"This too shall pass," is how Ramesh Damani, Member, BSE chooses to describe the current distress. Indian equities have three key factors to watch for, namely, US Fed meet, China and RBI. The market will start rebounding once Fed meet is out of the way, a confident Damani told CNBC-TV18.Another market guru who is not ready to believe in the doom story is Madhu Kela, Chief Investment Strategist at Reliance Capital. Of course he knows that a fall of this magnitude in a very short time unnerves even a very sophisticated investor, let alone retail investors, yet he urged retail investors not to miss the bus. One must remember India story is well discovered and a correction of this scale is extremely beneficial for long-term investors, he said.He goes on to add that one must distinguish between `risky' and `volatility' and history has suggested that volatility is a great time to accumulate. "I know we will be one of the strongest economy in next five years," he added to Damani's sentiment that India remains the most attractive investment destination among its peers. Damani does not want to blame China alone for the market plight. The real fear is of money going out of emerging markets if Fed raises rates. "And that is the fear, not yuan depreciation." Kela too thinks too much noise is being made of a 4 percent depreciation in rupee. Regarding Chinese dump, Kela knows the government will not allow destruction of Indian businesses and take "adequate steps."Companies that have survived bear cycle of the last 3-4 years are the ones to look at. The market is going to be bi-polarised and even within a sector, there will be demarcation; so stock selection will play a big role in current market environment, Kela said. Today's 14 PE is better than yesterdays 18 PE because the contribution is coming from quality companies, he said. Damani remains bullish on midcaps.Transcript on next page._PAGEBREAK_ Below is the transcript of Ramesh Damani & Madhu Kela's interview with Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Latha: How does this feel, does this feel like this is the last gut wrenching fall, does it feel like precisely at these times of fear the longer-term guy should stay put?
Damani: It is a very elaborate question, we don’t know what it is but I will tell you one thing that I am very sure about that Benjamin Graham mentioned that, he said, "When all the world's smart people got together and they discussed history for the before Christ, after Christ, they finally came to one profound conclusion that this too shall pass", and I am very confident that even if this is a tough squall, markets are fairly resilient and if you go into the market not expecting to lose money and not expecting to see a recession, you are in the wrong business. These things happen. Having said that the market is now going to focus on the three main items, the first of course is the Fed will raise rates or not, that is providing a lot of the volatility in the market right now. Is China going to grow slow, the answer we know, yes it is going to grow slow growth and then what is its impact on India but my sense is once we get out of this September 17-18 -- the Fed period -- the market will start rebounding.
Sonia: It has taken very long for the retail confidence to get back in to this market and the domestic fraternity has in a sense been the linchpin of this market move so far. Do you fear that the sentiment from retail could abate a little bit and we could see redemption pressure or is there still a lot of money that could come in?
Kela: If you talk in a very short-term, a fall like this of course unnerves even the sentiment of very sophisticated investors, forget the retail investors. So, when retail is continuously being putting money, obviously this kind of a fall will put them in a back foot. However, India story is now well discovered. It is not that I know something which the world doesn’t know. We know demographics, we know latent demand, we know 7 percent gross domestic product (GDP) growth rate. We know that we are the fastest country to grow, but the reality is still 97 percent of the population of India -- and lot of your viewers who are watching, they have not yet participated. Their only hope is corrections like this because it was so difficult to make money three months back. Even for people like us when the index was at 9,000 everything was trading at 20-25-30-40-50-100 price to earnings (PE) multiple. So, these are the actual opportunities for retail investors.
I urge people who are watching, if in your life you have been waiting for corrections, when it is already underway now don’t shy away. Now you have to start putting money. Therefore, is it to say that this is the bottom today and will the market start moving up after I finish my interview - that is not what I am saying. If you systematically plan our investment and if you have not invested in equity, which is the case with 97 percent of Indian population then maybe this is a great time to start.
Anuj: Just to extend Sonia's question, we have been to so many Investor Camps and almost at every Investor Camp, retail investors are coming to us and saying that it is a good time to buy. So far we haven’t seen any panic. Is there a risk of this fall damaging the equity cult, which we have just started to see? This year has been about a lot of domestic investments, is there a risk of this fall if it accentuates further damaging that equity cult?
