On the eve of 11th Motilal Oswal Investor Conference, Raamdeo Agrawal, Joint MD of Motilal Oswal Financial Services, said participation by over 100 companies reveal "total lack of fear" in India story. "There is no fear among retail or foreign investors; they may be away for macro reasons," he said adding auto/auto ancillary companies are immensely benefitting from the China slowdown. "China cannot scare us."Asked if participants question the slow pace of rate cuts, Agrawal said that is not a big bother because everyone understands India is tackling a lot of uncertainties, and it is a big deal to keep the currency stable. "Broadly rate trajectory is looking lower." It is commendable that RBI chief Raghuram Rajan insisted on banks passing the benefits given to them on to the customers, added Rajat Rajgharia. HDFC Bank has just done that and Dr Rajan may find it conducive enough to offer a Diwali gift." Agrawal remains optimist on India and advised that one must have faith in India and give time. Asked about the preferred picks, he Agrawal said he is looking at small list of companies and will present 35-40 new ideas at the conference. Buy stories like oil marketing companies, banks, auto, auto ancillay will play a decisive role in India story.The nature of participating FIIs are mostly long-only investors that too as a large teams, says Navin Agrawal, Director . Industry leaders like Vishal Sikka (Infosys), Chanda Kochchar (ICICI Bank) are key participants in the conference.Transcript on next page..._PAGEBREAK_ Below is the transcript of Raamdeo Agrawal, Rajat Rajgarhia and Navin Agarwal's interview with Latha Venkatesh on CNBC-TV18.
Q: The globe is the one that is creating the problems for us. India is a shining star in this space, are global investors still excited, what was your preliminary reaction when you invited them for a conference?
Raamdeo Agrawal: Excitement is very high. We are seeing very high levels of participation particularly the bigger groups are coming in hordes so Navin Agarwal and Rajat Ragarhia will tell you, who all are coming, how many are coming.However, this time what we are seeing -- the difference is that there is drop in the market, global macros are moving here and there, oil is moving, currency is moving, commodities are moving, it is a perfect chaos. But in that there is no fear. People have gone from here, they are not fearful and panicking whether I will be able to sell or not. Even the Indian Oil Corporation (IOC) deal just got done and in two days, stock is 10-8 percent higher than the issue price. I think there is no fear in retail as well as foreigner, they might be going because there is a macro call that people should withdraw from the developing markets or whatever issues but I don’t see fear. They will be able to tell you much more about that.
Q: What exactly is the nature of participation, can you give me some colour on how many foreign institutional investors (FIIs), how many corporates, some colour on who will participate?
Navin Agarwal: In terms of the participation, the number of companies which are participating in the conference will be about 125 in numbers versus about a 110 that we had invited last year. In terms of the investor participation, the numbers are about 700 institutional investors both domestic and foreign but the big difference that we are seeing this time around is that the nature of the foreign investors who are coming in are more long only investors and we are seeing -- as Raamdeo just pointed out -- larger groups of those long only investors so there is one fund with 10 analysts along with the CIO coming in, the other one is 12 analysts and the CIO coming in and that is what is taking up the overall number of the offshore participants this time. So more long only and larger teams to dig deeper into the markets.
Latha: There is a problem with the way the global economy is panning out. So what is keeping these investors -- Navin is talking about more long only funds and more participation from each of those funds, what is keeping that excited about India?
Rajgarhia: There are three factors, one is in this period of slowing global economy, global investors see India as one of the best destinations where the resilience to the global forces are the most. Second is India has gone through its own pain of slowing domestic growth over the last five-seven years and ever since this government came in place, we have seen various signs of things just about to turn better. Third is the way Reserve Bank of India (RBI) has handled the monetary policy framework over the last two years, today when the whole world is worried about currency, India is today much better placed in this entire period. So people are realising that India is truly a very long-term destination and that is evident in the way the large global teams are participating at our conference.
