? Three things; one, everybody in India is allowed to invest $2,50,000 abroad. Even Indian funds have US funds and you can go and participate in that. IndiaMART InterMESH had a meteoric rise starting from Rs 2,000-3,000. It has moved up rapidly because that is the only surrogate ecommerce company on a B2B basis in India in the listed space. You need to be there. The third one, this year is going to see the largest number of IPOs in this sector, in BYJU’S, Nykaa, and you have to be ready with cash. If you are 100% invested and do not have cash, you could be in trouble. One way to get in is mutual fund. There is even a listed ETF on Nasdaq. Do not worry. You can pay in rupees and acquire US assets at this point of time. Also, Indian equivalent companies are in the fray and more IPOs are coming into the system. All those should be a good part of the portfolio and I am sure this valuation is coming also because most people were not invested in these things. It is just what happened to Bitcoin and now the catch up is going on. If in India, your portfolio was primarily geared towards cement, etc, now there is a FOMO effect or these sectors are trying to catch up and that is driving the valuations of these companies. Look at the global construct; how many actually have exposure to an Amazon or a Facebook or a Google or a Microsoft? In terms of investment dollars, outside the US, hardly anybody. As the flavour catches on, can you imagine what is going to happen in the next three years as all Indians, Chinese, Africans and other nationalities start to allocate 10-12% of their investment surplus to US stocks? It is going to be the ride of your life.
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