Make peace with higher valuations as family offices flush with funds won’t let up, says Govind Parikh

Investors looking to buy stocks cheap are in for a long wait, given the structural changes in the market since 2016 that got accelerated following the coronavirus outbreak, veteran stock market investor Govind Parikh has said.

“You now have to change your thinking,” the reclusive but highly regarded Parikh said in a conversation with Moneycontrol. “…you cannot say that you will only buy stocks that are available at 12-15 PE (price to earnings) multiple. One should be prepared to buy at 25-30 PE if the company holds promise of growth in three years,” he said.

That’s because awareness about the stock market has increased tremendously in recent times, as evident from the trebling of demat accounts following the COVID outbreak, the sharp rise in broking accounts and in systematic investment plan (SIP) accounts of mutual funds.

But a major source of competition, even for professional investors, is the rush of funds from businessmen and business houses.

“Everybody had a lot of cash before demonetisation — SMEs, traders big and small, jewellers, realtors. When demonetisation came, all these players got their cash converted into the official channel. But because of e-commerce, many small firms lost business.

“Similarly. RERA hit some of the smaller developers hard. Also, as big companies became very big, the small companies struggled. And these are people having money ranging from Rs 50 lakh to hundreds of crores, intelligent people and not knowing what to do with the money in the bank. Then COVID hit. And lot of these people entered the market in a big way as bank deposit rates were low and good companies were available dirt cheap,” Parikh said.

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“What has happened is that a lot of family offices have tremendous amount of money. For instance, if the Cipla promoters were to sell their stake, that money is unlikely to be invested into another pharma plant. It will come to the financial markets.

“There are many other promoters who will get a fat cheque at some point. Then there are many other family offices where the businesses are already throwing up a lot of cash, and their investments of the last few years have appreciated massively. Add to that huge interest in India from markets like US, Japan, Russia, Saudi Arabia, both from institutions and wealthy individuals,” he said.

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“…so one has to make peace with the fact that valuations are likely to remain elevated for a while unless there is a major disappointment on the political front. Or if there is a sudden deluge of quality paper—either from a huge government undertaking like railways, or from some conglomerate. That could soak up liquidity and keep the market in check,” he said.