Damani: If it keeps falling, yes it will but I don’t see that happening. I think there are some great companies out here. I think once we get through this very troublesome period in September where so many economic events are lined up, China, the Fed raising rates, oil price volatility. Once you remove the curtains you will see great companies out here trading at much cheaper discounts than it did, inflation coming down, interest rates coming down, gross domestic product (GDP) growing, all the positive about India story. India is shining in this gloom; it is a knee-jerk reaction that is forcing the market down. Once sobriety returns, we will probably be able to look at the magnifying glass and pick up some hidden gems as you say, the A List as you say. So there is reason to be cautious right now because the market is clearly going through unprecedented volatility but there is no reason to think that -- to answer your question -- a bear market has started.
Anuj: Is this looking like a healthy bull market correction or are they in the middle of a cyclical bear market if not a structural bear market?
Damani: There is nothing healthy about it. I never understood the word 'healthy correction'. These things happen. Here is a statistic that your viewer should know that in 1979-1980 when the Sensex was formulated, it was 100. It is closer to 25,000 now that is 250 times move that translates into 17 percent compounded long-term, dividends are tax free, long-term capital gains are tax-free in India. It is one of the best asset classes that you could put your money into and that is something retail needs to look at. You cannot expect a great business to remain down forever, there will be times when it will fall down, there will be corporate misses, there would be volatility on the streets but I think over large periods of time we have seen the great blue-chip companies in India compounding at 17 percent and that is the Indian story over the last 30 years.
Kela: What cult are we talking of destroying, where is the cult? From 2009 till 2014, there was a withdrawal of Rs 1 lakh crore from the domestic investors. That is not even recaptured. It is not even recouped what we lost, we have got a part of what we lost and we are talking of the absolute saving and also the relative savings have doubled for each and every individual in India including the absolute amount of money, which was available, which effectively means that you saved a lot of money, you put it in bank deposit, you put it in gold, you put it in real estate but not one single penny of that money net-net has come into equity markets. That is statistics number one.
Statistics number two -- even out of the saving which is there, not even 3 percent is invested in financial assets in equity, what cult are we talking about? I am saying if there is a real crack, which has happened as Ramesh Damani said market may go down another 10 percent who knows if there is a real global rout, which happens but if history is to go by and this is my biggest point, investors now have to differentiate. Is it risky to invest or is it volatile? If it is volatile then it is a great opportunity. History has suggested these kinds of things are only proven to be volatility.
We have been in the markets, even the best of the companies, which has gone up -- take even for HDFC Bank or HDFC which have performed very well, you would see there is a correction of 30-40 percent which has happened even in those companies in the last 10-year period. However, if investors had to lose the nerve at this point of time and say is it a real risk, which means are we talking that the India story is completely derailed, are we talking that all which we have learnt in last 20 years about India, was it all an eyewash then I can agree with you that the cult might get destroyed but I fear that none of that is the case.
I think we are still going to be one of the strongest economies in the next five years. Our growth rates are there, there is a lot of work, which has happened in the last 12-18 months, which was noticed four months bank but somehow it is getting unnoticed.
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Sonia: I take your point about the India growth story but the catalyst for every bull market fundamentally is earnings growth and now there is talk about global growth slowdown which could perhaps trickle down to India as well because of the Chinese devaluation of the yuan and some of the players could become competitively disadvantaged. Would you worry about that?
Kela: I would not worry because we never talked about rupee getting depreciated by 80 percent vis-à-vis Chinese yuan and there is so much noise which has been made for 4 percent devaluation of rupee.
I am saying from 2008 to 2013 how much was a devaluation in Indian rupee vis-à-vis Chinese yuan. We never talked about that. We are only talking about Chinese yuan getting devalued by 4 percent.
Sonia: What we are also talking about is perhaps a worry because in spaces like tyres, there has been a lot of dumping of cheaper Chinese products and that is hitting some of the manufacturers?
