Private Equity Funds | FII: Why should promoters of new-age cos act like PE funds & go on acquisition sprees? Ajay Bagga asks

Last week, we saw the market showing some kind of resilience but one key concern for India is definitely the weakening rupee. How do you see that and what kind of an impact can we have on the equity markets because day over day, we are seeing the FII selling continuing?

Yes absolutely and that is the question facing most emerging market central bankers: how do they balance their currency depreciation with the domestic growth concerns and do they use their very precious forex reserves to protect their currencies or do they let their currencies find their own market determined path?

This applies to rupee also. RBI is very concerned. On June 24, the deputy governor said that they would be looking at stability and that they are in the market. Last month the governor had also said that they are very concerned about the rupee level. Friday’s government actions both on the gold and as well as on petroleum product exports is showing that the government is seized of it but we are expecting the rupee to go to 81 by Jan-February. We are seeing that depreciation coming.

Will RBI act? RBI will probably raise rates quite strongly on August 4. They are intervening in the forwards market. Will they come into the spot market and offer dollars to ease the dollar tightness that is hitting the markets? That remains to be seen and it will mean further erosion of the forex reserves but we have about $592 billion and maybe that will come through. I do not see any other issue but the rupee going down and the impact on the stock market. FIIs do not like an unstable currency, normally we see outflows on a strong dollar and that we have seen over the last 12 months and we expect FII outflows to continue.

Over the past six months, Indian markets have outperformed the rest of the stock markets. Do you expect this outperformance to continue as well because when talking about currencies, India has managed to perform relatively better in comparison to the other emerging market currencies?

Yes definitely and rupee outperformed even developed market currency like the Japanese yen. But in these portfolios, there is a steady allocation to India. The sales have been more because the global emerging market funds have seen outflows. It is not an India specific issue. If you look at Taiwan which is 68% electronics and hardware, semiconductors – that market also has seen very strong outflows, Korea has seen outflows.

So while the commodity economies have seen inflows, it has been more of a macro call on the FIIs.

Secondly, financials and IT have lost the maximum money but these are the two biggest sectors as well and so we have seen these outflows. I am very sure that we will continue to outperform. Our economy is strong. Our corporate earnings are expected to be between 12% and 14% growth which is quite high in a global scenario where growth is stalling.

I am expecting our markets to continue to outperform and domestic flows to continue to be quite strong. They are still very small if one sees the composition of our savings and the size of our GDP. Rs 11,000 crore a month is historically high for India but overall, we are not getting much of a market share. That gives strength for these flows to continue and help our markets.


is one of the top losers when it comes to the broader markets, a downtick of 20% this week. The market capitalisation has slipped below the 45,000 mark. Is this a case that everything becomes valuable at some price or is this the case of not catching a falling knife?

I am an old world fundamental investor. For me, these non-profitable companies valued on hope and spreadsheets are a no-go zone. I frankly think that we had a lot of excess over the last two years with the private equity money coming in.

I remember one very famous private equity guy sent out a presentation about a year back comparing this time around to the dotcom that dotcom companies were very early in their cycle while in this phase, the private equity companies are scaling up companies before bringing them to the market. I wish they had also scaled the profits before they brought them to the markets. The public markets are really not geared to value companies which do not have positive free cash flows and which do not generate a profit and to value companies on sales and on spreadsheet models becomes very difficult for the retail investor.

So these remain a no-go zone. Let them make a profit, let them deliver on their promises. I used to run mutual funds, I would go to the top IT companies around the country. They would not move beyond FMPs or liquid funds or fixed deposits. Now they are the most cash rich companies. What gives the promoters of these new-age companies the right to act like private equity funds and to go on acquisition sprees when their own companies are not making any profits? I think that is the big question the market is asking.

You want to be a fund, raise a fund and go ahead and run a fund, do not run a company then. A company needs operating disciplines and do not use my capital as a shareholder to go and punt further and further into the hole you have dug yourself into.

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