Global 'crisis of yield' reason why India is expensive: Raamdeo

A 'crisis of yield' under way in global bond markets has driven investors to chase high yields elsewhere, says Raamdeo Agrawal, Joint MD, Motilal Oswal.In an interview with CNBC-TV18, the noted value investor was talking about valuations of percieved expensive shares in India, such as private banks and NBFCs, which he said continue to offer prospects of high returns on equity.He added that he wouldn't sell such shares. "You don't come in front of a speeding truck," Agrawal said.Below is the transcript of Raamdeo Agrawal’s interview to Prashant Nair on CNBC-TV18.Q: The GST is done finally. You and I had spoken about GST for the last 2-3 years now. The market sold off today, I do not think we can relate the two. The market has been in a profit taking mode anyway. But what does the GST really do for the market?A: For the market, it may not have much of goodies. The market is all about the earnings. Where is the impact of earnings? Firstly, the GST is a Constitutional Amendment. The actual bill is going to be introduced in whatever form only in November-December. So, this is too long a period for the markets. Sometime in November-December, you will again have a special show for GST Bill. And then, actually implementation is going to be from April 1, next year and the impact, the chaos, positives, negatives, everything will be visible in 2017-2018. So, that is too long a period for this market which is so impatient. But then these are things.Q: Are you worried about the GST rate itself?A: I am not worried about anything. You have to take whatever Delhi gives. So right now, whatever they decide to give -- this is excluded, that is excluded -- you have to take it as it is and then you play the game accordingly. Q: But the point is that things will vary, the impact on earnings from a corporate perspective will vary depending on whether it is 18 or 22 percent.A: Once the code is out, sometime in November-December, once it passes, then we will take a look and will try to figure out which specific company is a beneficiary. But that is not a bigger thing in GST. Bigger thing is that it becomes a one country, one market. So, now you have one direct tax, that is income tax, and one indirect tax, GST. So, most of the guys, most of the businessmen, they have to worry about only two things as far as the taxation is concerned. Otherwise, there is a whole lot of chaos, every state has to have separate assessment. So, that part will become, it is a big thing about ease of doing business.Q: It is not just about the rate in terms of how you are looking at?A: As a nation as a whole, you have to pay as much as you were paying earlier. There is no per se relief. The real fear is that will they end up collecting actually less. Obviously some person will benefit and some will lose so let us not get into that. The bigger thing is it is a huge ease of doing business and the logistical nightmare, which is there right now [will end]. Half the time, the [goods] truck standing at the nakas and octroi posts, that thing will go away. So, what will happen is that if a truck leaves from Destination A to B of say 1,000-2,000 kilometers. Now the time for the journey will reduce from let's say 50 hours to 40 hours and the time taken will become predictable. So the asset turnaround is very fast and it will have lot of predictability. All these things will take some time.Transport intensive industries like cement -- it is a very low-cost item and it is very bulky, millions and millions of tonne has to travel thousand kilometers before it is consumed. The inputs also will come after travelling hundreds of kilometers. So, that will have a huge impact.Q: Cement to be fair is a regional industry, right?A: You don't consume where it is produced. Like in Mumbai, whatever cement you consume it comes from 500-700 kilometers away. So the transport cost will come down. In steel, the finished product has x kilometers to travel because typically steel is produced closer to iron ore [mines] -- so eastern parts of the country like Bhilai, Durgapur [produce steel] but it is consumed all over the country. However, for one tonne of steel, four tonnes of raw materials travel into the production base. So it is very transport intensive. Though a lot of railways are used but trucks are also used. So, there will be a lot of transport benefits over there.Q: As you said there is another interview when the GST bill comes up. We are going to leave the rest of the conversation for that. I want to move on because the market has been doing what it has been doing. Private banks, NBFCs that has really been the flavour, huge outperformance. NBFCs particularly, over the last six months between 30 and 80 percent in some cases. What do you make of it, simple question, is there too much exuberance here in this sector NBFCs?A: The market always reacts a bit excessively but what is happening is globally interest rates are falling and there is a crisis of yield in the world. About 30 percent of all the developed world's bonds -- about USD 13 trillion -- is negative rates and is falling even further. Since Europe [bonds] is negative, they are piling on to the American bonds. So the American 10-year is also going down. It is not negative but it has fallen from 2 percent to 1.5 percent. So, there is a continuous pressure because all the pension funds money -- trillions of dollars -- they are looking for yields.Q: Some USD 10 trillion at last count.A: USD 13 trillion. So, what they are doing is now since issuance itself is negative no worthwhile guy will go and buy a negative yield bond for a pensioner.Q: So you are making the liquidity argument.A: Cost of liquidity and the compulsion to get out from the current yield to better yield. So, you see here the yield, ultimately the money will find place in India also and as the bond yield falls, the cost of running businesses will drop and particularly all the NBFCs whose main raw material is the liability, the cost of liability itself will come down and the spreads for some of them will go up. Some of the well managed specialised NBFCs are able to charge as they were charging earlier and their yields are expanding and the ease of getting liabilities are a lot more and hence their franchise value is going up.Q: But the point is Bajaj Finance for example, big lender, diversified lender. Market cap is more than YES Bank now. I am not comparing both of them but it makes sense to you, YES Bank is a franchise, established, loyal deposit base.A: But Bajaj Finance can earn 30-35 percent kind of a return on equity (RoE) because they are not regulated - banks are regulated. Banks have to surrender 25 percent of their liquidity in CRR and SLR and they have a whole lot of other restriction -- where they can lend, at what price and those kind of things. Whereas NBFCs, they do some portion of that, they do it for consumer finance where it is a very short cycle and the return on capital employed is less but RoE can be very high. So, it is a very specialised kind of activity out there.Q: In your portfolio across the funds, 25-35 funds your composition is more private banks, IndusInd Bank, HDFC Bank, not so much the NBFCs particularly, you have stayed away in a way?A: No, we have Bajaj Finance also.Q: But not to the extent.A: We have been positive on Bajaj Finance for a long time.Q: It is a profile of investors that you are catering to, in that sense.A: Yes, it is there is one of the schemes. That is also a very large scheme. So, what I am saying is that these were known to be doing very well but when the markets reward, they reward big time. In the sense that it is almost up by Rs 4,000-5,000 in less than one year. So, we didn't know that it is going to be so good. We knew it is a good franchise but we didn't know it is so good.Q: You are comfortable owning Bajaj Finance for example, continuing to hold?A: Yes, I am comfortable.Q: You think it is a multiyear story and so it is true for other private well managed NBFCs as well?A: Yes, there is one formula. Don't come in front of a speeding truck. When earnings are growing and conditions are conducive for even more growth, don't come in front it. Don't say this is expensive, this is cheap, just you have bought it right, sit tight.Q: And if you have not bought it and you want to buy it?A: Then that is a different question altogether. Then it is a question of - I may slow down [purchases], I may not buy.Q: What if you woke up late to this entire story?A: Yes, it is definitely a hold for me whether it is a buy or not we need to go back to again and see.Q: Other private financials, I am not talking about banks, but others, I mean housing financials. You owned an erstwhile case Bharat Financial. The story there? Repco you have in your portfolio?A: Housing is like a multi decade story. If the underwriting is good, quality of franchise is good, so far we have not seen stress across the sector whosoever is managing, whether it is public sector, private sector, banks or HFCs. This segment of mortgage lending is pretty good and now market is realising how good it is. You are talking about gross NPA of 1 percent when the whole banking system is struggling with 10-15 percent. So, they have seen a superiority of the housing finance companies and hence there is a lot of line up for such companies. We are building one in Motilal Oswal. So, there is a lot of activity out there and the established ones who are doing well of course they are getting premium.Q: You are comfortable holding Bharat Financial? There has been recent adverse news flow as wellA: I don't know enough about that company.Q: You do own it in one of the funds? A: The manager would know. Q: The on-tap licensing which has been recently announced, you think there will be more players?A: That is a big one. It changes the landscape we are going to have and makes it competitive. Q: Who are the players you think who are most apt to kind of apply for the licence? A: The names will be visible and all sorts of guys will come. Q: Shriram Transport, City Union, Magma, some broking firms as well. Would you be interested in applying? A: We have not seen anything, at least I have not spent even a minute on figuring out because our plates are full. We have businesses, which we are building up. They are at the nascent stage and we need to focus on that and banking space will become seriously competitive now. Earlier there were three or four private sector banks and 25-27 public sector banks; [with] one third, two third [market shares]. Now, very rapidly there are many players and this PSU market share loss will be very rapid, very fast. There will be serious competition in private sector also in next five to six years. Then you have to be really good. Q: You have owned the best private banks.A: I am saying that if you want to start a bank, 10 years back it was like a cake walk. You start and you will make it because competition was weak. However, now from here, the guys who start now, they have to be seriously good because they will see competition in the private segment. Still, given PSU banks' current shape, their 60 percent share is very large opportunity but I see with On-tap, any worthwhile banker [will want to apply]. See there is no dearth of capital. There are a whole lot of these global bankers -- and we have a lot of global bankers with Indian skin -- they will all come, they will find enough backers in the companies, in private equity, they can come together themselves as a group. So, we are going to see a lot of activity out there so long as Reserve Bank of India (RBI) is liberal in granting the licenses. Q: Your sense on the private banks, you are comfortable holding those stocks? You think you own the best ones, HDFC Bank etc so no problem. Aviation is another space, InterGlobe Aviation (IndiGo) has come off quite a bit recently, went up all the way to Rs 1,400 is back below Rs 1,000. A: I think we were more, I would say, we could not predict well. Company did what company did, it is for us as an analyst to figure out. I am not talking about the stock price. Q: Are you less exuberant about the business now?A: No, I am as excited but after this quarter's result, I am not too certain whether I can predict.Q: Why is that?A: Because it didn't come as per my expectation. Numbers didn't come. I track only profit, stock price is for the market to do but say if I expect last year profit was Rs 650 crore, I was expecting around Rs 700-750 crore. It came to Rs 600 crore. Q: When has a quarter's miss started to bother Raamdeo Agrawal? What is it that really worrying you, is it demand?A: No, it is not business demand. It is just that what will be the -- they have the leading position with 40 percent share [but] does it have any pricing power? Do they control the market, in the sense is their destiny in their control or is somebody else controlling their destiny? I am not very clear about it. Q: The decision by them to also delay taking orders, taking charge of aircraft, do you think that is also in a way it masks the underlying demand weakness?A: Those are minor issues. There is no demand weakness. Month-on-month, last month also it grew by 21 percent. Market is doing very well, oil prices are soft, so it will further stimulate the market so I don't think there is any dearth and railways are as bad as it they were. So obviously you will get enough traffic. With the economy coming back, the number of people who are going to fly, or want to fly, will be too many. So, I don't think it is about the demand.