Sharad Shah is a rare or perhaps near extinct species in the Indian stock market: the permabear. And unlike most traders of his vintage, he makes no bones about his market strategy, short selling stocks. A stock market player for nearly 40 years now, Shah is considered something of a maverick by those who know him. Many of his contemporaries find him too outspoken and even loud, but Shah is not the one to mince words.
His trading style, or rather his investment ideology, if one can call it that, has landed Shah in trouble quite a few times in the past. Angry promoters have complained about him to the regulator, to investigative agencies, to the cops. Some threatened him with violence for short selling their stocks, and a few others even made good on their word. Not that it made any difference to Shah’s worldview of the stock market. With shares now in a freefall, Shah feels his theory has been vindicated, and it is payback time. Benchmark indices are down close to 15 percent from their record highs seen in October last year, and Shah feels there is still plenty of room on the downside. He is particularly bearish on midcaps and smallcaps, where he says the pain will be “unbelievable.”
Edited excerpts from a freewheeling chat:
In your previous interview in August 2020, you said you were extremely bearish on the market, and saw a crash coming. You have been downright wrong, considering where the indices are right now even after the recent correction...
Agreed. Because I did not foresee the force of retail liquidity. Never in my career have I seen such high levels of retail participation. I misread the situation.
So you must have lost a packet on your trading bets since you are bearish round the year?
Yes. I lost some money on my trading bets...till October last year. Things have been better since then. Barring a handful, many stocks have given up a good part of the gains made over the last year.
But you would have gained from the appreciation in your investment portfolio?
Not a great deal, since my investment portfolio consists mostly of mid and smallcap MNC companies. They did okay, but nowhere close to the massive gains one saw in random stocks during the last couple of years.
What is giving you the conviction this time?
Prices are way, way ahead of fundamentals…
But that has been the case for a while now...
…yes, but now you have high inflation, a weak rupee, lackluster earnings, and a massive sell-off in the US market. You can’t have equities quoting at sum-of-the-parts valuations under in such a situation.
Can you explain the sum-of-the-parts bit?
What I mean to say is that equities are pricing in a blue sky scenario, as if the companies can be sold for such a high price. That does not seem to be the case any longer.
How do you say that?
Look at the numbers being talked about for Gujarat Ambuja Cement. The stock rallied in anticipation of a sale, but have since given up the gains. This indicates that the market is not confident that the buyer will pay a huge premium. And this is not the only case. But I could well be wrong. In fact, on average I am wrong 87 percent of the time.
87 is a precise number.. do you keep track of your trades?
Yes I do, it is important to do that
With such a high percentage of wrong calls, how have you managed to survive?
By ensuring that the 13 percent right calls more than offset my wrong calls. Whenever I sense I have managed to get my call right, I double down on it.
You are known as a permabear in the market. Is that description right?
Yes. I have always believed that futures are only for going short. When I am bullish, I would rather buy the stock rather than the futures.
Short selling is highly risky. In a raging bull market, you get most of your calls wrong. But having been around for a long time, I feel that shorting is a good strategy. It has been hugely profitable for me over the last decade.
Right now the Nasdaq is in a free fall, but technology shares in India are not falling. I don’t see why Indian IT shares should outperform. Look at a stock like Accenture, it is quoting at 22 times forward earnings. And it is one of the best names in the IT services space. For how long can Indian IT names sustain valuations of 30 times plus forward earnings?
Which are the stocks you are bearish on?
I am short on Infosys, Dixon Technologies, Aarti Industries, Titan, Tech Mahindra and Info Edge.
You are up against Rakesh Jhunjhunwala in Titan?
He (Jhunjhunwala) is a great man, and I don’t claim that level of greatness. The size of my bet is modest, but I am going to ride it hard.
What makes you confident?
The company did Rs 500 odd crore of profit in the first quarter. Assuming there is no margin pressure, the company will do Rs 2000 crore for the full year. That kind of earnings is simply not enough to sustain a Rs 1.8 lakh crore market cap in present conditions.
I recall you saying that merely a stock being overvalued does not make it a candidate for short selling.
True. Bubble valuations can sustain for a long time, but at some point they have to burst. In many stocks, that time appears to be now, looking at the way prices have dropped of late.
How do you see the current spell of market correction compared to those in 2008 and 2000?
In 2008, we were a much smaller market. Today the market cap is almost 90 percent of the real economy. That is too high. Typically, the market cap should be around 60 percent of the GDP. So there will be a reversion to mean shortly.
Also, far too many more players are invested right now, and many are still entering the market. So I fear the implications will be far more severe. People have lost serious money over the last couple of months. In my own circles, I am seeing people suddenly become tight fisted.
But isn’t the liquidity situation now different from what it was in 2008? Retail money has cushioned the fall so far and is a far bigger source of liquidity than it was back then.
But there is a limit to which retail money can absorb selling by FIIs if they (FIIs) continue to sell at this rate. The last 11 months were an aberration. If prices keep falling, retail investors will soon quit in droves. At this stage, it almost appears as though local mutual funds are trying to fight the market.
But they (local MFs) don’t have a choice, right? if investors are flocking to them with money.
I am not saying it is their fault.
How do you see the correction playing out?
Bear markets are fast and furious, and they don’t last long. I feel prices could bottom out some time in June or July, but it could be a brutal correction.
Not to say that the Indian market does not have potential. There are plenty of companies with sound fundamentals, just that the excesses of the last couple of years in the market need to be purged.
Besides IT services, which are other sectors are you bearish on?
Metal and banking.
What about FMCG companies? They too seem overvalued.
They will correct, but not by much. Quality names in the FMCG space will always trade at a premium to the rest of the market. But the pain in midcaps and small caps will be unbelievable. They will take a long time to come anywhere their recent peaks.
What is your advice to budding short sellers?
There are two ways to short sell. One is buy going short on the futures and then hedging your position by buying calls. This also lowers the margin requirement. The second way to buy puts. And you need to be disciplined. As I rule I square off my positions if prices move against me by 4 percent, and then wait for a fresh opportunity to re-enter. Having traded for so long, I get a sense of when I am going wrong, and then I quickly exit my position.
You have had run-ins with promoters in the past? Does that happen even now?
No. For two reasons. One, the size of the market itself has become very big and my share of the trade is very small. Two, I consciously try to keep the size of my bets small. If my trade is large, then I become the market, and it becomes easy for my rivals to target me. I used to make that mistake in the past. With age, one tries to avoid needless thrills
What else has changed in the market?
The promoters have become the biggest operators in town, managing their stocks. And many of them do so through portfolio management services (PMS) schemes.
Any closing thoughts?The buy and sit tight for 10 years strategy is a myth. The number of genuine companies are not too many. The buy and hold strategy may work for some stocks, but again you need to be lucky to identify them at the right price. By myopic, and don’t take a view of more than 6 months to a year on most stocks.