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India too attractive to miss for global investors: Raamdeo Agrawal

Current government is going to come back with a slightly reduced majority, says Agrawal

, ET Now|
Updated: May 19, 2019, 12.01 PM IST
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Raamdeo Agrawal-1200
It is very unusual that while the GDP growth is 7%, the entire automotive sector is down. This does not connect. Either, the automotive demand has to correct very quickly or GDP itself might get muted, said Raamdeo Agrawal, MD & Co-Founder, Motilal Oswal, in an interview with ET NOW.

Edited excerpts:


The final outcome of the election will be known on May 23, This has been one of the noisiest elections in the past 30 years...

Very prolonged and very noisy.

You have actually seen various cycles of the market as well as various election seasons. In your view, how are the markets positioned going into this event?

A good thing is that this time there is a lot of data flow about election. Though one does not which of the opinion polls is more authentic but betting market and other estimates from psephologists give us some inkling about what could be the numbers. So, the market is getting a lot of data and based on that, I believe that there is not going to be any disruption. The current government is going to come back with a slightly reduced majority, about 245-250 instead of 282. But ultimately prediction is prediction. There will be mistakes. It could be even 300, it could be a little lower than 245. But at least the market is not saying that there will be any major disruption in the current dispensation in Delhi.

After Balakot, there was a sense in the market that there would be chances of a complete swipe by the current government. But in the last couple of weeks, the way voting has progressed and markets have coincided with the Nifty coming down from almost 12,000 to 11,300. Do you think it is good that the market is going into this event with tempered expectations?

One month is a lot of time with such a noisy election with claim and counter claim and various other issues. The kind of feeling which was there at the time of Balakot incident a month-month and a half back, that impact has got muted but, somewhere, a lot of opposition leaders kind of lost the way. So there is no alternative. Now the BJP or Mr Modi looks to be a there is no alternative (TINA) kind of situation. So, to that extent, the certainty of coming back has increased in the minds of the people but as the time passes, other factors start coming and uncertainty starts building up.

Somebody says that NDA tally might be 180-190. Suddenly it brings down the confidence and then globally also a lot is happening. The stock market is a reflection of everything, it is not only about the election. I would say, the other things have a bigger role in the sense of how the dollar is behaving, how the US-China Trade War is on, how the oil is behaving etc.

If you see, the FII flow as an indicator of what foreigners are thinking about India right now. I think they have become muted and the decline is because the aggression with which they bought in March and early April, has tapered down.

Even the China-US situation has completely changed in the last one week or so as was absolutely not envisaged earlier. Is this a surprise for the market? They are at daggers drawn because they almost kissed and made up a couple of weeks back?

They seem to have a love-and-hate kind of a situation where every time they find a new reason for postponing a deal by another one month-two months. But the US has gone ahead and raised the tariff by 25%. If by chance it becomes permanent, then it will have a huge repercussion on global trade and global competitiveness of China. A lot of things which China exports right now, the scale and the price at which they can sell is not possible by anybody else but with 25% duty, a lot of other countries, particularly India, will be very fast to seize the opportunity. But it has to become permanent. If it is only for a month or two, you cannot take a business decision based on that.

There are sections where the market is already talking about how India may actually turn out to be a gainer because a lot of manufacturing capacity from China can shift to India?

It is too early to say that. I would not count on that too much. That is one aspect. Second, is how the FIIs react. In March, they came out with Rs 32,000 crore of buying which is unprecedented and that took the market to different levels. The cooling off of the domestic investors from October-November have continued. The March flow is the lowest. Domestics are still very cautious and foreigners are also now sitting on the fence. They are not selling. It all depends on May 23 outcome.

Half the Nifty earnings is almost getting over. What are your reading in the numbers so far? Auto companies are talking about a slowdown which is visible clearly. But even an Asian Paints with 12% volume growth, Kajaria at 11-12% volume growth and HUL with a sombre commentary giving 7% volume growth are there. What is the reality in your view?

It is very confusing right now as to how much is the actual slowdown and how much is impacted because of the slowdown in entire credit flow. There is a disruption in the smooth credit flow in the system. There is an aversion to lend and lot of winding down of the NBFCs are happening because they want to become safe. This is a very confusing environment.

