Clear skies ahead; time to invest: Ramesh Damani

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Ramesh Damani, Member of BSE, shares his views on how the markets are likely to pan out as we move into 2007. He sees clear skies ahead for the year, and believes that the India bull market still has a long way to go.

He advises people to participate in this bull run and professes that this is the time to invest, as in his opinion, the markets are at the lower end of the appreciation band and there is a lot more upside left.

He further adds that domestic participation is expected to be very healthy this year, and the market is likely to over come the froth seen in select areas.   

Excerpts from CNBC-TV18's exclusive interview with Ramesh Damani:

Q1: Delhi is all fogged out. Is there any fog on the windshields of the markets, or are things absolutely clear?

A: There is a clear sky. I think there is a saying that our aspirations are our possibilities and for the first time the regulators, the government as well as the retail investors, are coming to grips with the fact that this is the defining bull market.

Every country goes through a defining bull phase like this in its 50-60 years history and I think the realization is finally donning across this great country of ours that this is the defining one. Investors should be aware that these are times to invest in the great companies of India and prosper; there will be booms as well as buzz like in October and May as well as a couple of years back, but the trend remains strongly upwards.

Q2: This is the fourth year that we are seeing a bull market of this magnitude. Last year was a spectacular 46%. When you say defining bull market, are you talking about these kind of returns coming in every year and if so, for how long?

A: It is hard to say of course, but we went back and studied all the great bull markets of the last century - whether it be the great Dow Jones' bull market of the 1920s, or the Japanese bull market in 1964, which started at the 1500-mark and ended twenty-five years later in 1989, or you look at the other regional bull phases that Thailand or some other markets enjoyed; typically these bull markets tend to take up the Index anywhere between 5x to 15x and we are at the lower end of the appreciation band; so, clearly in terms of historical price appreciation we probably have a long way to go.

Q3: Some people say the cycles are getting shorter. Is there a chance that the cycle could be shorter than the cycle that you mentioned in the past?

A: It could of course but generally though history doesn't repeat itself, it does rhyme. I think before this bull phase ends, you will see. They don't end with a whimper but with a bang and I think there will be a carnival like atmosphere; there will be a belief that this bull phase will go on forever and ever. My sense is that domestic inflows will be very healthy this year. So I think the trend is good and that the phase will continue for hopefully another year.

Q4: Do you see that to be the essential driver for the bull market in 2007? The kind of money that the domestic mutual funds have been pumping in because on YoY numbers, has seen little slippage in the FII numbers?

A: I think the driver is not that; liquidity follows a bull market. It doesn't cause a bull market,per se. The performance of corporate India, the fact that India is now the most favoured destination in terms of tourism, in terms of nuclear energy, in terms of mergers and acquisitions - these are all the forces driving or restructuring, a billion new capitalists to paraphrase the Book of India and this a one-off thing that may happen once in a few generations and I think that is the reason behind the enormous excitement in liquidity and run-up in stock prices in India.

Q5: Will this momentum also correct all the things that can go wrong? Infrastructure for one, do you think that just the sheer pace of the bull market will ensure that the markets will take care of all of that?

A: I see a lot of froth in the market in terms of some of the secondary market stocks. There is extremely a lot of froth going on there; the IPO pipeline is going to be very fat and greedy. There are enormous challenges ahead for this bull market, which have a tendency to be able to overcome these problems. Surprisingly enough the problem that you mentioned in the infrastructure is there but is well known by the market.

 The biggest problem I notice when I talk to corporate India is the intellectual bottleneck, the ability to hire, retain and train senior managers. Without doubt every single corporate Indian that I met told me that the biggest problem arises in the HR area and not in the physical area.

Q6: One word on the kind of themes that you are seeing playing out in 2007 - are we still going to be looking at a lot of activities in the capital goods, in the IT space or do you see new themes emerging?

A: Clearly there is a well established leadership pattern among the A group stocks - for example, ICICI Bank or Bharti Telecom and I think the pointers look good for those companies the year ahead. A lot of retail investors, at 14,000 Index, are very scared looking ahead and are afraid of market correction. This will get the 1992 or 2000 blues - when the market had a very punishing fall.

 Whenever this bull phase gets over - in may be two or four years, or three months from now, there will be a very serious fall. And all bull markets end badly there has not been a bull market that has ended well but the trend still seems very intact and we are advising our clients to put some money into some potential dark horses or into some potential turn-around themes - the domestic consumption ones because that will be a huge theme driving this economy forward.

Q7: What is this theme because haven't all the domestic consumption themes really tagged on to the bull run of last year?

A: There is a way to go. I think if you just look at statistics, the number of middle class families that India is going to create over the next three years or the fact that on Dhanteras for example Nokia sold four lakh mobile phones on a particular day, which is unheard of in almost any country that they have done business in; and Nokia does business all over the world.

 There are many anecdotal evidences that the consumer is going on a buying spree, not just the Indian consumer; the government with its buoyant tax revenues is going to go on a spending spree over the next two or three years. The government spending will take the economy into account and I think both, the consumers as well as the government are going to be spending. So consumption will be a powerful theme that will run across the next few years in this bull market.

Q8: Will it be the same sectors that did well last year? Will it be telecom, automobiles or are you looking at sectors that lagged last year like airlines? Jet for instance was down quite sharply over the year, Deccan too was not doing well. Do you see the laggards of last year picking up or would you bet your money on the winners?