Q: What s your sense? Rajat has been saying that India looks like a resilient picture, but there is a lot of pressure on the RBI to cut rates. There is the other end of the spectrum saying that he is the guy who is standing in the way. You buy that? You think that Rajan can make your story look much better or he is making it look worse?
Ramdeo Agrawal: I think his presence itself is a fantastic thing for the entire India story because today, we are tackling a lot of uncertainties -- commodity prices, China, US rate rise, then our own reserves, our own falling exports. So, a whole lot of issues are there and yet currency has to be stable because currency is one thing which is the reputation of the country and it translates everybody's sales or purchase in particular way. Stability does not mean that it should not go down. A very gradual devaluation vis-a-vis, your intervening currency is also a stability.
Q: So, it is not difficult for you to sell the India story? You do not repeatedly say that but your rates are not coming down? You do not get that kind of regret?
Ramdeo Agrawal: First thing is we are not big macro guys. We are bottoms-up guys. We are more concerned about total corporate profits as we were discussing before the interview than whether interest rate is up by one percent or down by one percent. I mean we know that broadly trajectory is looking to be lower but whether it happens in September or next September or May or June, we do not sweat that much on that._PAGEBREAK_
Q: Let me come to the design of the conference itself. How did you plan this conference? I am told from your copy that you have catalysts, enablers, participants and beneficiaries. Beneficiaries, I can understand, I guess they are the foreign institutional investors (FIIs) or the investors. How do you categorise the other participants?
Navin Agarwal: I would broadly split this into three parts, the first is the bulge bracket, the biggest corporates of India. So, you have Vishal Sikka from Infosys who will share his views on technology. You have Akhil Gupta from Bharti, you have Sanjiv Mehta, the CEO of Hindustan Unilever, Chanda Kochhar from ICICI Bank, Punit Goenka from Zee Enterprises, and a whole bunch of these big market-leader companies who will present their views on the businesses and how the businesses are doing. So, that is one side of the story.
The other side of the story is the non-corporate -- the bureaucrats, the politicians. So, we have Mohan Bhagwat, the chief of Rashtriya Swayamsevak Sangh (RSS) giving his perspective on politics on reforms etc. which will be very interesting. You have heard Mr Modi speak about reforms all the time. We have seen Mr Piyush Goyal. We had Mr Gadkari the last time at our conference speak about this.
Q: Whom do you have this time?
Navin Agarwal: We have Mr Mohan Bhagwat on one hand. On the other we have Vinayak Chatterjee to speak on the infrastructure space, we have Janmejaya Sinha who is the Asia-Pacific Chief of Boston Consulting Groups present, we have Anil Swaroop the Coal Secretary who is presenting and a whole bunch of these non-corporate speakers. So, that is the second leg of the conference.
The third leg is about 35-40 very interesting and promising bunch of investment ideas, bottom-up ideas where we see in the midst of this gloom-and-doom on corporate earnings, a possible 20-30 percent compounded earnings growth, so very exciting bottom-up interesting ideas. So, those are the three pillars on which the conference is standing.
Q: You also have Suresh Prabhu, the Rail Minister coming in and as you said, Nitin Gadkari has also spoken in the past. We are not going to get much help from the globe -- the export led growth is not going to happen in a hurry. We were expecting government pump priming and that is why I guess you have called the Rail Minister as well. Just setting aside the conference itself, are you getting a little disappointed by waiting and waiting for government spending? Are you seeing it on the ground at all? Yesterday, the analysis of the gross domestic product (GDP) numbers left the government numbers a little weak actually?
Rajgarhia: One of the problems that we all face in the market is too much over analysis of data, which comes very regularly. But we look at it in two ways. If you look at the aggregate fiscal deficit numbers, the number is while coming down, the composition of that deficit is shifting significantly from the non-planned expenditure to the planned expenditure. And planned expenditure is the government spending.
And secondly, if you look at the book to bill ratio of all the capital goods companies in our universe, they are at a 15-year high. Today, because we are into a slowing mode, many of these numbers are not making so much of excitement. But these are some very early trends. The government has begun this year with spending upfront. We will see this pace only picking up and the second half numbers will be better than the first half.
Q: That is still a matter of contention. There are some people who argue that this government has lost its ability to spend for about five years they have been given doles they have not put new tracks, not built enough roads so the ability of the government to spend itself is under question. You don’t quite believe that argument?
Rajgarhia: The last five years if you were to talk about of course we have had our own share of issues. We are more focused on the last six months of actions that we have been seeing.
Q: I know you are actually a bottom up investor and you are not a man for macros but still ultimately even your bottom up picks are operating in situation where consumer has to consume. In those companies, 50 percent of India which is domestically focused on consumption are you seeing any positivity at all?
Raamdeo Agrawal: There are various select pockets; I mean clearly the choices are reduced to very few companies. By the quarters it has been reducing. Good thing is that my strategy is very focused so I am not looking at 60-70 or 100 companies to perform. We typically have about 15-20 companies so in that even if I get 10 right and 7-8 kind of not performing so well, I think we will still do fine.
The point is, it is becoming very challenging to find new ideas but in every four to five months we keep getting one nice idea. Like last month we got was all the oil companies, which is still happening. So that growth is yet to pan out full. Before that some consumer companies whose margin expanded because commodity prices fell so something or other will keep coming.
Let me tell you about the macros also. The world might say that this is the end of the global economy. So the economist all over the world put together they always announce every ten years end of this country or this economy or the world has come to an end. 2007-2008, I remember when I was in US speaking in Wharton school it was looking as if they were literally standing at the end of the world. Where are they today? So let us be little optimistic. Our capital expenditure will start; I mean Indian economy will come full force. I mean some day, may be it may not happen in next quarter or next year.
Investing is not about next quarter or next year. We are talking about five year, ten year and you are still staying with a good companies which will be growing at 20 percent and will it go at 30 percent -- yes. The time will come when the boom will happen. It has happened three-four times and completely unexpected kind of, in 2002-2003 when I literally thought that India has come permanently to the standstill. What happened? We got the biggest Bull Run so I hope things will turnaround? Who knew that oil is going to USD 55 per barrel? In 48 hours before it was USD 42 per barrel and it was looking as if it is going to USD 30 per barrel. Today in 24 hours it has turnaround to USD 55 per barrel. So nobody can predict this thing. Let us hope that everything will fall in place. Macros will fall in place, micros will fall in place, will get enough ideas and we will make decent amount of money._PAGEBREAK_
Q: This time you have one other interesting story to sell, the domestic investor is returning. Can you give some colour on that? Is that making you more confident, is that making the foreign investor more confident?
Navin Agarwal: It is quite interesting. If you look at the last decade, the amount of money that the domestic investor invested in equities, you can split this broadly into two parts. In the seven years ending March 2010, which is when the market peaked at about 21,000 Sensex, domestic investors put in about USD 30 billion into equities at the rate of about USD 5 billion a year. So, the overall financial savings was about USD 120 billion and they chose to put this much money into the market.
Market collapsed and that USD 30 billion in the following five years ending March 2015 was sold at USD 20 billion. So, effectively, you had a lost decade of financial savings channelization into equities. A decade of a domestic public holding in equities actually falling year-over-year and foreign investors holding rising. The domestic investors, a lot of them are rear view mirror driving. So, you look at the rear view mirror returns on gold today, you look at the rear view mirror returns on real estate today they are both looking ugly.
However, the rear view mirror returns, 12-18 months, on equities are looking very good. So, we believe that on this new base of financial savings of about USD 200 billion run rate now, easily 5-7 percent can be channelized back into equities and this is not a forecast. If you look at the last five months, the domestic institutional investors (DII) buying of equities is already USD 8.5 billion so we are staring at a possible USD 10-15 billion runrate of domestic buying alone.
