Invested in Vedanta, Adani group stocks? Nithin Kamath has this lesson for you
Investing in stock market needs a lot of home work in pre-investment stage while finalising a stock for investment. A good number of stock market investors look at the valuations and sentiment in regard to the stock at the time of investment. In fact a good number of investors overlook higher valuations of a stock if market sentiments are bullish on that stock. We have seen that happening in post-Covid rally with Adani group stocks whereas various other over valued stocks like Vedanta, Tata Power, DLF, Avenue Supermarts, etc. have found no problem in attracting buying interest of investors in recent years.
For such stock market investors, Nithin Kamath, Founder & CEO at Zerodha has a simple investment lesson that one must look at. Advising stock market investors to understand what higher valuations can mean sometimes, Nithin Kamath said that higher valuations are mostly a result of overstating the size of the opportunity. He said that high valuations are detrimental and suggested investors to take outliers as exceptions not as rule.
Nithin Kamath shared his views on companies having valuations from his official twitter handle citing, “We celebrate valuations, but the more I speak to founders, the more I’m convinced high valuations are detrimental. Higher valuations are mostly a result of overstating the size of the opportunity. Of course, there are outliers, but they are the exception, not the rule.”
On unrealistic valuations that may connect Adani Enterprises, Adani Ports and other Adani group stock investors, Zerodha Founder & CEO said, “It hurts to see businesses that would’ve otherwise done well struggling because they raised money at unrealistic valuations. Higher valuations force you to spend more, hire more & take random bets. Founders end up losing interest if the assumptions about the total addressable market (TAM) don’t materialize, and growing fast enough to justify the valuations isn’t possible.”
See Nithin Kamath’s tweet below:
Nithin Kamath went on to add that unreasonable TAM assumptions are a larger problem in India because the revenue opportunity other than lending is limited to the top 2 crore Indians (~1.5% of India). And lending is crowded.
On how to combat this problem, Zerodha founder said, “…. lower valuations & raising only what is required counterintuitively, I think, will help founders focus & increase the odds of building a successful sustainable business.”
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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