Feb 03, 2016 09:14 PM IST | Source: CNBC-TV18

Won't be surprised by a further 5% correction: Raamdeo Agrawal

On volatile commodity prices, Agrawal says crude prices have to stabilise first for other commodities as well to settle down.

The market could correct another 5 percent from current levels near term, Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services tells CNBC-TV18. However, Agrawal is positive in his outlook from a 12-month perspective.

On volatile commodity prices, he says crude have to stabilise first for other commodities as well to settle down.

Agrawal says he is surprised by the pace of fall in Interglobe Aviation shares and says the management should have managed investor expectations better.

He says private sector banks are a good bet but investors should wait till the bad loan issues are resolved.

Below is the verbatim transcript of Raamdeo Agrawal's interview with Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Latha: Whenever we met you in the last two years, you have been saying don’t do an systematic investment plan (SIP), put your money now. What will you tell people now, some of them would have lost?

A: So the money is already in. So you have to be sitting tight now -- whatever you have bought. The short-term understanding of the market what it will do because more and more shorter end of the market, it is very irrational, we would not know how the markets will close by 3.30pm today, will it be down another percent or will it be recovering all the way up? Nobody knows what is going to be the end result. So the predictability is very poor right now and there is a lot of volatility in all kinds of markets all over the world. So it has its own connections here. So it is very difficult to rationalise what is irrational. So I don’t have any theories like the chartist guys. They are the best guys, they can see in the charts what is going to happen in next few days or whatever. So probably it is a paradise for the chartists right now.

Anuj: You always maintain that as an investor we should be worried about what is the downside to this market and once that downside is over, the upside will take care of your portfolio. According to you not for today, what is the downside right now in this market? Could we go to sub-7,000 maybe even 6,500 on the Nifty?

A: Quite possible. The kind of momentum which is there, losing another 5 percent here and there for a few weeks and all is not completely a very low probability when it could be a high probability event.

So short-term anything is possible, 5-10 percent decline but I would be very surprised if on a 12 months basis -- I am talking about investing, in trading, I have no clue what is going to happen but if you invest for a year or two to three years -- would be significantly away from 7,300-7,400 kind of levels. I would think it would be somewhat higher depending on what all happens but I would definitely bet that it will be higher from the current levels.

Anuj: What would be the trigger for that?

A: First thing is the decline of oil, which has started almost one and a half years to two years back. That has moved from USD 110 per barrel to USD 25 per barrel and now there are tens of reports saying that it will go to USD 17-15 per barrel. Saudi Arabia is not going to finish off itself, it is not going to commit suicide in terms of oil price. So obviously there is some sanity, they came in Davos and they said USD 30 per barrel is too undershot kind of a thing.

So I think sense of stability should be coming at USD 32-33 per barrel, whatever should be the range, but I think once the oil market stabilises -- which has taken the steam out of lot of economies, lot of companies, we saw 18-19 percent correction in companies' profit. So these things are very destabilising. These stocks are listed in US, so US indices will also go down.

So, the first thing is that oil must stabilise and we are seeing some signs of stability coming in -- not fully stabilised but looks like the bottom is hit. So once oil stabilises then other commodities also will get some kind of a stability. So everything has hit the bottom, whether it is coal, gas, iron ore, zinc, aluminium, everything is in pits right now. So this entire commodity pack, if it stabilises even in the next six months then the second half would be a new norm and new normal for the entire world, people would want to buy and maybe consumers will come out. So a lot of things will change. I cannot foresee everything but I know when things are bad, it is very difficult to figure out what will -- at the bottom we cannot see the top, at the top we cannot see the bottom. Right now we are at the bottom. That is what I believe.

I remember in 2002-2003, in new high low, there used to be one-two stocks, not even 5-10 stocks. I used to think when will I get my 20 stocks in new high and it used to be a wish. By 2007-2008, half the market was in new high. So when you were at bottom in 2002-2003 and this is the kind of time you remember for these dates, you cannot see much highs. I don’t think there will be too many highs and all time highs would be literally nothing, this will be all 52-weeks manipulated highs.

