Domestic investors in a mood to redeem: Raamdeo Agrawal

He also spoke about State Bank of India, calling it a rock. As far as secular growth stories are concerned, this is a testing time for good franchies,” he said.  He won’t be selling his well-earning franchises for something that may turn good.

Outgoing Rajan’s achievements also got Agarwal’s thumbs-up. “One of the biggest achievements of Rajan is putting banking licences on tap. It is a huge revolution.”

The rush for midcaps is high, he said. Investors are leaving out large companies, he said, adding that this time around all these companies like TCS, Infosys, Axis Bank, ICICI Bank are at reasonable PE multiples.

Pharma is untapped, he said. A lot of growth is ahead, he said. "There are going to be newer companies in the sector. We are going to see the emergence of new companies. It is a wide sector."

Navin Agarwal  said that growth is coming back for sure. With a good monsoon, and the GST out of the way, benefits of all these will come in 6-8 quarters, he said. "We have a bright future of corporate earnings, he said.

Consumption sector is under-penetrated, he said. There are a plethora of home improvement companies, he said, which are interesting. Ceramics is getting more organised, he said. GST will drive the market share of these companies.

Rajat Rajgarhia said that we have over-lived the period of less than 5 percent growth in the last 7 years. You can definitely start sensing that the strong double-digit growth is lying ahead.

Below is the verbatim transcript of Raamdeo Agrawal, Navin Agarwal and Rajat Rajgarhia's interview to Anuj Singhal & Latha Venkatesh.

Latha: Tell us about the seminar itself, you always make it big but this time it’s bigger than big, the biggest life insurance company in the private sector, the biggest stock exchange, the biggest two-wheeler company and the most important of ministers Piyush Goyal is going to be addressing, so first tell us how big is the 12th Investor Conference?

Agrawal: Every Investor Conference is becoming bigger and it should be like that and this time it’s a middle of this new government and Acche Din is still people are waiting and it is just about, so people are very in introspective mood to see what’s happening here. Globally, there is lot of gloom, negative interest rate environment is there, growth is a big problem, people are searching for yield, pension funds are likely to go bust, not being able to meet their defined benefits for their customers. The search for growth is really very hard and in that backdrop India is one place which is looking to be very, very interesting and one that we have a huge potential.

We are just about USD 1,000-1,500 per capita USD 2 trillion, so USD 2 trillion looks a little big, but per capita is just about USD 1,500-1,600, so we have a long way to go and we have current account deficit, fiscal deficit, inflation under control now, good monsoon, new leadership, ease of doing business being the theme of the government, developmental politics is taking roots. I think very interesting times. In that backdrop this conference is here.

Anuj: Last year at the conference the Nifty was at same level, the market was at same level, but the sentiment was different, the market was at that point sliding and now we have a rising market. So things have changed even though the market may not have moved much, but what’s been the feedback, the initial feedback from your investor?

Agrawal: I think Rajat is more in touch with customers on day-to-day basis, so he would be able to tell you more about that. However, as far as the domestic customers are concerned where I am in touch with that and I was telling you just now there is so much of concern about market being at a high level, stocks are expensive, non banking finance companies (NBFCs) are through the roof and hence it is the time to take the money out and go for retirement types like lot of guys are making a very permanent type of call and all.

Market has done so well and all the products, mutual fund products and they are at all time high and this is redemption because of high performance. I understand redemption because of non-performance, but this is a time when people are pulling out from the market because market has done very well. They are scared of repeat of 2008, people are scared of 2008 and all, but at current marketcap of say 72-73 percent to gross domestic product (GDP), I mean always market can correct by 10-15 percent, but I don’t see any kind of crash or big thing happening here.

That fear right now at least domestic investors are kind of very happy that they have made money, but they have kind of withdrawn, at the mode either they are not buying or they are in the mood to redeem that is the mood in the domestic market. I think Rajat can guide you.

