There's a bit of froth as valuations are a little overbearing; our markets are definitely heated up: Anil Singhvi

ICAN Investment Advisors founder and chairman Anil Singhvi Image: Hemant Mishra/Mint via Getty Images

This week, markets regulator Sebi set the cat among the pigeons when its chairperson, Madhabi Puri Buch, set off the alarm bells with a stark warning of a stock market bubble on account of frothy valuations in some pockets of the equity market. She red-flagged the danger of price manipulation across small and mid-cap stocks.

ICAN Investment Advisors founder and chairman Anil Singhvi, also a noted corporate governance veteran and the former managing director and CEO of Ambuja Cements, highlighted major risks for retail investors in current times of market exuberance. In a candid conversation on Forbes India Pathbreakers in January, Singhvi said, “Investors are not pricing risk appropriately, and they will lose. They’ll lose big money, no doubt about it.” In part two of the conversation Singhvi explains his concerns and lists the key risks retail investors need to be wary of in current times. Edited excerpts:

In times of exuberance: Investors beware

This is the first time I’m seeing that bank deposit rates are 8 percent plus, yet the hunger of the people, who are providing capital, is chasing larger returns without realising the risk. In my 40 years I have not seen that this—interest rates have gone up to 8 percent and yet fixed deposit is not fashionable and people want to participate in the equity market because, in the last three years, the equity markets have given the kind of returns that it is almost being taken for granted that “while buying equity, I'm not taking any risk”, which according to me is very wrong phenomena. I don't think that capital markets can run and can be bound for providing capital for all sorts of businesses and all sorts of characters, the right issues, and the IPOs. And look at the IPOs, when the IPO opens, it’s up some 2-3 times. You can't have that, there cannot be so much of a mispricing. In fact, often times you see, when the IPO is priced, it is also priced at a much higher rate. But when the market opens up and the IPO is listed, you see the prices have gone up even manifold thereafter. So definitely people are not pricing the risk appropriately, and they will lose. They'll lose big money, no doubt about it.

IPOs: Three big risks for retail investors

First and foremost, the business in which you're putting in money. What are the business risks and challenges? Have you understood that? Second, the people who are running the business. And thirdly, are you providing the capital for growth or providing capital for retirement of the debt or taking out some other investors? Often time in IPOs, I see that the local and the not so informed investors are taking the informed investors out. I cannot, I cannot just visualise this, that an informed, very intelligent investor is selling their shares and a completely ill-informed and uninformed investor is buying their shares. That's what is happening. That is where my worry is that he's [retail investor] getting into completely unknown waters. He's wanting to swim, and he's going to drown for sure. I think the wise capital is slightly conservative and unwise capital is euphoric. The wise capital is getting out and unwise capital is getting in. So, I think markets are to that extent… we are creating a bit of a froth. The valuations are a little overbearing and definitely our markets are right now heated up.

Also read: Price manipulation in SME IPOs? Sebi may soon tighten norms

India Inc: Quality of earnings

It has improved a lot, no doubt about it, but yet I think I would like to see more improvement in quality of earnings coming in play, and not have a thousand notes, the fine print which you see when the profit and loss account is there… as we call it notes to accounts. If we have zero notes to accounts that is the best thing to do. Directionally, we are going there. But still I think there will be more time required before we have no notes and these accounts to be read anywhere in the globe, they will reach the same profits. You will be surprised that the balance sheet which is submitted here is recasted when they are submitted in the US and profit numbers are very different. Why is that? They are recasted completely… including Infosys, supposedly the champion of good corporate governance… The profits are different when they submit their results for ADRs. That should not be the case. The Reserve Bank of India also lowered the bar for the banks that they are not as per Ind AS. Why? We should not come out with these artificial relaxations coming in play because providers of the capital or buyer of a share should be able to read what is presented to him. He can't go beyond the numbers. But if you change the rules of the game, the numbers are different.

Earnings outlook: The joker in the pack

Whatever the indices are and the numbers which I have seen, they look a little overpriced at 21-22 times earnings growth. Because we had a huge situation of pandemic, companies, those that are agile, set right their business practices in terms of cost, in terms of pricing, in terms of product, all of that, so definitely the earnings will be better. But I think we still have geopolitical issues. We are so dependent upon the external energy sources and that could be a huge joker in the pack and disrupt the earnings. So I think I would rather wait for a couple of quarters to see what is the momentum of our earnings because we still have or we still should plan for a downside on account of black swan events. I mean, every day you read something which is not making us very confident on how the energy game will be played with the Middle Eastern situation growing the way it is.