"Nobody would have thought that despite the Narendra Modi government being power and commodity prices falling, FIIs would flee the market and DIIs would buy," says Raamdeo Agrawal of Motilal Oswal Financial Services
Ahead of Motilal Oswal Financial Services' 11th Global Investor Conference, joint managing director Raamdeo Agrawal says though this is a corporate conference, the focus is more towards government policy initiatives. Everyone wants to gauge how far is the so-called acchhe din, he told CNBC-TV18.
He believes an important catalyst in the near term will be this government's performance.
After the government was sworn in on May 16, 2014, the Nifty rallied from 7203 to 9119.20 (all-time high) on euphoria. It is now down to 7655 (Friday's closing).
However, an upbeat Agrawal says the market is full of surprises. "Nobody would have thought that despite the Narendra Modi government being in power and with commodity prices falling, foreign institutional investors (FIIs) would flee the market and domestic institutional investors (DIIs) would buy," he says.
Though a big issue for the markets has been the fact that corporate profits have continued to remain lacklustre. So much so that a few of the infrastructure and banking stocks are 50 percent below the price at which they were trading when the Modi government took over. Explaining this, Agrawal says there is a need to look at aggregate corporate profits, which have remained stable over the years. FIIs, according to him, are interested in seeing it go up. He further explains that in the short-run, markets always seem to appear irrational. But in the longer term, it becomes fairly rational and it is during this period, if investors see that there is no possibility of the stock doing any better, then they will get out.
However, he advises investors to keep calm and accept the fact that markets will surprise. The ace investor gives hope to the market by saying that the probability of upward action from hereon is higher than downward. According to him, all companies that are commodity users and have pricing power will do well.
"Companies with competitive advantages, longevity and goodness will also continue to perform despite high PEs," he told CNBC-TV18.
According to him, investors are in a mood to invest. DII flows will keep coming, though if the markets keep closing lower, it may be a bit of a problem, he says. But he adds as chartists predict that the downside is capped at 7200, which is where the markets were when the Modi government took over. "After that oil prices have gone up. So I think we are very close to that 300-400 points bottoms-up, that is the total fear I would think one should got and then depends on what stocks to select," he adds.
Below is the verbatim transcript of Raamdeo Agrawal's interview with Latha Venkatesh on CNBC-TV18.
Latha: You must have spoken to a lot of investors over the past twenty-four hours, I am sure you have welcomed them all to the summit. What is the general sense you are getting? Is there now a feeling that this is the place where growth is compared to anywhere else in the world?
A: I think everybody is in a very expectant mood. There is a session by Mohan Bhagwat, that is going to be the highlight of the day tomorrow. What has happened is that though it is an investor conference and corporate conference, right now it is tilting more towards government policy initiatives and how prepared they are to face the storm in the global economy. How prepared we are and how we are responding, how far is acche din, what are we doing. So more about the government at any level - secretary level, administer level. So from every side, everybody is landing here. In fact the response is unprecedented in a sense that we have about 750 registrations, of that more than 20 percent - upwards of 150-160 people - have landed from overseas. The hotel doesn’t have enough rooms for them. So clearly the response is overwhelming, more particularly from the investor side.
I think the key theme as the line up looks is not going to be so much about corporate performance, which is in any case very lacklustre right now. Of course that will be examined and corporate's preparedness in response to current situation in global and local macro is there but the policymakers - what is new, how they are tackling new issues because country has come this far with old policies, now we want to go to different levels of work, different levels of distribution, so what are we doing. I think that will be examined.
Q: Over the last 48 hours we have heard at the G-20 on the finance ministers and Central Bankers of the 20 most powerful countries and the one thing that - these are all pundits of market economics - all these pundits are only looking to their governments, not so much Central Bankers. Central Bankers have done what they can, they are all looking to their governments to give more stimulus, to pump up their respective economies, so you are right, focus in a developing country like ours will be on the government but before I come to the number of government speakers you have, you have railway ministers and other people coming, is there any positive response either from you yourself and from your investors to this Jandhan and the payment bank license, is there a lot of hope that the payment bank kind of lays the last line to the Jandhan accounts, is there any hope in that? That is government initiative.
A: This is a little early because now session will open up in next 48 hours - first speaker is Chanda Kochhar, in the Q&A she will speak whatever she wants to speak but in response to that what is going on in the investor's mind, what is troubling them, those things will - you just talked about corporate failure right now, so those things will come up in the questioning and then by the end of the day, we will know what is troubling or what they are excited about or what they will take away from here. You get surprised that at the end of it, how things are changing. So it is all for the day as it develops.
Q: Can you tell us about the highlights in terms of government participation. I think you have Anil Swarup joining in?
A: Yes, Anil Swarup, Coal Secretary is there, then we have Mohan Bhagwat and Haryana Chief Minister. Vinayak Chatterjee is there - though he is from a private sector but he is a man of infrastructure so he will be there to speak about what is happening in the development of infrastructure side then we have payment bank CEO speaking in the evening, so you will get to hear originally from him what exactly his outlook and they have some grand plans. They have become one of the hottest property in the online space and he is going to be speaking here.
