Beware: All is Not Well on D-Street

Over the weekend I came across a wonderful mythological piece on twitter from the Mahabharata.

It talked about the element of luck as well as the support from the eco-system for success in one's life.

When the battle of Kurukshetra was at its peak, Arjun and Karna were fighting each other. It's said even the Gods were watching this epic battle between the two great warriors.

Arjun shot arrows with such ferocity that Karna's chariot would go back 25-30 feet. People were amazed to witness such skills.

Karna too gave a tough fight with his arrows displacing Arjun's chariot 3-4 feet.

However, Lord Krishna would applaud Karna every time his arrows displaced Arjun's chariot but not even once did he acknowledge Arjun's achievements.

At days end, a disappointed Arjun asked Lord Krishna, why Karna was being applauded for the mediocre performance while his arrows were displacing Karna's chariot with much higher intensity.

Lord Krishna smiled and replied to Arjun saying, his chariot was protected by Lord Hanuman on the flag at the top, Sheshnag at its wheels, and by Lord Krishna himself as the charioteer.

However, Karna's chariot was not protected by anyone, he was all by himself fighting valiantly.

It's said after the battle ended Lord Krishna refused to get off the chariot till Arjun got down. After Lord Krishna alighted, it caught fire and was reduced to dust.

Lord Krishna is to Arjun what Liquidity is to the Stock Market

With the market hitting new all-time highs every day and corrections lasting for barley few days (not even a week), it's pertinent to stay cautious, especially in certain pockets of the market.

I'm sure you must have read the famous quote, 'Don't confuse brains with a bull market'. It's important to remember this in the bull market we are in now.

In a previous editorial, I wrote about stocks going up along with the market. Making money has never been so easy, isn't it?

Words like supercycle, earnings boom, re-rating are used so loosely.

And the IPO market has become a joke.

While writing this editorial, I got an update on my phone which read - 8 months in 2021 and 27 IPOs with a total issue size of Rs 40 bn have already hit the market. A headline in mid-August read - 32 DRHPs filed in 30 days.

Does this ring the bell of 2007 and 2000? Market tops for both these cases happened during a deluge of IPOs.

A GMO report stated, record high IPO stock issuance at Wall Street is an ominous sign which should put investors on the edge.

The reason why Wall Street and Dalal Street are getting flooded with IPOs is because there are eager buyers who are insensitive to the price.

The Greater Fool Theory is at Work

The greater fool theory is the idea that, during a market bubble, one can make money by buying overvalued assets and selling them for a pro?t later.

This is because it will always be possible to ?nd someone who is willing to pay a higher price. We are certainly seeing this play out in the IPO market right now.

I often wonder why nobody is talking about downside risks. Not only the IPO space but also in the broader market. Many stocks are showing signs of over exuberance.

Here's a good example...

Jubilant Foodworks - A Good Example of the Market's Over Exuberance

This company is my personal favourite in terms of product and brand.

The stock is a market darling. The company ticks all the boxes right from business model to branding.

But the one thing which worries me is the crazy valuations. The stock is currently trading at PE ratio of more than 130 times. This means you are paying more that Rs 130 for every Re 1 earned by the company to buy the stock.

Let that sink in.

Any earnings disappointment would mean the stock getting hammered. The margin for error in such expensive stocks is wafer thin.

It's the Zomato listing effect which is leading to the rush in Jubilant Foodworks.

The logic goes like this: If Zomato is available at a market cap of Rs 1 Tn, then how can Jubilant Foods, a more efficient business with a better balance sheet, be worth half of that.

I've hardly read any research report which highlights the downside risks for Jubilant Foodworks.

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Why is nobody talking about the huge investments needed to scale up in new ventures like Chinese and Biryani dine in restaurants? What if these fail?

Isn't the market being too optimistic? Have we forgotten how Dunkin Donuts was a colossal failure for Jubilant Foodworks.

In such euphoric times, evaluating the downside risks is crucial. Understand the risk reward ratio of these stocks.

Does that mean I am predicting a crash in Jubilant Foods?

No.

But I can guarantee there is no way the stock can re-rate higher from this level. The doesn't seem to be more juice left in the stock.

Conclusion...

Just like Lord Krishna was the external force behind Arjun's victory in Kurukshetra, external factors such as liquidity, lack of opportunities in other asset classes, and sentiment are fuelling the market.

I personally believe the era of 'buy anything and it will go up' is behind us. Investors will have to get used to moderate returns going ahead.

Use this bull market to undo your mistakes.

Sell your poor quality stocks which have run up due to liquidity and hold on to fundamentally strong stocks.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure