Irrational exuberance is evident; stock-picking discipline is more critical than ever: Ajay Srivastava

"Markets can be irrational. People can be irrational. They pay the price eventually. But the fact remains that there are in this economy, people are buying stocks left, right and centre at PE above 50, what more can one say about it," says Ajay Srivastava, CEO, Dimensions Corporate.

Markets are good, but will they remain good?
Ajay Srivastava: Let me put this way. We can have a debate on many things about the market, but one thing intrinsic in this market is the strength of the buying which is coming from Indian PMS, Indian investors and so on.

I think that is a big pillar, one cannot ignore it. Whether we like it or not, in terms of pure demand for equity, it is a serious bull market continuing in this scenario irrespective of whatever happens, they do what they want to do, and the proof is that companies which are growing at less than 5%, retail, are quoting at a PE of 100 plus.

Now imagine, I want to go to the market and today I buy a company at a PE of 100, who is growing at 5%, maybe growing at 20 also it does not matter, and that tells you it can be irrational bull market.

Markets can be irrational. People can be irrational. They pay the price eventually. But the fact remains that there are in this economy, people are buying stocks left, right and centre at PE above 50, what more can one say about it. One should enjoy the ride, but be careful that you are not the one left in the party standing when the music stops and that is the crucial point here that in this environment you got to be very stock specific.

If you want to play with the 100 plus PEs you got to be very careful. This is money to lose, money to burn. I would say spend your money sensibly rather than burning the money because 100 PEs end up in a disaster ultimately for investors.

So, not everything is at 100 PE. I mean, it is only the so-called hallowed digital company, a few defence names, some consumer names are still not 100, but yes, I mean 70-80. So, not everything is at 100 times or 70-80 times.
Ajay Srivastava: Two retail companies, India's two leading retail companies are at a PE of 100 at this point, plus 100 in fact, and one is selling normal goods which is at PE of 100 or one sells clothing and that is at 125 PE.

Now, defy my logic, defy what it is, but the share price can still go up, but two retail companies selling at PE in economy at 6% with the demand falling and growth in one company at 5% is 100 plus, that tells you most companies, most decent companies are at PEs of above 50 at this point of time.

How do you sensibly load them up? What you have you are enjoying it. Luckily our age is in our favour, that we bought our stocks luckily at a time when they were cheaper. But today the Indian stock market, the Indian mutual fund industry is sitting on a stockpile of stock with a valuation upside which is just beyond any growth parameter of the economy and that lies the risk.

So, as I said to you, being age, we are little benefit of, but people who are investing today I think have a tough time going to be for three-four years how to make a return, one big downturn and you saw what happened in last six months, can wipe out your two years return. So, older people are having a good time, younger guys gear up you need to be a lot more alert as to what is happening.

Oh, but the comments that you have been making, like everybody is wanting, like you were also saying that the age is a number and it is really not sounding that great at least to me, but for us for a generation of us, give us some sense that where do you find value, in terms of the valuation not everything is looking that expensive and there are some sectors which trade at a lower PE valuation, maybe insurance, maybe some metal counters. Auto stocks have corrected. Any such pocket that is looking good at this point in time, giving that comfort or you believe that even there the valuations are a bit stretched?
Ajay Srivastava: No, selectively you are right, absolutely seriously there are companies which are growing well and they are going well. But you asked the questions that what are the sectors in India which quoted low pes and I will tell you the sectors.

Look at a Cotton Yarn, lowest PE, it is a globally largest company quotes at a historically low PE, phenomenal cash generation, nobody wants to buy this stock. If you look at the paper industry, it is the same story out there, nobody wants to buy those stocks. They are orphan stocks absolutely.

Good profits, good cash, but nobody wants to buy. It remained low PE. It has been low PE, have been low PE forever. So, if you look at sugar industry, it is the same story. It is a low PE industry. So, I am not necessarily saying low PE is what one should look at.

But the fact is correlate with the growth rate and in that you ask sector in India, India's auto sector I think is the greatest sector because the ecosystem of auto, auto ancillaries, local demand put together make us the number one hub in the world today for autos.

You cannot ignore auto supply chain in the world without putting India into it and we are buying lots of European companies.

So, auto as a one segment, I would say certainly auto and engineering in India is going to be the biggest trend in the next 5 to 10 years and you got good companies there, select companies there, some are cheap, some are expensive, but this is one sector you can bank upon that they will achieve global dominance if not already done so.

Whether it is an end user two-wheeler industry or auto ancillaries, they are phenomenal. This infrastructure ecosystem cannot be recreated by any country in the world and so is engineering sector.

So, I think there is a great demand, great focus but as you always say an Indian investor loves to buy what sells in India, it has done well for itself and therefore you look at the Indian sector, our hotel sector has done phenomenally well continues to and in two years’ time it will see an overexpansion of a kind you will not see.

So, if you are buying hotel, you got to be careful, you exit in a year's time because suddenly there will be some 3,000 hotels coming into the picture at that point of time.

So, if you look at auto, hospital sector, hotel sector these are core to India, they will do well, sometime they will have a pockets of problems but ultimately they will stand out and do well and as Nikunj said e-commerce companies, a lot of companies have come on age, you have seen how they change the profile, loss making companies, like Myntra, etc, gone into profits, so e-commerce is coming of age.

If you are not part of it, I think you will be left behind because this is one sector which will continue to thrive and grow. Now, valuation concern yes, but you cannot ignore them at this point of time, that is the way the world will interact. it has paid the price of no innovation and I do not think Indian e-commerce is going that way.

I think they will innovate well. So compared to IT sector, our great bellwether, who took dividends home but did not reinvest, now that is a lesson for the Indian entrepreneurs, if we do not reinvest you do not survive.

Look at the Indian pharma companies, they are struggling today because they did not reinvest sufficiently. They are trying to do now, but they are doing it. But reinvestment is the name of the game. E-commerce is innovating. So, I think you got various sectors you can bank upon and see a good return from capital, but traditional sectors are not the ones going to give you the returns and that is the change of paradigm.