After a strong run over the last two years, India's equity markets are falling and various uncertainties loom large, be it the elections in key states this year or the trade war firing up between the US and China. However, Raamdeo Agrawal, joint managing director and cofounder of Motilal Oswal Financial Services, remains unfazed.
Agrawal teamed up with Motilal Oswal to set up a small stockbroking firm in the 1980s. It is today a financial services giant, spread across equities, commodities, currency, mutual funds, housing finance, investment banking and private equity. Motilal Oswal Mutual Fund by itself has around Rs 18,000 crore in assets under management. Agrawal, who calls Warren Buffett his idol, says that though this year may not be great to make money in equity markets (he sees anywhere between +10 to -10 per cent returns), with the economy picking up speed and earnings recovery broadening, India's equity market remains in a structurally bullish phase for the next decade. He shares his thoughts, investment philosophy and how investments can navigate the tough times. Edited excerpts:
We have seen lots of ups and downs this year in the equity market. Do you see any signs of stability around the corner?
The stability was kind of [an] exception last year. The one-way traffic was unnatural. From that complete stability, the market has gone too hyper. The US [trade war with China] is driving a lot of it. Given equities are risk assets, our job is to overcome whatever trouble there is and make money. When you buy stocks, you have to take into account that things will go wrong. For instance, now, it is a bilateral trade war between the US and China. But, if China cannot export something to the US, they will have to export it to the rest of the world. If, for example, China is not able to export steel to the US, obviously it will dump it in India or Europe or somewhere else. So, this (trade war) creates a lot of chaos. I only hope this settles down. However, this is not a ten- to 15-day issue. It will go on for a while. There will be a lot of posturing. There are many other global imbalances, which will come up on the table. We do not know which one will come and when. It [risks and uncertainties] has to be built in the purchase price as we don't know all the risks. I am hopeful that things will not be as nasty as it seems.
Apart from the trade war, domestically, too, there are too many moving parts— various elections this year, fiscal deficit issues. How do you navigate amid this uncertainty?
You may count five to six negatives. But, there may be more things unknown, which may hit us in the next 12 months. Who could have predicted demonetisation, for instance? We can only be prepared for things we can see. So, you only look at the business, look at the management quality, see how much scope the business has to grow, build it into your valuation and when you find it comfortable, buy it. You should read signs. Right now, it looks like the rural economy is booming. The government has pumped resources through various schemes into the rural economy. Government expenditure on the rural economy has gone up significantly and in an election year, they will do whatever they can. So, whatever boom you are seeing, will accelerate. The first signal is tractor sales booming. Secondly, motorcycle sales; Hero MotoCorp has grown 20 per cent this year. So, obviously, the rural pull is there. Even FMCG companies are saying rural India is booming. Keep these kinds of things in mind and then you build your model and company you want to put in your portfolio and pick companies that can surprise in terms of growth. That is how you keep building your portfolio.
But, then the issue is that some of these good companies are trading at expensive valuations.
Quality is nonnegotiable. I would say acceptable quality; you do not need to have pristine AAA-rated types, AA+ will also do. But, I just do not want to buy junk. I know quality cannot be valued right. There are lot of moving parts in investing. We are focused on the QGLP format, which is quality of business, quality of management, growth, longevity of growth and the purchase price. When these four buckets are known, then we know how much we can pay, in relation to where the market is. There is no absolute valuation; it is all relative. If the market is trading at a PE [price to equity] multiple of say 15, then you are willing to pay 25x [times] for something, which has superior qualities. But, if the market is itself trading at 25x, I am not going to get that quality at 25x. So, I have to pay that premium. How much premium will I pay, that you have to see. Ultimately, I have to beat the market. If the market goes down by 30 per cent, it will be impossible to give you 30 per cent returns. But, I have to make sure I go down by only 20 per cent.
Is it becoming difficult to find the quality companies given the pain in several sectors and expensive valuations elsewhere?
Obviously. It has become difficult, but that is also the fun. Playing in the tough environment, whether it is because of valuation or lack of growth, I enjoy investing in challenging times.
You talk of quality companies and good growth prospects. A lot of it has often been associated with private sector banks. Is there some kind of concern creeping in, in the wake of recent developments in the sector?
In private sector lenders also you have good and bad companies. Just because you are a private sector lender, it does not give you a licence that you are good. You have to go into the balance sheets and understand their practices and the growth they have achieved. A big difference about private banks is that if there is any problem, you do not go to the finance minister for funds. You have to go to your own shareholders. So, you saw Axis Bank raise money from Bain & Co. Selectively, there is still is a huge opportunity among private lenders. In fact, the opportunity becomes bigger for the good guys like Kotak, HDFC and IndusInd. All the private lenders who are managing their affairs well, they are good businesses.
There is a concept called value migration. This has changed my life in investing. It is a very simple concept, which no one follows. No business is static. Look at power sector, from coal power it is all heading to renewable energy and solar. Automobiles are moving from internal combustion engines to electric. These values keep migrating. The need for personal profit is there. The question is whether the profit in the future will be made by the companies making internal combustion engines or by the Tesla's of the world. The world is saying, profit is going to move to companies like Tesla. We moved from wired phones to wireless, from public sector banks to private sector banks. The writing on the wall is clear. Value is migrating. So, you have to find those kind of businesses and I have to do it before all of it happens.