Anuj: Except Infosys maybe? Closer to that.

A: That is quite an event if it is all time high. Very few all time highs would be there. When the markets are at the top, you see hundreds and thousands of shares hitting new highs almost every day. So these are the depressed times and one can keep justifying, can it go another 5 percent down? Yes, but these are times to prove yourself whether you are a trader or investor. Only the true investor would stay invested right now.

Latha: What would be the new themes in the market? You are preparing for a period of probably global recession or at least stagnation if not recession and you are preparing for an Indian economy, which is going to see no producer price advantage at all. In many of the sectors, the ability to price, unless you are a brand, you are not able to price your way. So in such a situation what are the sectors that you would choose or even one sector as a safe harbour?

A: It is all about the companies. I obviously look at businesses also but it is all about the companies. What I have seen in my wealth creational studies more recently in 20th Wealth Creation study Mid-to-Mega the growth can be anywhere.

In worst of the times, you can find 20-30 companies growing very rapidly. You have seen that discretion like today Supreme Industries has gone up 40 percent. There are bad spots, it is difficult to find them. It is not that 500 out of 1,000 companies are growing at that pace. There will be probably 100-150 companies out of 1,000 companies. So percentages of companies doing very well are fewer for sure. So the amount of money you will make at this point of time will be less. This is the time to save the capital, protect to capital and if you can make some money, that is good.

Anuj: Are you rattled by what has happened with InterGlobe? I remember we talked about it a month back, that is one of your largest holdings in your fund also now and the follow-up question would be, is this time to accumulate more. The market is a bit more worried about maybe the disclosure quality or whatever but the stock has fallen 40 percent now?

A: I am surprised by the pace of fall. I was pleasantly surprised by the pace of rise also. It gets Rs 850 and then it dream runs, crosses Rs 1,300 and then with one spooky result, the whole thing collapses, multiple things happened. Of course the disclosure quality, expectation management by the company is a lot to be desired but I don’t think they have erred anywhere on legal basis but I think they could have managed the expectations much better. One is that.

Second is that this new schedule and all -- in aviation sector it is an ultimate growth stock. The source of growth -- driver is the delivery of the planes. In sight, there is no probability of that coming through, market is believing that is zero that anything is going to come.

I don’t know when it is going to come. It is a very common phenomenon that whenever new models have been introduced, they have to think problems and it takes some time to stabilise whether it is six months to one year but every quarter or ever year is going to cost this company its growth momentum. So it was priced to perfection for the growth. Clearly, now growth being delayed obviously you have to pay.


Latha: You enter only when you see the visibility of the new planes lying in or add only at that time?

A: It is a great stock. It got issued at Rs 765 and now it is more likely Rs 850. One can accumulate but it will fly only when growth visibility is clearer.

Anuj: You have been bullish on consumption stories, especially the ones with pricing power, Eicher Motors was a great example. What about something like Maruti, which again is one of your top picks. Do you get a sense that somewhere they might have lost the bit of pricing power or some of the sheen and that is why the stock has also corrected 20 percent?

A: Unlike motorcycles or some other segment, though his markets share is upwards of 45 percent, for the rest of the 55 percent, there is a whole lot of the world trying to snatch each other; Toyota and Honda and General Motors and Ford. Everybody is trying to get that because this is a large market. Do you know how much China is selling? They are selling almost two million cars a month. We sell hardly 2-3 million cars a year. So, in the next 10 years, if India goes China way, that is a possibility. So, everybody is trying their best effort here, they are bringing best of the product so much so that they are buying companies or designing products only to win Indian markets.

So, I think it is going to be an intensely fought battle. It is not going to be that easy to protect the margin or even the market share. So, it is going to be very well fought profit for Maruti.

One of the things which our analysts and all are saying is that, for the next 12-18 months, will there be enough production capacity with the companies to meet the eventual demand if it turns up, more like if it is more than 10-12 percent demand? The margin is more or less done. So, the only source of growth is going to be from volume. But, if you do not have production capacity, next 12-18 months till the new plant comes in, that is the concern analysts have.

