Why Shankar Sharma Is Skipping The Consumer Tech IPO Rush

Here's the edited excerpt of the interview:

Akhil Sharma is asking about whether your hybrid model of first global, what does it tell you about the current commodity cycle? Does the hybrid model tell you anything?

Shankar Sharma: That the commodity cycle was caught by one of the tech stacks that I had mentioned in one of the slides. We played it pretty well, we played the steel cycle quite well, the JSWs and the Tata Steels—we bought back in May last year. There are up 2, 3-4x from there, Hindalco and a lot of the other plays as well. Remember one simple thing that don't look for holy grails in something, nothing is magic, you need to make it happen. What you're playing is a game of probability. Investing is not a game of certainty, it's a game of probability. Now how do you play a game of probability? You don't play it by betting all on the commodity theme, that's gambling. That's not playing a probability game. So, how much did we have in Tata Steel and JSW Steel? We had I think about 4% of our assets in that. Even if we knew it was going to go up by 4x, we did not put more than that. That's the point, that play a game of probabilities don't play a game of certainty because it is not that. You have to diversify across several uncorrelated bets, that's the key here. So, we had Tata Steel we had JSW Steel, we have Info Edge, we have Alkyl Amines, we have Tata Elxsi. Now none of them are sharing anything in common with each other. If you look at our portfolio, there is no theme. There is no theme, this thematic thing is all nonsense. These are all biases. That's the key that play a game of probabilities, that even if you don't get it right, you're not going to get wiped out and probabilistically if you have chosen well, a few will make you a lot of money which means that don't run five stock positions or 10 stock positions. That's too narrow, you're going to be exposed to a huge amount of emotional highs and lows. At the very least, have 20 stocks your portfolio, if not a little bit more than that but five or 10 is all rubbish and the way, anybody who tells you that at 20 stocks, you cannot become rich. I mean, I can argue this point till the cows come home. You can become seriously rich on a 20-stock portfolio, for sure.

One final question and that is on things which maybe corn models by virtue of how they are, I presume, use reams of data to be able to predict. What about themes or companies that are coming up? We are seeing in 2021 has to be the year of all of these tech-enabled, if not your tech companies coming up. Some of the IPO rush that we're talking about. How do you, because out there, I believe it's just your experience and not the data which will help you. How do you look at all of these because Zomato has just gotten done, there is PayTm coming up, there are a bunch of others coming up too, how does Shankar Sharma look at that?

Shankar Sharma: So, there the machine will obviously not work. As I mentioned that those are the kinds of situations where the machine will absolutely not work. Again, you go back to first principles, you're putting on your fundamental analyst hat and that's what I did on Zomato in the last two days and we came up with something which was very interesting, and which of course merits a longer discussion but suffice it to say, all these stocks will—I mean right now, are big momentum bets because the IPO market is hot. I mean, I'm not putting money into any of them and not because I think the companies are bad or anything like that but IPOs are typically not areas where I have ever been successful because out of one that will do well, nine will be overhyped and overpriced. But I mean, there is a space and I'm very happy as an Indian to see so many tech listings or tech enabled listings in India because those listings are being, let's say exported out to the global markets. Now at least India will absorb a lot of these listings. These companies will need to fall in line with what Indian markets want which is profitability. That is going to be the challenge for these companies. Indian markets don't like losses, typically we have not liked losses so they will need to start falling in line, sooner rather than later. It will be interesting.

You don't foresee that, let's say, and I'm sure there are different components, I'm just trying to make it too simple and I know the answer can't be like that. I'm still asking you that back in 2001, you saw a spark in an Amazon which back then was probably not making profits. It was a smaller company then and is now a larger company. You don't foresee possibilities of that happening in the tech enabled space in India?

Shankar Sharma: No because they are hitting the market already at a very substantial premium. That's the problem, a lot of those upsides will belong to the private equity and the venture capitalists invested in the company already. We are coming in at the fag end of the—not the final growth cycle but at least $10 billion, unless you take a bet that they are going to become $50 billion companies on which I am a little low to make that bet, because TCS after 40 years has gone to 50 billion and is in a similar broad tech space. So, from a 10 to 20 billion journey is going to be more difficult and so the big money has been captured by the VCs and not by us.

Just one last question, on tech. Since you referred to TCS, it just struck me. I've just seen a bunch of these tech companies commentary being extremely optimistic at times, maybe even realistic because the numbers are there to back that and I just recently, two days back wrote a piece about how people were just so embedded in their minds that large cap tech will always do better. The last five years’ data suggests completely otherwise. My question is, do you reckon that Indian tech which was always being step-sistered as a services company which cannot get valuations, which will not create wealth and which has done completely the opposite, do you think this run can continue? Do you see that because you look at the globe at large?

Shankar Sharma: Oh yes, absolutely. I mean, again at the risk of making a forecast, which I normally don't, I don't see any major—see now, in oil and steel one can argue in many ways but in the Indian IT services space, I think, and I've always said this that in my view, apart from Bajaj Auto, which comes from a Bajaj group, the other best beasts of corporate India are the four or five major tech companies and now those governance standards have percolated to stocks like Happiest Minds in the old mid-cap IT space as benefited from the leadership of Narayan Murthy or Ramadorai where they have adopted similar processes, governances and transparencies, which is helping lift the whole industry up because you know there won't be fraud, there won't be a scam or none of that sort and they are tremendous. I mean, Ashok Soota is a brilliant manager irrespective of him doing a start-up like Happiest Minds or was it before in the 80s. I mean, Mindtree is there. So, I just think that this space looks very good. I mean, I'm rarely that impacted but I just think it's a great space to be in.