Market not expensive, pre-poll rally in sight: Chokhani

FMCG, pharma, automobiles, cement, that has been at 40,000 index and is the heavy investment, capital intensive type sectors that are at 7000-8000 index and is giving the average of 20. So, for individual investors it has been a good period and things have started moving into tier II as well after Diwali because I said while Tata Consultancy Services (TCS) at Diwali may have looked expensive, you could go to the next run and could get lot of valuation lift there so HCL Technologies, Lupin, all of them have rallied and the market is not particularly expensive now.

Q: In your report you say that Indian market is drifting but not collapsing. What are the average returns that you expect in 2014, will it be as 2013, extremely narrow for the headline index but lot of stock specific returns or do you think it will start getting more broad based?

A: There are two big events this year, one is our elections and the market should be in some suspended animation going into that and so, you will get a rally of hope, then you will get a rally of some panic coming in, things aren’t working out the way we want. Even if you look at the last state election results, going into the assembly elections the market rallied furiously and beta trade in a way came back and all the industrials, capital intensives started running a lot.

Once the Aam Aadmi Party won, market took a step back and said hey this win off the BJP or a stable government isn’t a done deal and the defensive trade is back over the last month. So some of that will keep playing out over the next six months because no one knows which way the election results will go. There is also tapering out there. But reality is averages are misleading because there is a 40000 index and there is a 7000 index in there. As investor, you could be very well in the index which is heading to the next 40000 rather than worrying about what the averages are.

Q: What would be your advise to an investor at dips in the run-up to elections? Would you also believe that there will be dips because the lingo of the elections is turning more socialist than we were prepared for?

A: India is never going to have a right wing capitalist government and that has been the case for the last 25 years. Whoever comes to power ends up becoming centrist and left of center and the nature of our politics is such that because of the way we vote, you will end up being a lot more socialist than you would have been and therefore, end up seeing governments behaving a bit schizophrenic as well when you get these burst of reforms followed by the pull-back and you keep reversing back to mean.

I don't think one is holding ones breadth to say India will become the next republican or the next conservative government and we start privatising or making this country a lot more efficient. It is a stage of evolution we have to go through which we will go through and the markets at the end of the day are just discounting mechanisms. So while we can wish for a lot of things, we deal with reality everyday and come smiling.

Q: Do you think this market can get as much of bad news as to even break 5900, go towards the 5500 mark or do you think that kind of negativity will not be there?

A: Indians have lost all hope whether it is Indian industry; there hasn't been an investment for the last five years. In the last five years, in aggregate the foreign institutional investors (FIIs) have put in USD 100 billion into India and if there has not been capital formation, by definition it means Indians have sold at least USD 50-60 billion of stocks.

When you are asking me tactical trade, I am wondering for whom is this tactical trade because the average Indian isn’t even there in the market. So you have to step back first and say please people believe in our country and come back. Get an asset allocation right first and then create a proper diversified portfolio and stop thinking about tactics. The fact is you are not even there in the game right now. Once you come and you start playing cricket, come on the field and then we will decide how to face spin balling and how to face space balling and how to face a bouncer.

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Q: But there is a reason to believe why the average Indian investor is upset, even if you look at the sector like power, for a major part of 2013 there were so many initiatives that came out for power sector, one thought that the sector was getting out of woods and now comes the Delhi government cutting tariffs which is retrograde for some of these power companies. What would the sectoral themes be where investors can make money in 2014?

A: What has worked for 25 years doesn’t change. If you look back 25 years from now, right now FMCG is very hot. It is the place everyone wants to be in. But just to put in context 25 years ago or thereabouts, Zee TV didn’t exist. It is larger than Colgate today in terms of size of revenues and profit.

I think 12 years ago Lupin was seen as a troubled company and I remember we did a private equity for them. Lupin incidentally has revenues and profits where the revenues are same, the profits are 150 percent that of Nestle (just to put in context). Even HCL Technologies, it is larger than Hindustan Unilever (HUL) profits. So even in sectors that one loves, there are things that are dramatically different.

Another fact, the profit of Tata Consultancy Services (TCS) is bigger than the entire combined profit of the FMCG sector. The market cap of TCS is still 60-70 percent of the entire FMCG sector and so, there is enough to do out there. You don't need to worry about the market, you worry about your own portfolio and what you are doing.

You can do technology, media, telecom, automobiles, there is just so much potential in our country and there has been wealth creation. Even while we are saying it has been grooming for the last four-five years, there are stocks that have tripled like TCS, Sun Pharma etc.

Q: Would you pick IT and pharmaceutical in an Indian 2020 team?

A: I have always had a bias towards businesses that can grow a lot more and where absolute size of win can be large. We have spoken in the past that there is a term they use in ice hockey that you skate to where the puck is going, not where it has been and the issue with everyone here is we like safety and therefore, end up buying blue-chips and then we get disappointed. We come into the market when the market is already looking that it has delivered returns. Wealth isn’t made that way.

Q: USD 1500 per capita income, we did scale up from USD 500 to USD 1000 in a relatively short period of maybe six-eight years but those were unusual irrational exuberance years. We have to first pay out the interest on that growth which was not ours. Is this actually USD 1500 five years down the road or is it going to take longer?

A: It is true that the bear case in India usually comes from the macro which unfortunately politicians don't run the government and its finances the way they should. I am sometimes dismayed that an India country report, I wrote during my MBA years 25 years ago could probably refresh and bring it out with exactly the same issues.

But having said that, we tend to be running 15 years behind China and is sometimes useful to look at what was going on in China in the year 2000 and you know where you will be in 2015. Similarly, where they are in 2010, we will probably get there in 2025. We lose a couple of years in periods like this when we start doing wrong things. But eventually, it is demographic trends that take over.

There is young India that wants to consume, wants to produce, they just don't want to sit around and get freebies from government. From election results we see people aren’t voting for parties that gave them a handout, they are voting for people who are saying, ‘I’ll give you a respectable life.’ No one wants to be like give a man a fish, give freedom for a day, teach him how to fish and get his whole lifetime solved. I think directionally our country is growing.

Even in the last 25 years you could have picked instances of the macro being very bad and yet there were individual sectors, stocks that did extremely well. There is a place for wealth creation in India and the people who make it happen are the entrepreneurs and it has been the story for the last 20-30 years at least.

In 1990’s, Deepak Parekh, Subhash Chandra, Azim Premji, Narayan Murthy were in their forties and created enormous wealth and they continue to but it was a big bang approach to Indian coming off age. In 2000’s, Mukesh Ambani, Anil Agarwal, Uday Kotak, Bhaskar Bhatt, Dilip Sanghvi, Ajay Piramal, Anand Mahindra were in their 40’s. Phenomenal wealth creation happened there.

As we speak today, it is not a story which is lost. Cyrus Mistry, KM Birla, Sanjiv Bajaj, Rajiv Bajaj, Kalanithi Maran, Vikas Oberoi, Punit Goenka are all in the right age bracket and so many more Glen Saldana. Across the space you have people and you are changing the contours of the country with the internet digitisation space and so, that whole space will also do very well. Eventually, it is about picking stocks and getting winners there.