Latha: Globally, you can make a case for doom as well, if there are negative yields and all time low interest rates, they actually are factoring in a depression economy or a recession economy. At the same time earnings are also faced with their highest valuations. One of them has to give is the argument what is the sense you are getting? Do we break out of this long period of consolidation on the upside or on the downside and why?

Rajgarhia: If you look at our earnings growth phases over the last 25 years the compound annual growth rate (CAGR) over this period always works to be 13 to 15 percent. However, it typically gets five years of 25 percent and five years of 0 to 5 percent growth. I think we have over lived this period of less than 5 percent growth for the last seven years. You know, we may be off by a quarter or two, but you can definitely start sensing that strong double digit growth is just lying ahead.

Coming back to what Anuj just asked Raamdeo Agrawal about global investor’s mood, I think year after year you see foreigners continuing to pump a money in to India over the last 15 years with an exception of one or two years every year they have been net buyers. Most of the big traded stocks the majority of the ownership after the promoters now lies with the foreign investors that is why many of the stocks keeps on hitting the limits. So, I think it is also a function of how much supply of paper that we can offer to global investors because somewhere the flows are also partly constrained by what they can buy. However, the mood amongst the foreign investors for investing in India is very positive right now.

Anuj: In the conference the companies that you have inviting almost form 60 percent of the marketcap of India. What has been interesting is the kind of bull market that we have had in the broader market in India. We keep looking at the Sensex and Nifty but the real money has been made in the broader universe. Do you get a sense that that is going to continue? Is that your feedback as well that that is the space to be in?

Agarwal: So, just building on what Raamdeo Agrawal and Rajat Rajgarhia just mentioned of this whole phase of 25 percent earnings growth for five years ending March 2008 and then 6 percent earnings growth for the last six years. I mean we were just looking at some numbers. This year ending March 2017 the overall Indian corporate sector profits are expected to be anywhere between Rs 5.75 and 6 lakh crore. The GDP of India is about a Rs 150 lakh crore. This is a lowest corporate profit to GDP that you have seen in over a decade at about 3.9 percent. This number has averaged over the last 10 to 15 years at about 5.5 percent and has peaked in March 2008 at 7.8 percent. So, you are running exactly at half of that level. Even if you assume that we go back from the current low profit margins of 10 percent from a high of 15 percent that we saw in a 2008 and corporate profit to GDP reverts to just 5.5 percent. At a 11-12 percent nominal GDP growth you would be at about Rs 215 lakh crore GDP by 2020. 5.5 percent of that gives you Rs 12 lakh crore.

You are talking about a potential 25 percent growth in earnings. I am reminded of my clients who used to keep telling me every year from 2003 to 2008 that analyst are perennially under estimating because they were always estimating 15 and market used to deliver 25. We have come a full circle where last five years every time you estimate 15 it turns out to be 5 actually. Today there is no belief that we could ever get back to 15. People think that 5 is the new normal, I believe that reversion of this 3.9 percent corporate profit to GDP to around 5-5.5 percent reversion of the corporate profit, net profit margin from 10 to 12-13 percent is not a big deal at all from where we are.

Inflation is coming back a little bit, growth is coming back a little bit; interest rate are falling, we have had a good monsoon, goods and services tax (GST) is out of the way, 7th pay commission awards benefits of all of this will come in the next six to eight quarters. Right now we have just had news flows, not the benefits of those. So, I think we have a bright future for corporate earnings from the gloom and doom that is painted right now._PAGEBREAK_Latha: You have always picked up consistency of growth but if you looked at this year's performance, let us take banks because HDFC Bank is one of the first invited companies in your list, actually year-to-date State Bank of India (SBI) has delivered a higher return than HDFC Bank in terms of stock returns only. Would you now look at the economy facing sectors with a slightly different eye? Would you look at sectors that normally don't come in your focus 25 or your focus 35, would you look at state owned banks for instance?

Agrawal: Just to put the record right, we have SBI and all the way from the top to bottom we stayed on. So, we have suffered with SBI's fluctuations. SBI is a very different case; it is 24-25 percent of the entire banking system. It is such a big rock, howsoever hard you push it will not go down, eventually it will climb up. So, with that faith we have some allocation out there.

