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Last Updated : Jan 13, 2016 10:28 PM IST | Source: CNBC-TV18

70% probability of mkt moving higher in a year: Raamdeo Agrawal

Speaking to CNBC-TV18, Raamdeo Agarwal, joint MD at Motilal Oswal Financial Services says current correction in the market is a great opportunity for initiating long term investments.


The current correction in the market is a great opportunity for initiating long term investments, says Raamdeo Agarwal, joint MD at Motilal Oswal Financial Services. He recommends investment into systematic investment plans (SIPs) to reap maximum benefits.

Speaking to CNBC-TV18, Agarwal says that he does not expect correction to the extent of 10 percent from current levels. However, he says there is a 70 percent probability that the market will move higher in a one-year time period and just 20-25 percent chances of it falling.

The recent fall in commodity prices have changed the government’s fiscal position, he says. Fall in oil prices has strengthened the government’s position, which will push the economic growth, he adds. Commodity prices, in recent times, have benefitted India, but not other emerging markets that are dependent on it.

Agarwal is not optimistic on earnings recovery in the first half of this year. However, he says one might see some upward movement in second half of FY16.

One of the stocks that Agarwal is positive on is Indigo, which, he says, has initiated re-rating for the entire aviation sector.

Below is the transcript of Raamdeo Agrawal’s interview with Anuj Singhal and Reema Tendulkar on CNBC-TV18.

Anuj: A lot of retail investors who have been investing in Systematic Investment Plans (SIP) and even your funds want to know what is happening right now and is it a good entry opportunity for those who have missed and should one top up in the kind of SIPs that they have been doing?

A: Particularly SIP investors, I must say that this is the time to show your determination to continue because what happens in good times, in any case, you are not going to ask the question. It is only in the tough time in the market that whether you should buy, because right now, SIP guys, they are the biggest gainers. Earlier when index was say, 9,000,you were getting 1 litre milk for whatever you were putting, today, you will get 1.2-1.3 litre milk. So, this is the time you must not stop.

If you stop today, your SIP is gone. And actually, the guys who are not there in SIP, if there is one time to start, it is now, because in down market only you must start and down market you must not stop.

Very purpose you did the SIP in the good market, looking back I am saying, at 9,000 you started SIP, you did that because you were not comfortable with 9,000. You though that market might come down to 7,000, but now when market has come down to 7,000, you should not stop it.

Anuj: In the past you have always said that we should ask how much is the down side in the market, because upside will take care of your money after that. So, I am asking you how much is the downside? Looking at the current set-up, what is your gut feeling?

A: Again, downside you have to see in terms of 12 months basis. In three months, because the way things are right now, noise level is so high, it is very unpredictable, but one year basis, I will be very surprised, your market is 10 percent down from here. It is all probabilistic, in the market it is all about the probability. If you ask me, I will give 70 percent probability, 75 percent probability that market will be higher from here a year henceforth, but there is a 20-25 percent probability that market could be 5-10 percent lower.

Anuj: 5-10 percent lower but in a one year period?

A: In a one year period, but in a two year period I will be extremely surprised if the market is actually down. It should be significantly up. And on a three year basis, it can be very surprisingly up.

Reema: But o you see the markets setting a fresh high this year itself? Do we have enough global or domestic triggers for that?


A: I do not have any crystal ball to guess or figure out but the point is momentums created by declines in the commodity price is so massive, that it has corrected the entire fiscal situation of government of India.

I mean one of the things which low oil price has done, they have not passed it on to, bulk of it, 60-70 percent has been absorbed by the government itself to correct the subsidy and now correct the fiscal situation itself. So, their indirect taxes are growing by 30-35 percent thanks to not passing on the oil benefits to them, because for 10 years, they bled the government revenues.

Now, for the last 12 months, they are kind of using the same source to repair the government finances. So, the repair of the government finances is going to go a long way. It is just about 12 months that they are getting the benefit of this, but the financial condition of government India becomes solid. You will see resurgence, in what way it will come back, only economists can tell you, but today, government of India finances are absolutely becoming solid. It never was that they were in good shape.

Anuj: But, what about the crude oil prices right now. Is that a bit of risk in terms of the kind of sovereign fund flows that may be exiting? That is one risk which is being mentioned. And for India, now should we be worried about what the implications are for global growth? It benefits us, has benefitted our macros so far, but now is it starting to worry us?