Then we have Sanjiv Mehta from Hindustan Unilever (HUL) so what is happening from the food and consumer side, those things will come up, Vishal Sikka of course and let us see what comes out.
Q: What is your sense about the automobile numbers, car sales numbers that we have got for August were not as cheerful as we got in June and July, a trend seem to be building in and that got disrupted you thought?
A: Nothing happens in a straight line and monsoon somewhere faltered and that might be one of the reasons but just two months blip is not a problem and even company might be changing the product mix because they are in a massive launch phase, so what exactly is happening to the company's product line up is not very clear.
Q: Generally what is your sense from the way in which the markets have evolved? Are you getting a sense that this huge volatility that we saw at least is carving down or do you think this market is actually headed much lower?
A: Good thing about the stock market is that it is always new. It is very refreshing. I mean we never knew that with Narendra Modi in action and oil at less than USD 50 per barrel, well below USD 50, there will be foreign institutional investors (FIIs) going away from here. So, that is happening and on top of it another thing is that domestic institutional investors (DIIs) will be buying left, right and centre.
There are so many variables. China has gone wrong, America is now raising rates, Europe is kind of struggling, commodity prices are slumping at a very rapid pace. What it does to the producing country? What it does to the consuming country in terms of their exports so, there are huge winners and huge losers. So how do you position your portfolio in investment - that is a key challenge? May be when there is too much of activity outside you have to remain very calm. That might be a best policy probably.
Q: You were speaking about FIIs leavening at a juncture which you wouldn't have expected after the Modi government is in and probably has done something. Varinder has sent a list of stocks where so many of them are below their May 2014 levels with the advent of Modi. You can speak about Amtek Auto and Jindal Steel and Power for obvious reasons. Steel has a commodity problem and Amtek may have specific problems. However look at the list of stocks which you thought should have benefited from a strong government. GMR Infrastructure, Reliance Communications, JK Tyre and Industries, Supreme Infrastructure India, Hindalco Industries, Tata Steel, again there are telecom. Titagarh Wagons, Bank of India, UCO Bank, Indian Oil Corporation (IOC), Indian Overseas Bank these banking as well as infrastructure are areas where you expected the government to do and they are all trading a good 50 percent below their pre May levels. Do you think we are in danger of losing FII investor interest rather seriously?
A: I think you have to look at the aggregate corporate profits and that profit is fairly stable. Of course who is wining, who is losing that is a different set of companies but corporate profits are fairly stable over the year. Now FIIs are interested in seeing that aggregate corporate profits go up. Not only FIIs any investor would like to see the aggregate, so the whole thing is that corporate profits are stable.
There are huge winners; they are huge losers as I said. So, what is happening is in the short run, as it is said in the short run the markets are very unpredictable and irrational. Shorter the time period more irrationality creeps in and longer you take it almost becomes perfectly rational. So, when we talk about 12 months or something it is a fairly, I would not say short-term but it is a more rational period I would tell.
There what is happening is wherever there is no performance or there is no possibility of performance, markets are very clearly punishing them whether it is sold by FII or by DII. Let me tell you, stocks don’t go to the higher level or lower because somebody is buying or selling. At a given point of time there is always an owner of a stock - whether it is called a DII and stock doesn’t know what is the colour of the money. The issue is what is the earnings power.
You grow the stock by 50 percent, let every single FII go out of that stock, still the stock will go up. That is the power of the markets. That is the faith in earnings and earnings growth. So, if a stock or the total corporate profit for a aggregate market and for individual stock ,if that companies profit and profitability and the growth doesn't happen obviously the market will be static and maybe in pessimistic scenario somewhat lower.
Q: Because we are seeing lower prices or at least not higher prices you are going to see a problem with a lot of fast-moving consumer goods (FMCG) stocks not being able to show higher value or higher revenue. Are they showing enough of volume growth to make-up for it? What are the initials signs you are getting is the lower inflation working in their favour are they able to increase volumes?
A: It depends on the companies; say to start with this Maruti Suzuki and all. As far as the opportunity is concerned on a ten year scale basis you cannot deny that India is one of the largest possible car market. Now how do you make it happen in the short-term on a monthly basis and on a yearly basis and how is the competitive situation. Even if the people demand a car, who is going to take it so now the price leader, volume leader, quality leader is Maruti.
So, what is happening there, and they have shown so far, if you look at four-five months, they have done better than what the market expected ever and so much so that last month I would rather go by their price action. If actually the underlying demand was very weak they would have not raised their prices and actually in a scenario when actually cost of production is going down, so they didn’t have margin pressure.
Q: There is too much of a storm at this point in time, what do investors do and what do you see after the storm, do you see a major rebound, how will you negotiate these waters?
A: First thing is that you have to keep your cool because that is the nature of the market. One must accept that market is going to surprise, market is going to fluctuate and more action on the downside, more reaction on the upside. If market has fallen by 1,300-1,400 points, so we are in for a very good action upwards and it could be bigger than what we have seen on the downside depends on what will happen or could be little lower whatever but probability of action upwards, at this juncture, is much higher than downside total action. So the shorter-term I would look at that way.
