“Abki Baar Sensex Pachaas Hajaar”?
Renowned investor Ramesh Damani in conversation with BloombergQuint’s Menaka Doshi.
Starting today, ‘Thank God It’s Friday’ will feature expert investors and their views on the economy, business and markets. This week it debuts with renowned investor Ramesh Damani, in conversation with BloombergQuint’s Menaka Doshi.
Earnings so Far
Major banks, information technology and FMCG companies have announced earnings. How do you assess their performance so far?
In the last few weeks, since Rexit (Raghuram Rajan’s exit as RBI governor) and Brexit happened, the market has demonstrated incredible strength. The bull market is in full form, conquering the walls of worry that we call Rexit, Brexit and perhaps even the earnings season. An earnings rebound in the next few quarters was on the cards, and I think this is the first quarter when the markets have upheld the litmus test.
Some technology earnings have been weak. But consumption earnings will be very good, cement earnings will be good, infrastructure will be good. A lot of pharma companies have come out with strong numbers. So, it might be a mixed bag on an aggregate level, but individual companies, oil marketing companies for example, are showing exemplary earnings growth. Overall I tend to be very optimistic, not just about last week but about the last few months in the stock market.
Still Bullish on India?
What would you identify as the key opportunities and challenges facing India, not just as an economy, but also in context of what is going on in the global economy? Could you list for me the key things that you use as parameters to decide whether you continue to stay bullish or whether the sentiment is turning?
The first thing we tend to look at is the overall direction of the market. I think the market made a very important bottom in August 2013, about six to eight months before the Modi government was actually sworn in, when the rupee was at 70/$ and P Chidambaram and the finance ministry went into a panic. The market hit a bottom then. Since then, it has been three years into probably a much longer bull market, and every indication is that the bull market has a long way to go.
Now the other question people ask is what about global events. One-third of the bond portfolio in the world is probably trading with negative interest rates...whether it is in Germany, Denmark or Switzerland, or many other countries. In India, you have positive real interest rates, you have oil prices going down, you have a government bent on reform, and I think that reform is taking shape. If you step back and look, you can see the tile instead of the mosaic, you can see the forest for the trees and I think there is reason to be optimistic. I think that the Indian economic reform process, the GDP number will accelerate in the coming months, as will corporate earnings. If you look at a globe that is starved of growth, you find growth in India. My feeling is that we are in a pretty nice sweet spot right now in the global financial picture.
About that continuing optimism you expressed in the India bull run, and it is not just you, several other well-known investors have felt that way. In fact one of them suggested this is “the mother of all bull runs”. But that hypothesis has been tested – whether it was in the beginning of the year, or every time a US interest rate hike is back in play, or even more recent commentary on Indian markets and their valuations. How would you look at some of these negatives or threats?
We are opening a Pandora’s box – the different problems that the markets can face over the next six months – FOMC, China devaluation, global terrorism. But my view is that the market is up year-to-date and is very close to its all-time highs despite a very weak January-February, despite Rexit, despite Brexit. The bull market is showing that it can climb the walls of worry. I think that one key global issue that would worry the market is if the FOMC (Federal Open Market Committee) decides to raise rates. The markets can deal with any subject except rate hikes, because that will change the valuation of all equities across the world. The market is now on steroids, it wants low interest rates. So if that happens – it’s unlikely to happen this year – then the market would have to grapple with higher interest rates. That would be the key risk, along with of course, the continuing bout of terrorism.
Even as I speak to you today, ten stocks in the Dow (Dow Jones Industrial Index) yield three percent dividend yield. Three percent dividend yield in dollar terms, in a market that is in negative interest rates. So that’s not a bad place to be in the equity markets.
Now the question that you asked – is this the mother of all bull runs? I have noticed in history that every bull market is greater than the preceding bull market. So the bull market in 2000 was greater than the bull market in 1992, the one in 2003 was greater than the one in 2000 and this bull market would be greater than the one in 2003. In terms of magnitude, points, distance, time, every bull market tends to be more powerful than the earlier one. So I am crossing my fingers and hoping we are right this time too. Last time in the bull market, the index went from 3,000 to almost 20,000 which is almost a 6-7 times move. We bottomed out at 16,000 and I am not making any prediction, but my logic suggests that there is still a long way to go in this bull market.