Kela: It's a very good point and I am sure more than you and me and more than these companies, the Indian government is worried and I am sure in due course of time some corrective measures will happen to safeguard the Indian industry. We are already hearing, it is already in noise that the safeguard duty will come in this sector, the safeguard duty could come in other sector and I am sure they will stand up to a situation wherein healthy competition is absolutely welcome but if someone is selling in distress and destroying the industry, I am sure government will take a note of it and corrective measures will be taken.
Latha: We have to distinguish that the Chinese devaluation is really a non-news. The only point about the Chinese devaluation was whether it would be a trend, whether China would allow it to float and then it goes to 7...
Kela: But after they devalued they are trying to intervene everyday to appreciate it.
Damani: They cannot get away with 20 percent depreciation because everyone will follow suite, so that leads to war and if that happens then its curtains for all global markets. So I do not think that that is a risk right now. China is slowing its growth, so all the export oriented nations to China - Australia, Brazil, Indonesia; they are going to get hammered. Money is going to flow out of emerging markets if Fed raises rates, so that is what is playing out, not so much the yuan depreciation.
Latha: The next point one would look at is therefore should one stay with say the Nifty companies or the stalwarts, the tried and tested. Is this is a time to go at all to midcaps?
Damani: That is the place where I hunt in so I always like those stocks. I find bargains in them even in today’s market. I found bargains in them two years back. It is the style that you come up with, Madhu Kela, the amount of money he manages needs to necessarily look at the Nifty 50 companies. I, as an individual portfolio investor looking more at stocks that will become big over the next 10-15 years or so.
Anuj: It has been a bottom-up market this year; a lot of stocks have made money. The Nifty and Sensex may not be reflecting that but till about last week lot of BSE 500 companies were at 52 week highs and had gained 30-40 percent, so smart stock pickers have made money. Do you expect this kind of phase to continue where the Sensex and the Nifty won’t give you anything but if you get your stocks right you still make a lot of money?
Kela: Absolutely, that will be the case. I think market in last two years, forget last two months have been so much bi-polarised, only yesterday I made a presentation so we can find at least in last two years forget 10-20 years. In last two year there are at least 50 companies which have given more than 100 percent return out of BSE 500 or BSE 1000 whatever. There are companies which have lost like 60-70 percent wealth if you are not being careful and that is going to be the trend. This is what I call people who have survived these bear market in India for last five or six years and have kept their balance sheet intact, have kept their ambitions intact have kept their organisation intact they are the people who are actually the reaping the benefit.
If you see any best performing sector also you can find them in pharmaceutical, then there are companies which have performed exceedingly well and there are couple of companies which have closed down in the last three or four years. Similarly you can kind in autos, you can find in non banking financial companies (NBFCs). That is going to be the trend. I think market will continue to be bi-polarised and you will have to distinguish even within a sector. Even if you choose a sector within that also you have to distinguish which are the one which you have to bet on._PAGEBREAK_
Sonia: What your biggest learning has been from all the wizards that you interviewed this time on CNBC-TV18's new series of Wizards of Dalal Street?
Damani: We did the first show ten years back - that's in 2005, so a decade later, couple of bull markets later, its good time to revisit the street and see the new ones. I think some of the old ones we interviewed in 2005 have gone on to become real stalwarts in the industry, real great investor. So there is a quest to go and find out who the new kids on the block are. I am using the word "kids" not in the pejorative sense - there are lots of bright, young people out there, not necessarily young but young to TV audience.
However, what we found, as we found on the first series is what drives all of them is a passion. Market is a passion business. It is never about the money. Money is how they keep score almost across but a lot of them give it back, in fact my first guest Ashish Dhawan, he quit financial markets at the peak to start a beautiful university called Ashoka University in Delhi and that shows the philanthropic ambitions, not necessarily private equity ambitions.
A lot of them across the spectrum as I see are building up careers because they are passionate about business whether I interview them in India or interviewed Jim Rogers or Marc Faber overseas, the one thing that ties them altogether is they love the business, they would do it for free if they got a chance to do it and money is where you keep score but the rest comes from pure adrenalin; market is what excites everyone.
Latha: What was different between the wizards in 2005 and the wizards of 2015? Is there an evaluation in the lessons?
