zomato IPO: Can Zomato disrupt QSRs like Jubilant FoodWorks?
Three months ago, there was a debate over inflation and higher interest rates. And now we are getting worried over slowdown. What is happening in the global economy?
Charandeep Singh: Try to ignore the macro headlines as much as you can. We at Girik are so focussed on our processes that we tend to ignore a lot of the noise regarding interest rates, taper tantrums, etc. I do not think they have much relevance to the ultimate outcome of what the stock does. They can definitely cause certain short-term gyrations and create volatility in the near-term. If you are an investor you have learnt to bear that by now. Corrections because of unexpected bad news are always going to help your equity returns if you are a good stock picker.
A large part of your portfolio is centered around IT stocks. Given that there is a lot of excitement in old IT companies and the new consumer tech companies, what do you make of the IT numbers which have come out so far?
Varun Daga: IT has clearly been the leader of the bull market. Every bull market has a leader and for this one it has been IT. It is just not the IT on the software side, but also on the digital side, especially on the product side. There are a lot of companies which have been coming up on our screeners and they are still on top of it. Numbers have been phenomenal, right from largecap IT companies like Infosys or TCS and going down to smaller IT names. We are very impressed with the numbers. The good part is that they were never so expensive. They continue to do well because the digital part of their businesses are still growing at a very fast pace. We are still very gung-ho about the sector.
What is the right way of looking at valuation for IT companies? Most of the IT companies are trading at PE multiples which are north of 25. What is the scope for IT stocks from here because market price is a function of EPS and PE?
Varun Daga: Consumer names were also growing at a similar pace back in 2011-2012 and nobody ever thought that these guys could get multiples they are getting today. So I think it is anybody’s guess. You cannot say that these companies are already at 20-25 multiples and so they cannot get to 50 multiples. Compare it to consumer names like Nestle or HUL. These guys also have great governance, amazing cash flows, very stable earnings and they are also pandemic-proof. A lot of large money is moving to IT. It is probably wrong to say that they cannot get higher multiples. Yes, we are not used to that. As we have seen in consumer stocks, for example, as long as the earnings acceleration continues, it should hold better multiples.
Where within some of the traditional consumption names or QSR themes would you advise investors to look at closely?
Charandeep Singh: Let me begin by saying that we are not going to advise investors to buy anything because investors need to do their own homework. We have compliance restrictions on advising people.
QSR is a good theme. Consumer is a good theme. When you look at a QSR company, you must be aware whether it is capable of not losing its relevance with time. One QSR name that sticks out, which has done very well historically, is
. They are the out and out leader. The interesting thing about them is that they have close to 40 million registered users on their app. They were very early adaptor of technology. To disrupt somebody like that would not be easy.
Today there are restaurants being born that rely on Zomato. They are happy to pay them their 20% because they cannot do without them. But when you look at someone like Dominos, they have got their own digital stack out there which gives them direct ownership of their customers. They are able to not only give their customer a direct experience but also able to save that money.
It is a very challenging and exciting time because the QSR space is moving along in a very fast manner. Dominos is very well established. They have a very good name. Large QSRs like Burger King have the capital and the resources to go out and make sure they scale up. But when you look at QSR, one must not ignore what the Zomatos and Swiggys of the world are doing. One must understand where they fit into the ecosystem before making an investment call.
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