How rocky is India's road to 10% growth?

Below is the verbatim transcript of the discussion:

Q: When you look at a market like this, do you change the way you invest, do you change the way you evaluate companies and how important are the experiences of last several cycles that you have seen when you think about investing in such a market?

Shah: Investing is very simple and common sensical. It doesn’t change with the market cycle, it doesn’t change with companies, it doesn’t change with the sectors. If we see the growth investors versus value investors, eventually the consensus truth is that growth without value is useless and value without growth is useless. So, no matter where the market is all you have to find out is companies that are available at a reasonable price, which are available at a price or a performance which is going to be more than what market is discounting. If you can do that consistently irrespective of market cycle you will get your winners.

In 2008 market was at top. By 2010-11 markets had come down dramatically but within that you could find a large cap company like TCS which went up 5-6 times. So, even at the peak bull run of 2008 you could still invest in a large cap company like TCS as much money as you had and you would have gone up 5 or 6 times whereas the index would have become half. So, no matter where market is, no matter where cycle is if you can pick up good companies you will always make money.

Q: I know you can pick the TCS' of the world etc and there could be select examples but on a consistent basis do you have to worry a little bit more, do you have to do deeper analysis, does something change in the way you do your day to day activities because the margin of safety which we all learn about in business schools theoretically at least goes away, right?

Shah: Stock investment is not like a science, it is an art. There are no defined rules of success from a scientific basis but certainly, there are defined rules of success from an art basis.

If I take this class back may be 10-15 years and then ask them to invest on just two simple common sensical thing which even my mother or my daughter can answer that I will invest in company which will remain in existence after 10 years and I can visualise today that they will make more money 10 years down the line than they are making today, just two common sensical questions. I am sure anyone can answer them with conviction and then you start visualising your investment philosophy.

Q: Do you look at at least what has happened with the stock market versus what has fundamentally happened with the company. There is somewhat of a dichotomy with the movement where earnings have not really gone up, there is no change in the way the companies are performing, yet we have seen the prices go up 30-40 percent and in some cases 50-60 percent in some sectors?

Sivaram: Typically at the turn of a cycle the valuations always look expensive because one, it is an occupational hazard that the analysts cannot project what will happen next year when a cycle turns. A classical example is what is happening right now, we are at the bottom of a cycle. If you look at the capacity utilisation of most of the companies they are very low right now, be it an auto company, cement company you just go on. Everywhere capacity utilisation is very low.

We know that when the cycle turns and the demand sort of picks up there is an operating leverage which kicks in and we know interest rates are very high right now and people can argue it will go down in six months or one year but eventually interest rates are heading downwards.

If you put these things together what we can anticipate is that the EBITDA growth will be faster than the sales growth and the profit growth will be faster than the EBITDA growth because of these reasons. It is sort of a triangle formation. Historically whenever you get these sort of triangle formations, those are the best time to invest in the market.

So if you go back to 2003-2004, 2004-2005 the profits for the market grew at almost 35-40 percent. Beginning of the year analysts used the standard model which is 15 percent earnings growth. That is the occupational hazard, that is how they are trained. So, can I say 100 percent sure that it is going to happen next year, probability is very high. Now whether it happens from second quarter or third quarter it is very tough to say, but we have everything in the making for a very good next few years provided and the fact that we also have a very good government right now and if they just do enough these valuations are misleading, that is the only point I can say.

Q: Will you look at India from a little bit far away. Do you see it slightly differently because you have the luxury of sitting in London and looking at how things happen in India?

Vazirani: The first thing to say is that market is always right, rule number one. Rule number two, if the market is wrong, refer to rule number one. So, what does it mean. Yes, we are at, from historic perspective, at expensive valuations. So we are about one standard deviation away from last 20 year mean. As Sridhar and Nilesh said there is a lot of analysts putting in some numbers and just to give you, a colleague of mine did some mathematical analysis. The chance that an analyst is correct in his 5 year forecast is one in three billion. So, so much for analysts forecast.

So what is the market pricing in? What the market is saying is that there will be growth, we don’t know when but in the foreseeable future. Much more importantly there will be money to fund the growth.

Q: Do you see any parallels with 2004 and the bull run then versus today?

Baijal: Of course yes in the sense that it is a bull market. We are now starting to believing that we will not only have a three years of bull market or five years bull market, probably have a pretty elongated bull market. One fundamental difference which from 2004-2008 everything was of course going right, there was nothing which India can go wrong. I used to still remember listening to Montek Singh Ahluwalia as the Planning Commission Chairman and talk about how do you sustain more than 10 percent rate up growth. That was a question mark.

The question was never there that should we go 7 percent or 8 percent, the question is how do you sustain more than 10 percent growth rate, which I would in some sense assume complacency. There was some complacency we got set in and we got caught in that 2008 crisis times but still I managed because me and Nilesh were in the same industry.

I still remember 2008 crisis, how we managed the whole stuff. One, mutual funds managing the open ended debt funds and equity funds and the entire money is subjected to fly overnight and the way we managed things that gave us full confidence that how things could come back, but from the real sense point of view there is a clear difference. The one, may be you can call it as god sent opportunities or whatever we call it, at the end of the day from a hukkah world we are now moving to a certainty world.