Do you have some exposure to public sector banks?
No. We had some exposure to State Bank of India. But, that, too, we have sold. So, broadly we have stayed away from the issues at the state-owned banks.
Which are the sectors where you see doing well?
Some of the private sector banks, auto companies; we still have good allocation to some oil companies and pharma companies. Currently, we are low on the IT sector. Now private insurance companies have come into the market, mutual funds are coming in to list. So you will get fantastic opportunities to invest in the financial services. Like Warren Buffet says, rule number one is, do not lose money. If we are buying 20 stocks, we will get things wrong, but the effort is not to get things wrong. As an active asset manager, the role is to pickup the bad guys from the portfolio and throw them out. That is why we have the QGLP framework, which will lessen the number of mistakes we commit.
From a pricing perspective, are IT and pharma sectors looking better, right now?
Surely. We have actively analysed it. We have bought some pharma companies, we are very active there. IT, somehow, has slowed down quite a bit. We are venturing slowly. It is still not a roaring segment, but some positive outlook is building up.
Motilal Oswal recently had its annual conference in London. What is the perspective that you are getting from foreign investors on Indian markets?
The interest towards investing in India remains massive. The issue is what is going to happen in six months to one year. India is a structurally bullish story for next ten years. So, foreign investors may not bring fresh money immediately, but they will not take the money out from India. They are looking for every opportunity to invest. If the market goes down sharply, they will invest big time. But, right now, global markets including the US and Europe are doing well. So, they do not have the urgency to come in to India and pile on at this valuation. They are not finding India to be relatively cheap.
We had some correction in stocks since January. Do you think, there could be more?
In the current year, firstly, there is a headwind of valuation. Secondly, you have elections. So, a lot of these crazy things could happen; every election will be termed as a mini general election. Third is that you will keep hearing about a grand alliance. The market has its own way of reacting to this situation. Then, you have the global cues, like the US-China trade war, that we do not have control over. So, my sense is that this is not a great year to make money, plus or minus 10 per cent. Domestic flow is fantastic, every day I get money, and since demonetisation, it has only increased significantly. With that flow and foreigners not fundamentally willing to sell, they are only selling on the margins, and corporate earnings are also kind of picking up. It will be a stock-pickers market, performance will be fully rewarded. If I pick up the right stock and it works out the way we thought, we will get rewarded.
Talking about domestic flows, there was a drop in inflows in equity mutual funds in March. Do you think that was an aberration?
March is always spooky; this LTCG [long-term capital gains tax] has also come. A lot of people wanted to book profits and open up new accounts. I would not read that much on just one month's data. For us, it [the inflows] was just 10 per cent lower.
Any bright spots you see this year? Is the corporate earnings recovery widening?
Yes, very clearly, be it road construction or infrastructure build up. Look at Mumbai, the whole city is dug. Some worthwhile construction is happening. So, if you look at roads sector, we know a few companies that are talking of literally doubling their turnover next year. So, we have finally got some kind of momentum in the economy. Corporate earnings must pick up, and you will see a much better picture in the March quarter also. It will not be across [sectors], but you will see some spark.
How do you see the restructuring that has happened in a few sectors like steel and telecom?
The steel industry is booming, so the underlying assets are all at a premium. That is why companies like Bhushan Steel, Essar Steel, Monnet Ispat [all undergoing insolvency processes in National Company Law Tribunal] are all being lapped up. Power sector is one pain point. New plants are not coming up, but consumption is growing each year. There have been power plants already constructed and mothballed. These will be revived. Maybe, it is just a matter of time, around two to three years, when we will again face power shortage and at that point of time, they will be able to make decent money. Telecom industry is already consolidated. But, it is still a Mahabharat. Not a two-way, but a three-way Mahabharat.
Overall, we are not in a bearish phase yet?
This is not a bearish phase. Every business cycle has to first expand and then collapse. When it has not expanded yet, there is no question of a collapse. The business cycle had taken a breather, but now it is just on an expansion mode. It has not peaked since 2008. We are on the cusp of recovery. For instance, for the first time, the total truck sales have crossed the 2011-12 figures. We have to go to much higher levels in terms of business economics. In that phase, some of the companies will make disproportionately large amounts of money.
So, retail investors need to choose stocks properly and sit tight for two to three years?
Retail investors should go to the well-run mutual funds. SIPs [systematic investment plans] will take care of timing the market and investments should be in three to five mutual funds, depending on how much money the retail investor has.
Last 40 years, India has delivered 15 per cent returns. In fixed income, the post tax return is not more than 5 per cent. With the power of compounding, in fixed income, you do not double in ten years also; it takes 14 years. At 12 to 15 per cent, you may double in six years and if you get one great year, more like 2014-15, when the index also rose around 35 per cent....
So, if you stay in the game, you will get such opportunities. You can never time the markets. If the monsoon is normal this year, the stage is set for a bumper second half. For investing in stock markets, you need to have a fundamentally positive outlook.