Why Rakesh Jhunjhunwala Isn’t Hyped Up About Startup Unicorns

Billionaire stock investor Rakesh Jhunjhunwala isn’t hyped up about India’s startup unicorn boom as he doesn’t find their valuations convincing.

“In financial markets, the ultimate valuations are based on cash flows. When will these startups get those cash flows? Nobody knows,” Jhunjhunwala told BloombergQuint’s Niraj Shah in a session at the Shri Ram Economics Summit 2021. “You may tell me my grapes are sour. But I don’t want to invest in startups as investments require large organisation and it’s highly speculative.”

Jhunjhunwala questioned the underlying financial metrics of these companies saying that just because some Chinese unicorns command high valuation doesn’t mean it stands true in India. “Chinese companies, who had no competition, get huge cashflows and get huge valuations. Tell me which Indian unicorn has cash flows?”

He also said startup unicorns subsidise their offerings for growth but that’s not sustainable. “When you’re subsidising things, that you’re selling a Rs 10 potato for Rs 6 so people will buy it obviously. But then eventually you’ll sell it for Rs 10, what happens then?”

Jhunjhunwala hasn’t warmed up to startup unicorns but venture capital and private equity investors have. Just last week, India witnessed six new unicorns getting minted within a gap for four days. Even in pandemic-stricken 2020, investment momentum continued with deals worth $10 billion and at least seven new unicorns. And according to tech industry lobby Nasscom, that number could easily double this year.

Yet, the stock-picker remains wary of the risks that come with investing in a startups. “The strike rates are very low. It’s like a lottery. I don’t invest in them, but people have made money and there will be people who make more money. I wish good luck to them.”

Despite Jhunjhunwala’s reservation about investing in startups, he has claimed that his unlisted portfolio has delivered better returns than those on the stock markets. The investor said most successful unlisted companies that he has put money in have an investment life of about 10-12 years.

“I’ve made 20 investments. Ten turned out to be dud, where I wrote it off and made zero. Five did moderately well, and five did exceedingly well. Where I’ve had 200 times return,” he said.

Bullish On Indian IT And Pharma

Jhunjhunwala said he expects Indian information technology companies to flourish for a long time.

Citing Daniel Ricardo’s economic theory, Jhunjhunwala said, “If a country has an advantage in something, so it grows. The more it grows the more it has an advantage in something. So that’s what happened to Indians. The opportunity for tech applications is going through the roof.”

These are advantages, Jhunjhunwala claimed, which cannot be “killed” or replaced. “India has got skilled engineers available at a reasonable cost. Industries have size. Indian software has a brand,” he said. “I want to know a country which has all India has become back office of the world.”

Like information technology, Jhunjhunwala said another sector where India will lead is pharmaceuticals. “We’re going to be a pharma capital of the world.”

Not A Bull Or Bear

The market veteran, who’s popularly called the “Big Bull” by television news, said he doesn’t care about such tags. Eventually the goal of an investor should be to make money, he said.

“I don’t think its good to be a bear or a bull all the time,” he said. “You have to be a chameleon. We’ve got to change as the colours change.”

He said that he has made a lot money from bearish positions in the market. “The mantra to success is to be a realist.”

Trading Vs Investing

The billionaire said he’s made the bulk of his wealth by trading and not through long-term investing. And still, he wouldn’t recommend that to others.

“My personal opinion to people is don’t trade. Out of 10 lakh, 9.99 lakh lose. Trading requires basic defeat of human ego, which very few people have and recognition that markets go on extremes on both sides. And there is nothing logical or reasonable here,” he said.

Jhunjhunwala said he himself was forced to trade because he had no initial capital to start investing. “To invest, you need capital. So how do I get capital? The only way was to borrow or trade. Therefore, I studied trading. And trading is much more fun than investing. You have money next day in your bank. Trading is at the heart of all my wealth.”

Not In For The Crypto-Party

When asked for his view on cryptocurrencies, Jhunjhunwala quipped: “I don’t have to go to every party in town.”

One of the main reasons for it’s the high volatility. “These cryptocurrencies fluctuate 20-25% in a day. So you go with a budget to a restaurant,” he said. “You plan your budget at say 20 crypto-coins and by the time you get there it is 25 crypto-coins.”

Besides, he said it’s unlikely the government will ever give up their right to issue currency making the use case for cryptos limited.

Even as an investment class, cryptocurrencies fail to enthuse Jhunjhunwala. “I don’t know on what basis you value it. And I don’t know how you can control the supply.”

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