Damani: I think the 2005 series - 1993-94 the Indian market had opened up. It was blooded at that time. Now the market is in operation for 20-25 years, so you have built a track record over periods of time. You have seen how they have done over various bull markets, bear markets. You can have a lot of people who do well in a bull market, in any given bull market; the '92 bull market, the 2000 bull market was associated with people who weren't the best stock market people, there were flashes in the pan, but we have done the litmus test as how these people perform over various bear markets, over various bull markets, have the picks been sustainable over a long period of time and we find that between 2005 batch and 2015 batch. Is there similarities rather than difference there are similarities because great stock picking is great stock picking and people use the same formula but the one thing that surprise me that and most people will also be surprised by - there is a feeling sometimes that this is a close club that we all know each other, we all meet at parties, social occasions, weddings. So there is a lot of familiarity, but what surprises me and a lot of other people is that the picks, the stock picks that they have used to get to the level that they are, are all different, for example Rakesh Jhunjhunwala bought Titan Company but none of the other wizards have bought Titan but they made equal amount of money through other stocks which they bought. Madhu has his own stocks in pharmaceuticals; Rakesh has his own stock picks like Titan, Lupin, fast moving consumer goods (FMCG). All of them have reached the pinnacle of their careers through great stock picking. So it is a stock pickers business, the way to wealth in the Forbes 400 is by picking great stocks, building great stake in companies and being patient riding out the volatility. So that has remained consistent over a decade.
Sonia: Since we are talking about stocks, for the next three-five years if this is a great time for retail to put in money, which are the sectors or if you want to comment on any individual stocks that could be market leaders here on?
Kela: This is what we are discussing. A] If the point which I am making just to correct myself -- if I did not communicate it properly. Our advice is not for traders and people who are trying to make money over one month or three months timeframe because no one knows where the market is going to go over a one month or three months timeframe. But if you have a perspective as Ramesh Damani just said there is going to be so many winners -- I was just doing my numbers only yesterday; our internal estimate is that the size of the GDP will grow conservatively in the next six years. What we are talking about is that whatever we have built in so many years in India, the same opportunity is going to be available for next five-six years and there are a lot of new businesses, which are going to come up. I must say that whatever I speak, people must consult their advisers because these days the regulator takes a very different view of advise, which we are giving. But there will be sectors like 'Make in India' programme, for instance defence, is it for real, is it that we are talking about defence manufacturing being for real in India and part of it getting substituted, so there is nothing in defence sector in India today. So will there be only existing companies or will be new companies which will come.
Second, yesterday only I met with one senior most bureaucrat on the mining sector. Now government had its plan fixed up to go to 1.5 billion tonne of coal production in this country. We are talking about 550 million tonne of coal production. If we reach there, I cannot even fathom the number of multibaggers, which will emerge out of this sector alone. Can you imagine, the amount of investment which will go for us to reach to 1.5 billion tonne of coal and the number of people who will stand to benefit out of this renewable coal supply, which will come from the domestic market. This is where the difference is. The guy who was watching me, he is watching the trigger and he is saying that I need to live for today, tomorrow, one month. I am seeing the opportunity but in the next five years if it unfolds, how does it matter, if the stocks I buy, goes down more. I am very happy; I want to buy it more.
Anuj: Since we have both of you, I remember your conversation with Madhu Kela and the most fascinating bet was about Divi's Laboratories. The way Madhu Kela managed to pick the stock at the price level and we have seen the journey, if from this series, is there any particular conversation that stands out, something along that line?
Damani: I will let you watch the series and then we will come back and discuss.
I am discussing with Kalpraj Dharmashi for example, he is not a well-known to investors in public. It is a very distinguished track record -- he in the 2003 got the boom coming in the pharmaceutical companies in the capex stocks out there. So one someone working under the radar, trying to figure out what the next big move is -- the lesson there is that even in average or individual investor using some resources can build a portfolio that makes him a distinguished investors on Dalal Street.
We are going to get for the first time Durgesh Shah of Enam. We will do a very wide ranging show with him. Enam is being very publicity shy and they have been below the curtain but they have a very distinguished track record over many years of finding great winners in auto ancillary, in the tyre companies, in automobile manufacturing. So I am quite excited to bring those points of view out across to viewers.