Anuj: But you do not share that concern?

A: No that concern is there, but it is not for 10 year issue, it is not a three-year issue, it is a one-year issue. These things happen and company is saying we will supply. My sense is that there is a demand, they will produce at mid of the night and they will supply. But that is leap of faith. So, that is what happens at times. You think one way. That is how the stock has corrected also. So, in bad times, people believe all the negative arguments, nobody will believe in the positive arguments.

Latha: Your favourite financials have been just the two retail facing banks -- HDFC Bank and IndusInd Bank. But now you are getting some of the economy facing banks at fairly decent bargains. I am not referring to public sector undertaking (PSUs) just yet. I am referring to Axis Bank and ICICI Bank. You will not think that these are attractive. I mean they have proven managements, but they are going through a rough patch. This is not a time to dip in?

A: Yes and no, because you have to be comfortable with the book. Right now, wherever underlying book has corporate loans or infrastructure loans, how much is the bad loans and how are they going to push it through the system because for public sector banks, in any case, there is no equity value left in public sector banks. It is all optional value whatever little is there Rs 3,000 crore, Rs 5,000 crore. This is not equity valuation of PSU banks.

But private sector banks, government is not going to come and give you capital free of cost and their valuations are not like an option value, they are serious equity valuation. So, the book has the common companies, which are stressed. So, once these things are clear, obviously these companies, these banks are very well managed and there would be great investments.

Latha: So, you are not a buyer just yet over there?

A: Till this dust settles, I do not want to get into where underwriting mess is there anywhere. So we would stay out.

Latha: The world is in a bad spot, but in spite of it, you have some export themes largely IT. You would continue to bet on IT?

A: IT and pharmaceuticals is also there.

Latha: Let me start with IT, you would still keep your bets after all they have become commoditized, the day of great earnings is gone you would think?

A: No, I think still in terms of size of the earnings, what you have earned in the last 15-20 years, they will earn multiples of that in next five years in terms of absolute numbers.

So the larger companies, which are there, because of the base effect growth will be much more muted but what guidance I am getting from now, larger companies everybody has 2020 targets -- Infosys saying USD 20 billion, Wipro is saying USD 15 billion, Tata Consultancy Services (TCS) has yet not been that explicit about their growth targets.

So these are very impressive numbers and the currency devaluation -- they have a cost volume price mix and currency. So currency advantage -- this is almost 10 percent devaluation. The last round of devaluation somehow has not panned out in terms of margin expansion. All these companies they used become much more aggressive in terms of taking the clients and maintaining the EBTIDA margin around 25-27 percent. My sense is this round again, if they maintain -- the margin and profitability returns are very good, what you need is now topline growth. So if they grow this extra margin for topline growth, in current situation getting 10-12 percent dollar growth is fabulous and helped by bit of currency devaluation. You are talking about at least 14-15 percent kind of topline.

Anuj: We are now 15-16 days away from Budget. Can the Budget deliver for market and what would be the top expectation from the Budget?

A: We have seen two-three disappointments in the past in terms of Budgetary announcements and all. So I don’t expect anything from the Budget.

What comes out, what is in the wraps, taxation -- I have heard that direct taxation is being discussed, subsidy and incentive, so a lot of discussion is there in terms of bringing down the tax rate. When you bring down the tax rate, you are obviously going to take away wherever the exemptions are there. So what exactly will be the extent of change? Will it be truly transformational? They will come down from 30 percent to 25 percent and take away everything and it becomes very simple and what will be the impact for the capital markets in terms of capital gains taxes. So those are things to watch but apart from that, it is a business as usual.

Latha: You are not going long on any set of stocks before the Budget?

A: No, Budget or no Budget, investing goes on. They cannot make or break any businesses. If oil has fallen from USD 100 per barrel to USD 35 per barrel or power companies are doing well, I don’t think Budget will make that much difference.

(Interview transcribed by Sonal Jadhav)

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