On top of it, this election is so noisy. The confidence levels in a lot of businesses, particularly for the months of March-April is quite low. I had gone to a hotel for a party. He was saying April-May was a complete washout. Till March, it was booming and he is guiding me that next month will be a bumper. You are passing through a very low phase of businesses. I would not like to extrapolate whatever is happening right now too much into the future. A lot of things will change.

But at the same time, let’s not disregard the fact that the last couple of years, people got estimates awfully wrong because they started the financial year with strong numbers. What is your own number?

Next year, the earnings growth for Nifty could be more than 20% and one of the sources of earnings growth is going to be the corporate bankers like SBI. So there is confidence and if you read the commentary of the quarterly results, there is a high probability that those numbers will come. If not in the first half, in the second half of this year we must see very determined recovery in corporate profits.

How are you analysing the consumer space? The premium which they had enjoyed for a long time is being mildly stripped off by the market. Is this a mild correction happening and would people reposition themselves there?

In the last 30 years, all these consumer companies have kept on becoming more and more expensive decade after decade. When I started my career in 1989-90, I wanted to buy Asian Paint at 15-16 PE multiple. It was more like 20-21 PE. I thought it was expensive. When I was determined to pay 25, it was at 30 and now it is 50-60! This has happened because of the longevity of these franchises and nobody has been able to damage the franchise quality in a major fashion. That has been the major factor in people staying on to the stocks. They are not willing to sell these stocks and hence it is becoming expensive.

When you buy at significantly three to four times of the growth rate, say growth is at 15-16%. Till about 30-35 PE, it is fine but the moment you start crossing 60, you are actually speculating. This time at the Berkshire Hathaway AGM, one of the things that was discussed was Heinz Kraft. It was accepted that the business is fantastic because on a tangible assets of around a billion, they make about a billion. The issue is the price we have paid for it.

It is the humility of some of the great investors that they also agree that sometimes they go wrong…

Yes, he was very clear that they overpaid and that is why it is bringing all kinds of….

Let us talk about another area where the market has seen price damage. You have held on to those stocks for long -- the Eichers, Marutis of the world. When the commentary comes in or the numbers trickle in, have you seen this kind of lean patch earlier as well?

Yes we have seen the lean patches but not with so much of money as to exaggerate the situation in the sense that if you are holding a very small quantity in your personal portfolio, you are not that worried, the thing passes.

I do not bother about my personal portfolio that intensely on a day-to-day basis but when peoples’ money are involved, then you are being reported by analysts, fund managers and by sales guys. Everybody keeps bringing out why you are not performing. That brings in a lot of sensitivity. It is very unusual right now that while your GDP growth is 7%, the entire automotive sector is down. So this does not connect. Either, the automotive demand has to correct very quickly back or GDP itself might get muted.

As a practitioner of market money management and also a citizen watching the economy for such a long time, what is your take on the debate on data quality?

This is a broad aggregate. We do not bother about that much. I take all the data that comes from companies very seriously because that is real, because they have to face it after three months. If Eicher, Maruti or anybody else says next quarter we are going to get this number, they have to face up to it. The slowdown is real in the sense that instead of Rs 1,70,000 crore, you sell Rs 1,40,000. Somebody tells me that my economy is booming but I am not going to believe it. If the company, which has 55--60% market share, are not able to sell cars, that is the reality for me.

What do you make of Mr Vinod Dasari shifting from Ashok Leyland to Eicher?

Very iconic shift and I think he is a very big performer. I am sure it will be a terrific addition for Eicher.

Some believe that this is the time to position towards defensives and pharma. Stocks like say Divi's or DRL are at life-time highs. What is your view?

Pharma, particularly the export pharma dependent on exports to US or Europe, is not a very generic kind of industry. Every company has its own challenges and its own opportunities depending on what kind of ANDAs or you have filed, which markets you are in and where you are in the cycle. It all depends on the individual business strategy.

Some companies which suffered earlier, like Divi's, had their own problems a year before and from there they came back and now they are doing very well. Dr Reddy’s had its own set of problems and now they are doing very well. It all depends on individual companies. It is not generic like cement. If one cement company is doing well, almost all the companies are doing well. You have to be very careful in investing in pharma and it is slightly technical also.