A: This global macro, local macro, I have no clue in the sense that I also keep reading the same news papers. I do not have any edge in the same, but one thing I see is that the collapse of commodities, which was built in 12 years, got collapsed in 15 months is hugely benefiting India.

But the world is not getting benefitted. A lot of emerging market countries have been demolished. Brazil, Russia, South Africa, Australia, they are in very bad shape, because their economy was based on the strength in the commodity prices.

So, global emerging market as a pack which had become very popular in the last one decade. A lot of people worldwide, they diversified their portfolio between developed market and developing market and developing market is equal to global emerging market (GEM).

Those funds are getting massive redemptions. And in the process India is also being sold. So, one is that. Second, because the economy underlying is doing badly. I am telling you, do not bother about who is buying-selling.

he issue is whether the country is doing well, whether the companies are doing well. We can only focus on the companies’ performance. If the companies are doing well, like Reliance is doing well, you see what has happened. There are companies which are owned by foreigners, owned by global and very popular among the retailer now.

What has happened, last year, they have performed by 25 percent. It is the largest cap company and yet they have performed. So, the issue is not who is buying, who is selling. It is about the companies’ performance. So, I have to at least, my mantra is to focus on the companies, not about the global macros and all.

Reema: So, speaking about companies’ growth, FY16 has been the fifth or sixth year that we have seen earnings downgrades. Now, all hopes are pinned on FY17, analysts are projecting a growth of 16-20 percent at least for FY17. As things stand, does that look optimistic or are we likely to hit almost 20 percent growth in FY17?


A: It is too early to say. Analysts are asked to put it, so they put it up. Then they start the year with 15 percent and they keep coming down every quarter. If you ask me, I do not see for the next two quarters at least, any kind of significant earnings growth. But, I would be very optimistic on the second half of the year. Why I am saying this is that this earnings growth is very much impacted by the trend in the oil prices.

Now, oil has moved in the last 15 months from USD 110 per barrel to more like USD 30 per barrel which is a massive adjustment, USD 70-80 adjustment into one of the benchmarks of the energy prices, which is a USD 10 trillion industry. USD four trillion for the oil, as much for the gas and as much for the coal. So, all three are completely in shambles. So, this adjustment is so massive that it has taken all kind of industry losses and raw material price decline and everything.

So, once this stabilises, and I hope, it is stabilising in the next six months. I do not think if it goes on like this.

Reema: But, that helps the margins and bottomline, not so much the topline.

A: No, if you run a business, then you realise that raw material prices, the finished product prices get adjusted immediately, whereas my production process is 60-90 days.

So, I have to use the high cost raw material and sell at lower price. So, there is a continuous inventory loss in the inventory, the work in progress and everything. And the consumer wants it at the cheapest price. So, I think the world must stabilise.

Anuj: I have been wanting to ask you for long now, ever since IndiGo’s initial public offering (IPO), as a find you invested a lot of money in IndiGo and your smile says that you are happy about it. You made a lot of money on IndiGo, but is this a story which is still unfolding and can we see big gains from here on for aviation companies?

A: The best of the gains are still ahead, because what we have seen is the USD 35-45 per barrel oil price. In fact, the current price reflects, in my mind at least, USD 45-47 per barrel oil. So this 45 to 30 is yet to happen. I mean, USD 6-7 happened just in one week.

Even aviation turbine fuel (ATF) prices have also not been adjusted for that. So, there is a lot to go there. Second, it is not only about aviation. You get barely a company of this stature which brings a consumer. Where we got excited, it is not about aviation company, it is about the consumer proportion.

It is a company six years old, which came out with first plane and in six years flat, they got 40 percent share. And if they really want to ramp it up, they can go to 50-60 percent. It is a cake walk for them. So, in a scene of bankruptcy, all the three competition, Air India, Jet Airways and SpiceJet, all three were in shambles. In that a company comes and gives the best possible consumer experience.

Anuj: So, this is not just an aviation play that you are doing, it is a specific call that you have taken on IndiGo.

A: It is a call on IndiGo, not n the aviation sector as much. Of course, the happenings in the sector is benefitting others also. In fact, you see the rerating, what has happened the rest of the price, only after the listing of this. You see the price movement after the listing and before the listing.

So, it is a clear leader and my sense is the full power of the leadership will play out in the next 2-3 years, so I hope there is a lot more to make and this is not an ordinary company.

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First Published on Jan 13, 2016 11:32 am
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