Indian equity markets are expensive but still better-placed globally: Raamdeo Agrawal

Raamdeo_Agrawal On FII and Retail Investors Behaviour

Indian equity markets aren't cheap and are among the pricier ones, trailing only Japan, which command a high price-to-earnings ratio of 26 times, compared to India's 22, said Raamdeo Agrawal at the 19th Motilal Oswal Annual Global Investor Conference on August 22, 2023 at Mumbai

Despite this, Agrawal remains “confidently optimistic” about Indian equities and said much of the optimism, more so from corporates, isn’t fully priced in.

He emphasised that a combination of solid corporate earnings and the active participation of both local and institutional investors is making India's equity market story more picture-perfect.

He spoke about sectors like aviation, hospitality and lending, among others.

Agrawal said that it is an unlikely scenario for foreign institutional investors (FIIs) to emerge as sellers for two consecutive years.

A quick glance back over the decades brought up a pattern: over these 30 years, markets have only experienced net-negative outcomes from FIIs in five years. Furthermore, he expects FIIs to be buyers of Indian equities over the next 3-4 years.

Excerpts from an interview with Raamdeo Agrawal, Chairman & Co-Founder of Motilal Oswal Financial Services.

What sense are you picking up from your conversations with high net worth individuals (HNIs) and corporates over the India growth story?

We have met about 10-12 corporates across various segments, like manufacturing, services, exports, and technology. Currently, stock markets are bullish. However, it seems that corporates are even more optimistic, possibly on par with me. This mutual positivity isn't just due to market highs. Corporates themselves envision significant opportunities.

Interestingly, there's minimal discussion about risks, and no visible concerns have been raised. The overall situation appears picture-perfect. Industry structures are undergoing numerous changes, and lending practices have become more disciplined. The banking and NBFC sectors are in excellent condition. Both the hospitality and hospital sectors are experiencing high demand. In aviation, there's a shortage of planes. The government's Vande Bharat programme, of a few thousand crore rupees, in terms of order sizes, is running successfully.

The prevailing sentiment is positive. It is possible for the economy to achieve a growth rate of around 6-6.5 percent in 2023. If circumstances align favourably, there is potential for the growth rate to approach 7 percent in 2024-25. This positive outlook seems not yet factored into the price.

You think Indian equities aren’t yet expensive, given the sharp build-up in optimism, backed by sharp participation from retail and foreign investors. What are your views on valuations and themes that could be alpha generators?

Yeah, the market isn't cheap, no way. It is enjoyable to enter the market when it is very cheap. It has sold out, not exactly like during COVID times. Often, there's a 10-15 percent correction due to global reasons or something. That's a sweet spot to buy into the market. Currently, we are sitting at an all-time high, clearly. So that will definitely moderate shorter-term returns, say one or two years, or three years. The longer term doesn't matter, half a percent here or there.

The government is committed to capital expenditure in various sectors, particularly railways—like the Rs 2.5 lakh crore per annum. When those orders of Rs 2.5 lakh crore are awarded, 8-10 main players will likely receive them. This is a significant scale change. Of course, there will be other suppliers or component suppliers beneath them. It will have an effect.

My sense is that, as we move forward and if the Indian economy remains undisturbed, momentum will pick up in Quarter 1, Quarter 2, Quarter 3, Quarter 4, as global geopolitics also finds some resolution.

Of course, there could be disturbances, like the US interest rates suddenly escalating by 100-200 basis points. We don't know from where the risks will emerge, but for now, the picture looks perfect. I am confidently optimistic about the current state of the markets.

Let’s speak about the FII trend in August. India has attracted the highest level of FII, compared to that of emerging or developed economies. Do you expect that to change anytime soon?

Certainly, I can only delve into historical data. Since 1993, their involvement has been evident. This spans nearly 30 years of active participation in the Indian markets. Over these 30 years, they have only experienced net negative outcomes in five years.

Within a given year, they might have some months with negative results and others with positive ones, but in total, out of the 30 calendar years, only 5 have yielded net-negative results. Interestingly, last year happened to be one of them.

When you analyse this sequence and create a chart, the likelihood of them buying rather than selling over the next 3-4 years is quite high. At least in the immediate term—given the prevailing bullish sentiment—it's unlikely to have two consecutive years of selling. While it's unlikely to predict the extent of their purchases, one thing is certain: they won't be selling. It would be surprising if their net impact this year turns out to be negative. This addresses a crucial market player.

Addressing another crucial player- retail investors -- the scale of this revolution is evident in the number of demat accounts. By 2020, this count was around 40 million, and it has now surged to 123 million.

In my rough estimate, over the next 4-5 years, the number of demat accounts could potentially reach around 250 million. Even then, growth wouldn't necessarily stop. It is conceivable that the count could continue rising to 300 million, 400 million, 500 million, and beyond. But let's focus on the upcoming 4-5 years.

There is no alternative for these investors. Their only option is to invest in India. While foreign investors can decide between China, Brazil, and India, Indian retail investors have no choice but to allocate their funds here. This dynamic adds an intriguing dimension.

If the paper supply  increases, it could originate from 2-3 sources: private equity funds and new unlisted companies planning to enter the market. There are several ways to facilitate this. One approach could involve the government introducing PSU stocks into the marketplace. Additionally, adjusting the minimum listing size from 75 percent to 65 percent could encourage more listings. Regulators are aware of the potential sources for increasing the paper supply.

The situation is demanding but crucial. India is already considered one of the more expensive markets. Only Japan ranks slightly higher, with a price-to-earnings ratio of 26 compared to India's 22.

It is important to avoid entering a higher valuation range and maintain the current level of expensiveness. The positive aspect is that corporate earnings are projected to be strong in the upcoming year. With DII (Domestic Institutional Investors) and FI investments, along with robust corporate earnings growth, the outlook remains promising. It's a picture-perfect scenario.