As far as the secular growth stories are concerned, in fact what is happening is this is a really testing time for the good franchises particularly in financial sector and even in other sectors because when the economy is slow which ones have those differentiated strategy or ambition or extra work which can give you that extra bounce in terms of earnings - 20-30 percent and that is why the companies which have quality franchise and growth - QG - both are there and there are very few, maybe be 150-200 companies, those companies are being lapped up.

We popularly say don't come in front of speeding truck. So, I am not going to sell my well running franchises and go for something which may become very good.

Latha: But this speeding truck in terms of NBFCs, you take Bajaj Finance and Capital First of the world or you take the Ujjivan and Equitas or the up and coming RBL, the way they have run up, this speeding train you will board?

Agrawal: If we have boarded we will not get out.

Latha: Will you board?

Agrawal: If we like something, if our perception is that growth rate is longivated, if something is growing at, in India to talk about 40 percent growth is not out of context. If something is growing at 30-40 percent and we think that next 5 years also it can grow, I am willing to buy at 30-35 PE.

Anuj: Since we are talking about the train that you boarded, one of the train was Infosys, I don't see any of the big IT companies being invited or being part of the conference. Is your view changing after the commentary from Infosys because we spoke about it in our show as well that you have taken a big bet on Infosys, is that changing a bit?

Agrawal: Portfolio is one thing conference is another. In conference we have to reflect the mood of the markets, mood of the investors. Ultimately what people want to listen, ultimately there are limited 15-16 tracks and in that you have to accommodate all kind of guys and the new ones also, say like you have now the first time insurances coming up. The best and the biggest insurance company is presenting and it is a large sector anywhere in the world. In India it is small but that opens up a new mindset. Even I am eagerly waiting to listen to HDFC Life. I have met all of them but yet I would like to listen in the public forum what exactly is the opportunity, how things look, what are the other guys saying, what is the experience in other parts of the world. It is a very large country, young country where life insuring possibility is massive, we are just about started, they have broken even barely in last 2-3 years. So, the runway is very long if there is a profitable growth.

Rajgarhia: We have a panal where the whole new bank licensees are participating, so that is a new segment which is now coming up.

Agrawal: One of the biggest contributions of Raghuram Rajan was opening up the banking sector for the private sector and finally he has even put it on tap. It is a huge revolution. After 20 years of limited opening we have seen the market cap of HDFC, ICICI, Axis, Kotak being much bigger than 75 percent of the PSU banks, so what is going to happen in next 10 years, these banks are going to become very large.