Second is every storm has its winners and losers, so clearly we are scared of the losers because those stocks are also there in somebody's portfolio - particularly in the larger portfolios, they are definitely found in 2-4 percent. So what happens to them? Clearly you have to take the loss. Then what happens is from the dust or rashes of those destruction, you find new winners coming in and those winners you have to be - what happens is bad things sink immediately, whereas good things sink very slowly because if earnings have to double, it will take 12 months for the earnings to double and you will get 12 months after they change the rules of the game that you get.
So I think rupee has weakened against dollar. So you have businesses like IT, pharmaceuticals, then a lot of these auto exports like Bajaj Auto which does more than a billion dollars worth of exports and all, these companies have been distinctly benefited just because of devaluation. One their competitive edge further sharpens in the global market place, second translation benefits are there which is perpetual. So these companies when the next quarter results will come maybe not in September quarter but December quarter, it will be far more pronounced.
Q: I was going to ask you, if you are looking for things emerging from the storm, what would those themes be? You gave me one, the rupee theme, is there any other theme that strikes you, where you may look for the winners?
A: Another theme, which is because of China and commodity deflation and collapse in energy prices. I think all the companies which are users of the commodities and they have a pricing power - if they have perfectly competitive environment where 50 guys are doing the same thing like pipes and all those kind of things, they have to pass on whatever is the benefit but when it comes to companies, the businesses where they are not that select as I told you about automotive companies like Maruti, they raise prices.
Q: So it is a question of paints and packaging benefit by intermediates becoming cheaper, you will prefer paints rather than packaging.
A: There are a whole lot of companies, you have to go company wise and understand their competitive advantages, how much pricing power they have and how the benefits of this commodity deflation flows through it and every company has a very complex structure in terms of how they deal with a lot of these pressures.
Q: How uncomfortable are you with high price to earnings (P/E) ratio? What is the threshold P/E where your discomfort level starts because when you speak of paints for instance, clearly Asian Paints has withstood so much and has made so many people rich but it is an expensive stock. So what is your threshold of discomfort?
A: This is also an evolving process. I was also very uncomfortable with Asian Paints at 20 P/E multiple in 1990s. Right from 1991, I know Asian Paints is a terrific company I wanted to buy then when I was ready to pay 20 P/E, it was 24 P/E, when I was ready to pay 24 P/E, it was 28 P/E, when I wanted to pay 28 P/E, it was 35 P/E and now it is around 43.50. So the issue is that the companies with competitive advantages, their goodness is improving and longevity is also increasing.
When I was looking at it - it was less than 50 percent market share, today it is 60 percent of the enlarged market share. So the complete advantage of the company has grown. So market rewards them and they are unleveraged. So clearly, the benefits to the companies, which are unleveraged is far higher, it is fully appreciated by the market. So these things are being learnt now.
What happens is there is a corporate profit and then high quality corporate profit with 70-80 percent kind of a return on invested capitals (ROICs), which doesn’t require much capital for growth. Second is growth itself. Now, at what pace the companies are growing or are likely to grow? If I think Asian Paints can grow from here, all combined at 40-50 percent then 50 P/E is very reasonable. The current profits, quality of profits and growth and longevity of growth. 50 percent in one year is not that important but 50 percent for five years, at fifth year end -- even if you grow at 40, in fifth year you will be at 5 times, so if your P/E is 50, in terms of five year sense it will be 10.
Q: The other thing I wanted to ask you is I was looking at some mutual fund ranking and your midcap fund ranks very high for a one year performance. How has the response been with the market now almost in bare territory, we have lost 20 percent from our March 3rd highs, is there any faltering in terms of the flows or are you still flooded with money?
A: July and August both were very big months. In both the months, we did almost same levels of about upwards of Rs 700 crore of net sales for the AMC. For our size of AMC, this is very large size. For AUM of about Rs 8,000 crore, Rs 700 crore is almost 8-9 percent types. So that is a very high growth rate, for the available base rate but so far we are not seeing any slowdown in subscriptions, but I think we saw some bit of redemption for the people who made a lot of money. They have made a lot of money but yet people are scared and they would sell and they think that at 7,200 they can come back. I am telling them, you cannot get it right but it is a war of words right now.
Q: Basically the retail investor - although the foreign institutional investor (FIIs) have taken away some of their money, you are not seeing the domestic institutional investor (DIIs) flow at any point in time receding because of the market wobbling?
A: I think the mood is clearly to invest. They also need stability, this month 8 percent gone, next month again 8 percent will go, I think somewhere they will also get scared. However, my sense is that worst prediction I have seen is 7,200 by March. We are already at 7,500. There is not much downside left. I had said earlier, this is a perfect chartist call, I have not seen such a brilliant technical call by anybody - so this is a compliment to most of the chartists. I have not seen anybody saying below 7,200 and incidentally on May 16 when Prime Minister Narendra Modi was sworn in or the results were declared that day, it was 7,200. After that oil prices have gone up. So I think we are very close to that 300-400 points bottoms-up, that is the total fear I would think one should got and then depends on what stocks to select.The Great Diwali Discount!
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