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Sumit Jalan of Credit Suisse on investment themes for 2018

Talking to ET Now, Sumit Jalan, Credit Suisse , says in 2018..

Talking to ET Now, Sumit Jalan, Credit Suisse , says in 2018 we will see a more diverse mix of sectors heading the market and not necessarily very large transactions from insurance alone.

Edited excerpts:
2017 has really been the year of IPOs. It has been the year of companies raising funds left, right and centre. Is there a froth building into the market or would you say those are just specific cases and things are looking bright enough for 2018?
I definitely feel 2018 is looking as bright. There will be changes compared to what you saw in 2017. In 2017, we saw close to $10 billion of IPOs but 75% of those are BFSI and that too insurance. I expect BFSI to continue but instead of insurance, it would be more the traditional lenders and financial services including new players like AMCs. It could be wealth managers, registrars. The mix will definitely change.

The second thing is last year we saw "decacorns", companies which were raising billion of dollars $10 billion plus valuations. That is a new phenomenon in the Indian context. I am not too sure that you would see that trend continue in 2018 because that was specifically coming from insurance space. I would be less bullish about large transactions this year but I expect a lot more newer sectors like renewable, little bit of traditional sectors like energy, auto ancillaries could potentially also come to the markets. We will see a more diverse mix of sectors heading the market and not necessarily very large transactions alone from insurance.

Let us talk about some of the niche areas, pockets where you may see activity or PE exits. In 2017, a lot of consumer companies went public. D-Mart, Thyrocare and Dr PathLabs have gone public in 2016. What are some of the niche pockets which right now could be called unknown sectors that would suddenly appear on everyone's radar?
The fact remains that with the surge of liquidity in the market, majority of the conventional sectors are at times over owned by investors and therefore there is hunt for under owned sectors which would move in new themes. Insurance clearly was a completely under owned sector in 2017 and there were some what we call concept stocks which hit the market last year. As I highlighted earlier, there would be again more of new under-owned sectors like renewable, wealth managers etc.

Maybe, it is a little early for 2018 but new tech companies will also see hitting Indian capital markets.

I understand insurance was under owned before it came to the markets but the frenzy with which the market has bought into insurance have really made an argument to look at the pricing at which some of these issues have hit the market. India is under insured and so the potential is very high but the book value or the premium value at which some of these issues have come in, an ICICI Pru, SBI Life, many believe, over the course of the next one or two years in the price working in that upside?
This is something we have been grappling on a regular basis in every IPO pricing conversations but the fact remains that if you statistically look at it, in 2017, 36 IPOs were launched, of which 18 delivered a 10% IPO pop and thus the listing gains.

That is like the Holy Grail that we like to solve for 10-15% of listing gains. Having said that, some of the large ticket IPOs drew a lot of attention and the ability to do such a perfect pricing became that much more challenging. Attention from the investors during the anchor round conversations led to a reasonably fair discovery of price. This is why you will see some of the smaller IPOs or more concept stock IPOs have done far better in the after listing gains than some of the largest IPOs where the fair discovery happens fairly fast including in the run up to the IPO marketing exercise itself.

I do not personally think that as a matter of framework, things will change in 2018 either till there is enough liquidity and high demand for these large ticket IPOs but I expect that you will see more of smaller ticket IPOs this year and hopefully the perfect price discovery of solving for within 5-10% of listing gains may or may not happen. Hopefully, there will be greater gains for investors as they list.

Which kind of stocks and sectors are investors interested in? Do you sense that trend may just continue for 2018 as well?
Investors definitely are looking for sector rotation now. You are already seeing the desire to own say IT as a space which has not really seen too much of flows from secondary market, has been going up. We, at Credit Suisse have a model portfolio. When I analyse our model portfolio at the start of last year and at the start of this year, it is literally an inversion of the model portfolio which means that some of the traditional sectors like metals, mining, energy sector and a lot of traditional sectors are seeing a rebound because these have been under owned over the course of liquidity surge. Some of the BFSI and BFC lenders have been over owned and you could see muted interest in those from a pure secondary perspective.

So, there is interest not necessarily in new thematic sectors, it could be just liquidity going back into the more traditional under owned sectors.

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