How about NBFCs? How are you analysing this space?

One of the things, I keep telling guys is that you can buy a bad cement company, a bad steel company but never buy a bad lender. You are giving Rs 100 and you get that the cover for you is very small. You want to have credit cost of 1% or less than 1%, whereas if one borrower blows up, that can take the entire NBFC down. One has to be very careful in any lender -- be it NBFC or even a private sector bank, public sector banks or whatever. You cannot compromise on the quality of lender.

2018 was a destructive year for midcaps and smallcaps after a good four years. In January again we saw midcaps, small-caps coming back. But that rally fizzled out and it was the largecap which led the market. What is your take on the valuations of that pocket versus largecaps?

These things keep happening. One of the things was that the period between 2014 and 2017 was the main period in which mid and smallcaps flourished.

The Modi rally as they were calling it at that time…

It was a domestic rally. The reason could be anything but the domestic flow was unprecedented. You got Rs 2.5 lakh crores in 2017-18. All the PMS guys were buying small and midcaps and they were buying the same company every day. So they were pushing their own products higher and companies were finding it difficult to catch up with the valuation.

They were doing well but if you push the company price by 4-5 times in a very short while, what do you do? Nobody complained about the rise. Now it has corrected and that is the complaint. Current levels of valuations are not bad, but it is much lower than what it was 12 months back. Compare what has happened 12 months back with four years back, before the rally started and you will be very happy.

You have just come back from a trip of four cities in the US and have interacted with a host of clients globally. How are they looking at the way Indian economy and political leadership is panning out?

We go and meet all the people who are interested in India. We are not meeting hundreds of them. We are not figuring out how many are interested. We are going to 20-25 guys, all of them who have money here or who are likely to increase their allocation and things like that.

Second, I found lots of interest in India. Of course, everybody is waiting for the election to get over but I think on the whole. they were positively inclined.

Historically whenever Mr Modi goes on foreign visit...

It has nothing to do with that. It is just that India is too inevitable. It is too big a country and it is rising too fast in the sense that now we are in the top six-seven countries in terms of market cap and in next 10 years we are definitely likely to be in top three or four. So everybody now has a India strategy. They want some India allocation, some percentage of their funds to be in India and lot of people are under-allocated.

One of the things is that they have not seen this level of valuation. They love individual stocks but when it comes to valuation, they also give up. The real challenge is broad-basing of the growth so that wherever growth reappears, the fund can be channelled.

If NDA gets anything upwards of 220-230, how do you think the market will react? If the tally is closer to 190-200, how would the markets react?

It is a huge event risk. A lot of local clients I speak to, have taken money out or they are sitting on the fence. It is not about the number. It is about the stability. Even with 225 or even 220, if you are able to provide a stable transition without much noise or breakdown, it is okay. Nobody wants to come with a ruling party who has to make it up from 220 to 272 and midnight oil is being burnt to figure it out. If that kind of situation does not come, where there is a comfortable transition from one regime to the next, the market will be fine and welcome it.

If there is a question mark on that, then probably we should be....

Yes, the market does not like uncertainty. See right now, there is uncertainty. We might say anything about 245, but market wants certainty and the event to be out. That event is not out and so event will be out only on 23rd. If the market corrects further from here, that will be very good. Market expectation will be much more muted.

How do you rate the five years gone by of this government and where do you see the next focus area?

One of the things which is coming out very clearly is job creation. There was a lot of correction of old practices in terms of how real estate industry was taken care of, how the indirect taxes were unorganised. There was demonetisation. A lot of these big changes have been made. Whenever you make big changes, it has its own cost. You cannot do big surgery without pain. So the pain we have gone through, hopefully the next phase will be for growth.

Let us see how much cost they have to bear?

Yes everybody is pro-poor but the pro-poorness has to come from the taxes and taxes can be collected only when the economy grows. I think the growth in the economy and will bring all kinds of things like good job creation, feel-good factor, corporate profits and hence the stock markets. A lot of good things will happen. The focus is on growth rather than beating the significant players in the economy.

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