Rajgarhia: If you look at the whole market and the growth outlook over the next 5-7 years, the two big sectors, one is financials and second is consumption and the consumption paradigm is just getting more and more broader. So, that is why we have United Breweries, Pidilite, Bajaj Auto do benefit from the consumption theme. So, the conference has some of these very interesting companies and their CEOs sharing their views on what the next 3-5 year growth outlook for them is looking like right now._PAGEBREAK_Anuj: Let us talk about Pidilite for example or UltraTech Cement for example, they have all four of them Quality, Growth, Longevity, Price (QGLP) but the problem with some of these stocks has been that you always have to pay top dollar to buy some of these stocks. Do you think we will still remain in that kind of a market where you will have to pay premium to buy some of these stocks? Rajgarhia: One thing that this market has taught in the last five years is that anything that looks expensive on a 12 months basis, if as a growth continuing over a five year basis still continues to get re-rated and most of the leaders in their respective categories have set new benchmarks of valuations. So, we also have to be more flexible when we look at valuations because these are very exciting times for many product categories. We never thought cement in the early stages of a recovery will start trading at USD 200 plus EV per tonne. However, maybe that is going to be the new benchmark. However, if we are clear that the next five years demand is going to be better than the last five years, don’t just get off the bus because the valuations have because what you will buy next may be cheaper but may not have growth left in it. Latha: What is your sense about consumption companies which are at the moment second rung? You have the Asian Paints and you have the Page Industries, would you rather put incremental money in these consistent 10-year stories or in stories that will be the next 10-years. Where do you smell the next 10 years in the consumption space? Agarwal: Basically in India, most of the consumption categories are highly under-penetrated which is the story let us say for the leaders. So, for instance, Asian Paints in paints, United Breweries in brewing or United Spirits in alcoholic beverages and so on and so forth. However, you are absolutely right while these companies will surely continue to do well and exploit their leadership position as we close the penetration gap, I think there are many interesting discretionary consumption categories that are now emerging which can potentially do exceedingly well. So, for instance, there are a plethora of home improvement companies which are now starting to do well. Ceramics is a category that is now getting more and more organised and reforms like GST will drive market share in favour of these organised players which are themselves under penetrated categories. So, we believe that while the market leaders will certainly continue to do well as the under penetration in these categories is bridged, but these emerging categories can do far better in terms of growth rates, in terms of re-rating, exactly the same way that Pidilite and Asian Paints have undergone re-rating in the course of the last 10 years. Latha: Let me put it directly to you, HDFC Bank versus IndusInd Bank versus RBL Bank, where will you put maximum incremental money? Agrawal: RBL Bank is not listed so we will start from zero base. Latha: When it lists, it is not very far from your investor conference, maybe in a week. Agrawal: Yes but I don't have those stocks. So, if I have put already in these two, so, if I want to put incremental money, obviously the choice will be RBL. It is just by default; from zero debt what do you do?Latha: You were not one of the anchor investors? Agrawal: We are.Anuj: The question that you avoided or moved on, on Infosys, IT, because now that it is not as loved as it was last year and so that is reflected in the conference but your personal call, do you think it is now offering a good entry point for those who would have missed out? Agrawal: Tomorrow is the full day conference, I am going to get up at 6:30 and rush to Pune to meet Vishal Sikka. So, tomorrow is the conference, we will take a call, we will hear for three to four hours, we will see what are the -- the competitive advantage of India in the tech field cannot be still undermined. Now it is also impacted by whatever is happening within the industry but the global economy is in slow mode and BFSIs pace which was one of the largest client base, after 2007 they have been suffering big time. One bank or the other something collapses and they are very large clients of these guys. So, that is posing its own challenge. Second is the kind of new technological development, digitisation that is opening opportunity as well as it is cannibalising the older models. So, where does it stand, it is an open question in the sense that 10-12 percent growth they are still not denying, 10-12 percent dollar growth is not bad. There are very few companies in India which are talking about 10-12 percent volume growth, to have an such high quality franchise with a high cash flow, transparency, high payouts. So Infosys sub 15 times 2018. One of the crazy things about the market is that right now all the large pools of profits are grossly undervalued. They are available at sub 15 PE multiples.Look at all your oil marketing companies, Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL), Indian Oil Corporation (IOC), all of them are 5-7 depending on whose number is what, anywhere between 6-8 PE multiple. You look at Reliance Industries, that is just about double digit, about, maybe even less than 10.Anuj: Are you confident about Rs 75 EPS for Infosys for example because that 14 times will depend on whether that EPS number is achievable or not?Agrawal: Rs 2-3 here and there, not