Now you can divide the foreign buying or selling into two parts. There is emerging market hiccup right now and you are seeing redemptions in emerging market funds and money has been taken off the table from the Indian markets as well. We have had USD 2.5 billion of withdrawal in the month of August. You could have a month or two or three or maybe six months when you have domestic institutions buying and foreign institutions selling but if you look at the 10-year picture, India is an underinvestment for global money. So we see foreign investors continuing to be long-term buyers of equities.On the other hands we see potential USD 10-15 billon of domestic selling being channelized into equities. So it is looking like a very interesting situation. You have this three-six months of global volatility, emerging market redemptions, India sell-off by foreign investors but if you extrapolate and look at maybe two-three years out, I think the situation looks much more interesting and very different from what you saw in the last month.
Q: Surely all your investors are going to ask you, what should I buy, what do you tell them?
Rajgarhia: you have to buy stories which are still growing well and where you are still able to buy them at valuations which leave room to at least play the earnings growth. Look at private banks, all of them are well capitalised, still growing at 20 percent in a 5-6 percent GDP growth environment, you have many of the consumption plays like Maruti, which is at the beginning of a volume growth operating at a high margin you have some of the cyclical recoveries like commercial vehicles, this is just a first six months and one of the biggest themes to play in this cycle will be the oil marketing companies (OMCs).In the quarter that went by, the three OMCs aggregates were almost 10 percent of the corporate profits. I don’t think people have seen that number for the last one decade also. So let the cycle start beginning to play. Many of these stories are only going to get bigger and better and more and more stories will keep on developing but I think there are enough domestic plays for people to position themselves in the market now.
Q: Did you miss out anything?
Raamdeo Agrawal: No, I think the difference between the short-term and long-term -- I think that aspect must not be forgotten particularly at this point of time. There is going to be so many stones coming into the market from completely unknown sources. As I said, now China cannot scare us.
Q: China cannot scare but global growth is still a big engine, for instance in auto ancillaries or even Tata Motors selling Jaguar-LandRover (JLR) in China or for that matter the amount we export to the Middle East, it takes away something. Do you think the Indian growth story can overwhelm this big negative coming from the world?
Raamdeo Agrawal: Every company will have its own territory like for one Tata Motors, Eicher is doing very well. They are growing at 50-60 percent. Maruti is doing very well 50-60 percent growth in the earnings. So you can have these kind of arguments about micro versus macro.
This China is a big guerrilla and almost one-third of the global growth was dependent on China and that is slowing down. Clearly world will be little unstable. So you have to see how you protect your portfolio out of that and there is a chance that you can benefit out of that. There are companies, which are hurt badly, steel companies are very badly hurt, aluminium copper companies are badly hurt, iron ore companies are badly hurt, coal companies are badly hurt but the users of these commodities, they are hugely profitable like Eicher or Maruti. These auto companies use steel, aluminium, copper, plastic all of rubber, all of these things are followed by 30-50 percent. Tell me which car is available to you Rs 20,000-30,000 cheaper, nothing, they have raised the prices recently. So obviously the margins are expanding. So you have to present there. You have to be a little opportunistic.
Some of the consumer companies -- sugar prices are down, wheat prices are down, vegetable oil prices are down, packaging cost is down, transport cost is down. So there is a combination of 7-9 percent volume growth, 4-5 percent price growth and then margin expansion so you have to work out where exactly the benefit is. It is not like you touch anything -- market is not giving opportunity just because you have written the cheque, market is not under obligation to give you returns. The problem is in the index.
Q: Let us not look at the index, would you therefore look at exactly the company to sell, is auto ancillary the place to go, would Motherson Sumi, suddenly you see this 10-11 percent months to date fall in August, would those be the buying opportunities?
Raamdeo Agrawal: I don’t buy because something has fallen by 10 percent. If something becomes cheaper, if I was buying Maruti and if it comes at Rs 3,500, it is better for me. My investor will get it at cheaper prices. What I am saying is investment selection is not just because it has fallen a little bit. Something is falling 30 percent, I may not touch it._PAGEBREAK_
Q: What I am asking is would you prefer now that more money could be made in the midcap? So, that is where people burned their fingers. For instance commercial vehicles (CV), you spoke about Ashok Leyland as an obvious winner. But, should people rather look at Atul Auto, a smaller player?
