Do you also concur with the view that the de-rating is over and if yes what are you buying at the moment from this internet pack?
Well we are firm believers that these internet companies would do well. I think last year was a year where we saw significant price erosion on these companies but that was primarily because those IPOs were mispriced and there was a lot of enthusiasm in that sense but I think now the fact is that after having got listed these companies have made significant pivots to their business models where they realized that eventually businesses have to generate cash for their shareholders. They have to make money and generate cash for shareholders and we have clearly seen all of these companies making very rapid pivots towards that.
And as you rightly said after sharp price corrections valuations have become much more reasonable in that space. We like many of the names in the space. Overall in the space we remain very excited because we think this is going to be one of the fastest growing space within corporate India over the next five to 10 years and yes we have ownership across
, and within the space.
Well the path to profitability is getting defined. The supply from key investors and anchor investors is so large that for next couple of quarters there is going to be more supply and less demand?
Well I agree with your point and I think that is fair on part of those private equity investors because they have been early investors into these businesses and some of these investors have already been invested in these businesses for now almost seven, eight, 10 years. But having said that being a fundamental investor and if I look back at my experience of last 25 years in market if the underlying business is strong the business will find its own value and there will be enough takers for that.
I do not think so there is a dearth of buyers and as you said some of these private equity investors might want an exit I am sure there will be enough takers wanting to take whatever stock they might have to offer because eventually stock will gravitate towards their intrinsic value.
What is your outlook then when it comes to some of these businesses in particular I wanted to discuss given the fact that the company has been profitable from day one. Now the management as well saying that they are going to sustain their costs sub that 10% level going forward. Why do you think the Street had punished Nykaa so much was it purely because of that bonus issue or were there some other underlying factors?
Well I think as I said probably these businesses at the start of last year when they got IPOed they were grossly mispriced in terms of IPO pricing and I think they were riding on the tailwind of globally a lot of these internet companies which were doing phenomenally well in terms of the stock price movement.
With rising rates in US and probably a reality check I think we are finding these businesses are not getting measured or valued more in terms of traditional and sustainable valuation metrics because eventually the fact is the business of business is to generate profits and cash flows for shareholders by delivering whatever goods and services to customers.
I think Nykaa itself was in terms of valuations pretty rich in that sense and now probably we have seen moderation in that. The good thing about these businesses is that they want to be on a very high growth trajectory.
Most of these businesses given that customers and consumers are making a rapid pivot to internet and we are seeing significant increase in digitization and adoption of technology which will continue to grow at 30-40% over the next five years. And the good thing is most of these businesses internet– the nature of internet business is that these businesses are businesses with very high fixed cost structure which effectively means once you reach certain threshold levels then incrementally the operating leverage plays out and the incremental delta to profits on is very-very high.
And I think now that these businesses have reached operational breakeven the incremental profits for these businesses will be significantly higher over the next two to three years which should get reflected in their P&L.