much. The PE multiples cannot move. If I am saying 15, it might be 16 but it is not like 26 or 30. What I am saying is that large pools of profit, this time the rush for midcap is so blindingly high that people are just missing out and leaving the large franchises which are actually going to remain on face of ours in the next 5-10 years, they are the companies which are going to take us forward. Every time the market is different but at this point of time all these companies, TCS, Infosys, Axis Bank, ICICI Bank, Reliance Industries, everything is like a very reasonable PE multiples.Latha: Let me rephrase Anuj's question this way to you, until say March 2016 or June 2016 how much did IT form a part of your focus 25 or your focus 35 and how much will it be 12 months down the line?Rajgarhia: The scheme discussion you can do with Raamdeo Agrawal, I can share the model portfolio that we typically make for our strategy reports. So, we have been underweight on technology now for at least more than a year. The two basic reasons while over a 10 year period the compounding of these stocks can well be 15 to 20 percent from 2009 to 2014 the big ones like Tata Consultancy Services (TCS) and HCL Tech moved up by 15 to 20 times. This was also the period when they lived through the best phase of the currency. I just think that markets always moves in cycles as earnings move in cycles you had five years of great period for technology. You may have five years of great period for the domestic facing sectors and investors have to keep on shuffling their portfolios.Anuj: Of course one more speaker would be Rajiv Bajaj from Bajaj Auto and at Motilal Oswal you have always liked two-wheeler companies you have started with Hero MotoCorp which of course was always an iconic investments for you. Eicher Motors and now of course Bajaj Auto as well, the big question is among these three which ones do you think the investors would end up making most money over the next five years or ten years?Agarwal: What has ended up happening is very interesting in the two-wheeler sector, while two-wheeler can be generic as one single thing. Each company has ended up carving out some niche for themselves and the modes are so invincible so for instances in the premium bikes Royal Enfield has its hands down. It is almost impossible to beat them.As far as the export side is concerned while Hero is trying hard to get into that segment, Bajaj Auto so firmly entrenched although the global slowdown and country specific issues are impacting their own exports, but Bajaj has a fairly deep mode as far as that business is concerned. Turning to scooters you have Honda Motorcycle and Scooter India (HMSI) by far the leader in driving almost all the incremental growth in the sector.However, given the good monsoons now after two bad monsoons Hero is obviously, well penetrated into rural India. While they seem like one category, one set of companies all four have very dominant positioning in some segments some mode, which is difficult to break into for each other and they have become kind of unique companies in themselves.Bajaj itself we think is very well positioned because of their focused on motorcycle one hand; export three-wheelers, very strong balance sheet, strong dividend payouts so we continue to like the stock very much.Latha: Finally, all is not well with the wellness industry, which pharma company will you pick?Agrawal: We have Sun Pharma, we have Lupin and we have Ajanta Pharma. I think pharma industry is very untapped opportunity, still lot of growth is ahead. We had some issues with the FDA inspections and all, but I think a lot of relief is there in last 4-6 months, a lot of relief is there. They have done their job of telling them, “boss, you guys are going to become big, so gear up yourself with the quality and everything and these guys have also taken notice”, that yes we have to do that, but opportunity is very unique to India.Now whether it falls in company A or company B that is the only issue, so I am very clear that this opportunity is a growth oriented opportunity and we are going to get even newer companies, which are coming in this sector say like Jubilant Life Sciences you might have seen very recently, Ajanta Pharma we saw 2-3 years back.We are going to see emergence of new companies in this sector, because it is a very wide spread sector. So lot of these companies which are first time starting to export to US which is the world’s largest and most precious market, whenever they start their mix changes, their profitability changes and the valuation changes.Anuj: Ahead of this conference, do you get a feeling that we could be at the goldilocks scenario, where the foreign investment is going to continue. You have said that you have seen some domestic redemption because of profit booking more than anything else, but that will also comeback. Do you think we are at a stage like that?Agrawal: See investor psychology you cannot understand and in the very short term, you people are driving psychology, so whenever you push them to buy at some time they start buying, because foreigners are not going to relent. The kind of interest rates scenario I am seeing, I don’t think we are going to see much lull in that side. I mean what are little they are buying, they will keep buying and then terrific monsoon, GST all kinds of ease of doing business is everyday being announced.I think like railway budget being merged with main budget means there is no resource constraints for railways. You can take up Rs 1 lakh crore project, Rs 2 lakh crore project whatever the general budget sanctions, so a lot of things are being planned. I will be very surprised market actually goes down significantly from here for a prolonged period. 5-10 percent correction anytime it can happen, but whenever this thing happens, when foreigners are buying as well as Indians are buying - - we are going to see some new highs.