A: I think clearly in term of a portfolio or fund-manager, you need to be in some of the big banking companies like ICICI Bank, or Bharti Telecoms of the world, because they tend to keep pace with the market. But what we have suggested, because a lot of our retail clients and I deal exclusively with the retail, is that they have a sense of vertigo and will look at stocks that have a turnaround potential or the ones that are the dark horses when going to 14,000.

 It may not be necessarily well-known or well discovered for the market; so they are trading at very modest market caps; earnings are still poor but if we get the domestic consumption theme right, then these companies will edge their way to profitability, not perhaps over six months or one year, but may be over two or three years.

Q9: Are there any names or are you keeping it exclusively for your clients?

A: Not exclusively for my clients; this is to give you a fair idea. Say for example, we believe commercial air-conditioning has a big potential in India, whether it is residential or commercial. So something like Hitachi will tend to do very well.

If you look at the consumer sector business spending, which we think will skyrocket, look at the financial companies involved in the segment. There is a small company that we think over the three-year period will do well; I would not recommend anyone to buy or trade Any names it for six months - a company called GE Capital, which trades around Rs 150. So, over the three-year period, GE Capital and Hitachi should benefit from this primary theme of domestic consumption that we have talked about.

Q10: You spoke about McDowells at the beginning of three years at Rs 8 and gave the two-year horizon, which shot up in six months. Are you still bullish on liquor companies, or are they overpriced?

A: I am, but let us not get confused with the scale; we are very lucky to get to trade in this bull market and let me make my full disclosures that I have positions in both the stocks mentioned. I have enormous vested interests, my office buys and sells the shorts freely because we are a brokerage house.

Q11: You were very bullish on the disinvestment theme at one point of time. Then you got fairly fed-up as time went by; how is it looking this year?

A: We have had many discussions about the public sector stocks and would still point out one thing to you - that these stocks have been absolutely great winners in the bull market. Take a Container Cooperation and Bharat Electronics for example - they all are 20-25x from the prices we used to speak about them so frequently, so it has been a great theme despite having absolutely zero progress on terms of the disinvestment because at the day end, they were great businesses that we have invested in and I clearly think that the odds are that we are not going to be disinvesting in the next year or so.

Q12: The outlook on oil prices seems to be that it could stabilise or go down this year. Would you get back to companies like BPCL and HPCL if you were out at all because they were losers last year? BPCL down about 25%, HPCL down about almost 15%.

A: I think from a pure-value contrarian pick, which I happen to be, I just find these companies enormously attractive. They are trading at 0.1 times sales, 5% dividend yield, almost impregnable business models, retailing, refining petroleum products. I think that oil prices will probably be higher. So why am I bullish about these companies? I think they will find a way to make money; the government cannot allow these companies to close down. They will have to allow them price their warest freely. If you are a contrarian investor you would put a small percentage of portfolio to these companies as I have.

Q13: From the broader markets just as a consumption theme that you like or is there something else also that you fancy, in the kind of rally that we have seen in real estate?

A: Real estate is one sector I was scratching my head on; I just do not understand the valuations. When Soros was here, I happened to meet him. He said one thing that made sense. He said, "If you look at the built-up area - residential or commercial - they probably won't fall a lot because this is not a very highly leveraged market.

I think this is paid mostly by people paying cash upfront but if you look at the land-bank that the companies are acquiring, getting multiples on land bank, they are extremely leverage and could be prone to a downturn if interest rates go up or if someone decides not to hold the bag anymore." So at least in real estate, some passing-on call, I am bit circumspect about the valuations that I have seen.

Q14: Any other broader market themes that you like at this point?

A: I think that we continue to like mid-cap technology; we continue to like a lot of other things that have been winners in the past. We are trying to balance two things, the industries we meet, or have vertigo and then they want to buy companies that are unknown and unheard of, so they can prosper from that but I think that overall the market will be a good one this year.

I think B1, B2 leading up to the Budget will probably have a good year. The full challenge for the market is to accept the Budget and it is not too early to start talking about; it is barely 60 days away. So I think the first challenge will come in the Budget; till then, probably there will be the sweet spots for the market. I think January-February are historically very sweet spots for the Indian financial markets.

Q15: When you say the first challenge, you are not very synched that he will be able to cut tax rates that people are hoping for, because there are various stocks that the Left is going to get its way in and may be not many tax rates be cut. Is that a view that you share when you say? Is that a challenge you see?

A: It would be. Basically, I can make out two parts from the noises coming - that he will actually cut the corporate tax rate because tax collections have been so buoyant and he is a supply-side believer. If tax collection goes up, their rates go down. Compliance has been very good in corporate India.

 I will point my hand at what happened in China few days back. They cut the corporate tax rate in China; the market was up 5% making a lifetime high. So there is some belief that raising corporate tax rates will worry the market. The market will be watching at what he does with the long term capital gains, if there is belief that he will reintroduce long term capital gains in the market.

Q16: The final call on commodities?

A: I am firmly in the Jim Roger's camp but think we are on a multi-year commodity bull run and that the current phase is probably the pause that the commodity markets are going through - consolidating. I think we will see higher prices ahead for commodity in the next few years.

Q17: So would you look at large cap Tata Steel, Hindalco, or elsewhere?

A: Of course, what is going to happen over the next year or so in terms of the acquisitions of Tata Steel is a questionmark, but Tata Steel is increasingly beginning to look like a good value player.

Disclosures:

I have a vested interest.