In other words, you are saying there is considerable upside to this market. How much higher do you expect equity markets to rise?
Well, Menaka if I can use the meme of the times, and I use this with a sense of humour – when I was asked this at a conference, ‘where is the Sensex headed,’ I said, to quote our prime minister, Abki baar Sensex pachaas hajaar. Let’s start with that round number, let us hope we get there. I am hopeful but of course do not put your money where my mouth is.
Sensex at 50,000?
You can’t really be saying the Sensex will rise to 50,000 in this bull run?
The trajectory of bull markets suggest that the index typically doubles before it peters out. For example, let’s take the 1992 bull market that culminated at 4,500 but what people don’t remember that it started at 800. Or the 2003 bull market that started at 3,000 and finished at 20,000. Readers can do the math. Bull markets have a long way to go in terms of magnitude. So I think we will be surprised by what develops.
Each bull market tells a story. The 2000 bull market suggested India will be a technological superpower. That has happened, hasn’t it? So each bull market has a story. It depends on individual investors to find the story, place bets accordingly and see where the chips land. I remain optimistic. The 50,000 was said in a moment of levity, but I think it is as good a time as any to get into the retail market. Just because the index has gone from 16,000 to 28,000, it doesn’t mean that bull market is nearing its end. In fact I think it’s just well on its way.
If The Fed Hikes Rates?
You flagged one big concern among many others, a potential rate hike by the Federal Reserve. Now whether it happens this year or next, it could mean a substantial correction in our markets? Have you been able to assess what it would mean in terms of foreign portfolio outflows and therefore the impact on Indian markets?
You know it is actually too far away to be crystal ball gazing, we’ll deal with it when it happens. Whether the global economy is weak or strong then, what will oil prices be then, we will have to decide at that time. But from the past experiences in the last few years, it seems the market is ready to face almost anything. What happened to the CAC the day terrorists attacks happened in France? It closed higher. Markets can go through Rexit, Brexit, terrorist strikes, almost anything it’s able to handle and take in stride. The one thing I find the market does not have the ability to handle is a significantly higher FOMC rate. So if the Federal Reserve starts signalling they are going to aggressively raise rates now because inflation is hurting the economy or because interest rates are too low, that would be a warning sign that the bull market may be coming to an end. As of now, the guidance is that the next six months we are not going to see any hike. So why pray for an early death? Let’s watch and wait.
Bank Stocks: Buying Opportunity?
I would like to ask you about a few sectors and see if you are still interested in them or whether your investment strategy has changed. For instance banks. On the one hand, especially government-owned banks, face big bad loan problems, on the other hand some would say some of these banks are available at cheap valuations. How are you looking at this sector, especially government-owned banks? And if I was to extend that to rest of the financial sector, that is NBFCs and microfinance institutions, do any of these investment opportunities interest you?
The public financial sector have always been a cause for concern to market men who have been studying their balance sheets. It makes little sense to me that, say six months ago, these companies were paying 30 percent tax rate and a high dividend rate but not making provisions. So basically, they were paying out profits and tax on money they didn’t have. Now that they have recognised the reality and taken a write-off these stocks have been in a depression. Are they cheap enough to buy? Not until I see a cultural change in these PSUs. I think we need a cultural change not necessarily just a balance sheet change. We need to make sure this problem does not recur. So to summarise, I probably would not be looking at them at this point.
Investing in Technology?
What about sectors like IT, FMCG, industrials? Have your views on these sectors changed?
Well, with the IT sector I have a nuanced view. It’s been a long-time favourite of bulls on Dalal Street. We have all cut our teeth with companies like Infosys, Wipro, TCS, that have gone up 50 times, 100 times and have made us a lot of money. So we are all very enthralled by those companies and they continue to do well. But those companies pioneered a service-led, business-oriented model in India, which essentially means you export services to the west, bill in rupees, collect in dollars and you make a margin. And because the rupee depreciated and volumes were growing you kept doing well. That model maybe under threat due to automation, competition and just due to the fact that there is a slowdown in global IT spends.