The message I want to bring about is that these people had no secret for the success, it is not that they are born rich or they got a drug that cure cancer but good hard stock picking, finding great companies and then the magic that works for everybody, allowing compounding. Compound your portfolio at 20-23 percent, it doubles every three years, by the time you know it, you are rich. So it is one of those lessons that I want to bring across as a host to people, I want to demystify Dalal Street and this is a very exciting period, the index has gone from 100 to 25,000. I want to capture the flavour of the stocks for future generations. When you look back, you will say this was a Buffett, this was a Soros -- we have the same role models in India and I am very happy to bring them on the screen so wider audience can understand their investing styles.
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Latha: There are some people who believe that if the Sensex price to earnings ratio (P/E) has been historically 15 times then every time it goes to 12 or 13 up your bargains, every time it goes to 17-18 down your bargains, down your picking would that be the style that most people would follow?
Kela: That is true because broad composite index and the valuation of broad index essentially indicate which is a real buying opportunity. We have seen history of the markets over many years that whenever markets goes to a 11 or 12 or 13 P/E zone on a next year forwarding earnings basis, you make lot of money over next two years. Whenever market goes beyond 20 P/E multiple then you take a long time to make money. These are proven.
The only point, which I want to mention is today's 14 P/E is better than 18 P/Es of ten years back because the quality of earnings have changed so significantly, the composition of index has changed so significantly. today if you look at the sustainability of Nifty stocks -- there was no pharmaceutical company 10-12 years back in Nifty, there were hardly one or two, there were no real big IT majors, there were no big auto companies, fast-moving consumer goods (FMCG) weightage was not as high as it is today. So, there are lots of sustainable businesses which have come.
The contribution from the metal companies or from public sector banks which used to be very high has gone down significantly. So, the quality of change is less appreciated by the markets when we compare, the 15 P/E of ten years back is equal to 15 P/E of today I don’t agree with that.
Sonia: Since we are talking about the learning’s that you have had from your conversations I was very interested to know what you leant in your discussions with Utpal Sheth who is the CEO of Rare Enterprises. Everyone in the street wants to know what Rakesh Jhunjhunwala is thinking but we now know that Utpal Sheth is at the forefront of Rare’s investment style?
Damani: Very below the radar, very quiet, very focused during the companies; the interesting thing is when I did the first show Wizards five years back, I used to ask all my wizards then as to who they admire or who they talk the business from. Lot of the time his father’s name came out. Hemendra Sheth was one of the distinguished investors of Dalal Street along with Chandrakant Sampat in the early 1960s-1970s. So, lot of time his names came up and it was my good fortune that I of course got to know Utpal Sheth and I realised he was following his father footsteps. He is a classic stock picker, under the radar, lives and breathes the stock market, has a great long-term performance in some very brilliant stocks that he was the first to identify in the market.
So, again we come back to the theory that this is sometimes it is the cottage industry. These people working alone, figure out these brilliant 100 baggers, 50 baggers coming up rather than using all institutional resources of say a mutual fund or a hedge fund. It is fascinating. Your viewers will learn a lot. Peter Lynch talks about the circle of competence that you find the stocks that you know, explain a stock with a crayon to a child I think all of them tend to follow that in some degree. I think organise retail will be very big as Utpal Sheth found out for example. Then okay how do I bet from it and then he kinds of figures it out from a top down perspective and a bottom-up perspective. However, it is always fascinating to see their own thought-processes.
Sonia: What do these guys do when the chips are down?
Kela: I get more excited. I just feel the bull market is so difficult to make money. Three-four months back I came in your show and I was very nervous. Everyone was talking that 9,100-9,200 and we can’t say sell because we do not believe it is a sell from a five-ten year horizon but we could say it in so many word. So, I get very nervous when we are in a roaring bull market because for us to make money becomes very difficult and the margin of safety evades.
So, when markets are like this, you can find opportunities wherein money is already risk adjusted. If I took for Rs 100 to make Rs 150 and if Rs 100 can become Rs 50 then I am not doing a great job. However, if I bought it at Rs 60 and it can become Rs 50, I know vice a versa it can go to Rs 150 and it is only available in times like this.
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