'80% of original Sensex firms no longer...': Top CIO explains why 'new age' valuation fears may be misplaced

Mihir Vora, Chief Investment Officer at TRUST Mutual Fund, on Sunday sought to allay fears around valuations of new-age companies. He said every business appears "new age" in its initial phase, but investors must assess whether valuations reflect long-term growth potential or irrational exuberance.

"A common question that I get these days is about the risks of 'new age' companies and business models, and whether valuations are 'too high' for these companies," Vora wrote on X. "For this, it is worth reminding ourselves that the process of 'creative destruction' has always been an integral part of markets and economics. 'New' technologies and businesses are always emerging, creating new opportunities or disrupting existing businesses."

Vora pointed out that of the 30 companies in the BSE Sensex in 1987, 24 are no longer part of the index-an 80% churn. "Eight of the original 30 don't exist anymore (bankrupt, taken over or merged). There were no financials (banks, NBFCs, capital markets-today 31% weight) and no telecom or IT companies (today 22% weight). That is, more than 50% of sector weight is new," he said.

The veteran fund manager said any new technology or business model will feel "new age" during the initial adoption and growth phases. "Then it becomes so common that we don’t even talk about it being anything 'special'," he said.

Pointing to past examples, Vora said that IT services companies in the 1990s and 2000s were once considered new-age, fast-growth businesses. "Today, many of them are commodity businesses providing largely non-differentiated services," he said. "There are dozens of such examples. Moreover, when a sector or company is in its growth phase, valuations will look optically expensive as the market starts appreciating the longer-term growth potential."

He said the real question for investors is whether valuations are discounting high growth with a long runway or are "euphoric/irrational". "That's where wisdom and sanity checks need to be applied," Vora said.

Helios Capital founder Samir Arora said a similar argument applied to Bharti Airtel. The company, he noted, was loss-making when it launched its IPO at a market capitalisation of around $1 billion. "The funniest thing people do is when a company just turns from loss to profit-say the profit is five paise-and they divide the price by 0.05 and go bonkers over the PE," Arora said.