But increasingly I find, as an analyst, there are a lot of opportunities in what I call product-oriented companies on Dalal Street. There are a lot of companies catering to vertical markets, building products in knowledge, database, antivirus. They offer some very attractive opportunities to investors, they are available at fairly cheap valuations. So rather than look at the old services-led model, which of course I have in my portfolio, I would also be looking at the product-oriented companies. And there are maybe half a dozen on Dalal Street now that have exciting balance sheets, exciting prospects, and probably deserve a lot of investor attention. So that is my short take on technology.
‘Next Gen IT Stocks’
That’s been your position in the recent past as well. And if our research is correct, you’d invested in companies such as Polaris, Geometric, Sonata. Are you still adding to such investments?
There have been a plethora of offerings in the recent past. Polaris spun off a nice looking product company which I own. There are a lot of others, few companies have come out with an IPO recently. So it requires little bit of digging. The road to riches is never easy. There is risk in these stocks because they are unproven business models yet. We don’t know if India can legally sell, in the domestic market, a lot of licenses or are they all going to be pirated software. So time will tell. But I am fairly excited about these companies because they address very good opportunities. For example, the Aadhaar database was built by an Indian company and that’s a huge technological achievement. They have 100 crore people on the database. Antivirus software companies are showing up in India. So that makes me excited as a technology investor.
Industrial Stocks: Reforms Boost?
What about industrials? Are you seeing enough investment pick up for the industrial sector to show promise here on?
You know, sometimes you need direction from New Delhi and I think we are getting it. If you look at how the government is going about the PSUs, using them for investments, some of the stocks have appreciated handsomely. Also they are starting on the strategic disinvestment roadmap, so they are doing a good job there. Now the big bet that the market will have to make is - Indian manufacturing at 20-25 percent of GDP, can it become greater than that? And that is why the Prime Minister launched his Make in India scheme.
Now here’s the point I’d like to make. This is a country that, if it puts its mind to it, can send a Chandrayaan to the moon or launch a space shuttle. Five countries in the world have the kind of technological capability to do the same – U.K., Russia, France, America, China. We are the sixth country perhaps to do it. But at the same time why can’t we go to Cupertino instead of Chandrayaan and tell Apple computers that we’ll build the iPhone 5 out here. I think we’ll start getting some of those orders for manufacturing and a boom there. It’s a long-term call but I am hopeful because at least it’s in the eyes of the North Block in New Delhi.
‘Bullish on FMCG Sector’
We have had a decent monsoon so far. Do you expect a rebound in rural consumer demand and therefore does your outlook on consumer stocks improve from here on?
Absolutely. We needed a good monsoon, otherwise the bull market would have derailed very badly. I think there is a consumption boom going on in this country hidden behind the numbers. In terms of sales, at say, department stores, tractor sales… I think there is a very strong consumption boom going on in this country which will show up in the next few quarter of earnings. So I remain fairly bullish on the FMCG space.
No Sign of Revival in Infrastructure?
Are you betting on a recovery in capital goods, in infrastructure, or do you still think that is about six months to a year out?
I think infrastructure is recovering. I think capital goods, some of the companies I follow, are not showing anything in the balance sheet yet that indicates they are recovering. But I think infrastructure, in terms of defence, roads, I think they are well on the way to recovery.
Further Upside in Oil Marketing Companies?
Is a commodity upturn in sight according to you? Metal companies are now a good buy?
I really avoid those companies, I don’t have much knowledge of metal companies. But for a sector that is looking at becoming a darling of the market in the next six months, it’s already done very well. I think there is still some steam left on the upside - probably in the oil marketing companies. I think they are phenomenal companies that have basically monopolistic businesses. India is now the largest volume importer of oil in the world. Prices are deregulated, the government has announced bonus and liberal dividends for these companies. So I think they are catching market fancy and the rally should probably go from single digit PEs (price/earnings ratio) to double digit over the next few years.