Ramdeo Agrawal: What I am saying is that if something has to sell for Rs 500 in 2020, today if I buy at Rs 100, I will make five times, if buy at Rs 50, it will be 10 times. See, in 2020, what is going to be the price, you cannot change that price. Now, at what price can you buy? Can you buy at Rs 100, can you buy at Rs 90, can you buy at Rs 80? I will always prefer Rs two cheaper.
Q: I am still coming back to the shorter-term because the retail investor can be scared off. Do you think that things can get bad enough to scare off the retail investor? I mean if they see 7,300, if they see 7,400, first of all, will they see it? Or do you think at least going by your experience and going by the flood of retail money that 7,700-7,800 will hold?
Navin Agarwal: Indian corporate earnings are getting downgraded. Currency is volatile, it is seeing lows every passing day. Foreigners are selling; they had the biggest selling in the last seven to eight years in the last month alone. Indian monsoons are not looking very good. Water-levels in reservoirs are running low. So, I have a list of a dozen negatives. Will that take the markets down? Possibly. But my own track record of getting short-term is very poor. So, I am probably not the best person to answer that question.
Q: What I am saying is that you were speaking to a bunch of investors, to people who have a lot of experience of seeing several business cycles. Are they giving you that kind of scare or are they more like Ramdeo saying that now all the devils are out, they are known and they are out.
Navin Agarwal: I agree with you there that what has happened lately in the last one or two months because of dissolutionment with the high expectations of reforms that were there on one hand and the global volatility on the other, we know investors who like a stock, who want to buy it at a particular price, that price is seen on the screen, but they want to just procrastinate, just wait and watch, because their existing portfolio is losing money. So, we have seen even long-term investors, people who believe in the long-term story, who have conviction in their ideas also now holding back. And I think that is not a good sign and that is something that needs to be addressed.
So, I agree with you that withdrawal of buying, which is usually what catalyzes a fall and not just selling, is something that is becoming more pervasive even among the believers is something that at least I have personally observed among multiple investors in the last few weeks time.
Q: One of the news we got over the last 24 hours is HDFC Bank cutting its interest rates by 35 basis points. Now, it is a substantial fall. Three quarters of a percentage point fall in lending rates, could that be that push for consumption?
Rajgarhia: When I saw the media today comparing the base rates of all the banks, I thought it is really commendable that the bank with the highest net interest margin has the lowest base rate in the system. So, that speaks very well on how to manage.
Q: He is the one who will start the challenge.
Rajgarhia: But I think this also serves as a good message to Raghuram Rajan where he has been advocating for the last three months that banks need to transmit the previous policy rate cuts into their own policy rate cuts. I think that process has begun. This is a festive period when typically banks like to prop up their retail products. And as long as you are able to manage your cost of funds and credit cost which no one does better than HDFC Bank, rates will keep coming down.
The environment is just getting conducive for Dr Rajan to just come an give a festive gift by doing another rate cut. HDFC Bank has just kind of created a favourable backdrop for that.
Q: That had to come. But I am sure you are going to sell HDFC Bank to your investors. What else will you sell to them? I mean will you still sell Hero Honda? The challenges for that company are there.
Ramdeo Agrawal: We are already fully invested.
Q: You are fully invested, but you would still think that there is space to invest in?
Ramdeo Agrawal: My sense is that market goes lower. It is actually a good news. Most of us, we do not want, including me, I do not want to see a lower price, I want to see a higher price because it feels nice. But actually people are yet to come into the market. So, if the stocks are lower and foreigners who benefitted significantly last five to six years, they bought it and domestics, they sold it. This is the biggest story.
Now, the tide has turned where domestics are buying and foreigners are selling. I only hope that they do not get tired in this 7,800-8,000 short-term gyrations and they start selling and foreigners start buying.
Q: So, they have to keep running till they can pass on the baton to the foreigners.
Ramdeo Agrawal: I hope the foreigners get tired of domestic buying and finally they come in and then both of them, they take the market to a different levels.
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