BQ Edge | How Raamdeo Agrawal Spots Value In Markets

When it comes to spotting value in businesses or in the markets, Raamdeo Agrawal prefers to look at the narrative over numbers.
Raamdeo Agrawal, chairman of Motilal Oswal Financial Services Ltd. (Photographer: Dhiraj Singh/Bloomberg)
Raamdeo Agrawal, chairman of Motilal Oswal Financial Services Ltd. (Photographer: Dhiraj Singh/Bloomberg)

When it comes to spotting value in businesses or in the markets, Raamdeo Agrawal prefers to look at the narrative over numbers.

“Numbers have no meaning without a narrative in my mind. I have my frameworks, to understand businesses, my own 40 years of experience, a lot of management books,” the veteran investor told BloombergQuint's Niraj Shah during a BQ Edge webinar.

“So I look at every business model in the prism of four, five colourful frameworks," the chairman and co-founder of Motilal Oswal Financial Services Ltd., said. "That framework will not come to be known unless we have a story.”

Agrawal said a narrative gives information on the origin of an enterprise and the track record of the entrepreneur in tackling their initial challenges. The struggle of a new entrepreneur to overcome initial challenges becomes a strength as it allows an assessment of the company’s future, he said.

Any dissonance between the story and numbers can have an adverse impact on the investor, he said.

“In the stock market, what you’re buying is a future, not the past. But the past allows us to see,” he said. “From the prism of past, we see the future.”

He has a thumb rule over when to exit a business.

Agrawal said it’s essential to give every narrative or framework a three-year timeline to test their validity. “If a story doesn’t work in three years, have a serious re-look and just exit.”

Watch the full interaction here:

Full Transcript

Niraj Shah: Mr. Agrawal, you know the genesis of this idea, of this conversation on this topic was the four shows that we had done back in Diwali 2017. People still remember that and I think in one of the shows you had told me that before you do anything, you ask the promoter, ‘Kahani kya hai?, kahani kya hai, wo batao? Aur fir hum dekhenge’ (What is the story? What is the story, narrate that and then we will see). So, I wanted to understand from you, how important is this concept of the narrative or the ‘Kahani’ when you are making a decision to make a large investment?

Raamdeo Agrawal: Just 30 seconds first, we're talking from Agra, I'm staying very close to the Taj Mahal. So ultimately, the story of this century; when the guide comes and tells you the story of the Taj Mahal—that this happened in 1521 when Mumtaz died and for the next 22 years they constructed the Taj, the architect came from Iran, and the perfect marble architecture, there is absolute symmetry from all four sides of it, you can click a picture from any side and it's the same— you just don't feel like going from there.

So that's a story of love, excellence, the epitome of love, and symbol of architecture of the 16th century. So that's the story of what they had achieved in that point of time and business is a piece of art and unique in itself, and whether it is good, bad or ugly, that is for you and me to judge, but I consider every enterprise to be a piece of art.

So, what is the evolution of that particular piece of art? Where did it start? What is the backdrop of a person and how he came into starting that business? Typically, if it is a first-generation business - the person himself was sitting, he tells how he stumbled upon this idea, and how he innovated. See, somebody has started from zero, at least that's what I have seen in last 40-50 years. All the companies have started from literally zero with a very humble background, Rs 1 lakh, Rs 2 lakh or literally nothing. So how did they innovate it at that point of time?

If you can make money out of nothing and in the most adverse circumstances, (when) nobody believes in you, then that shows a seed for the company to prosper and keep winning.

And, how big is the win? Is it a global win? Is it a local win? And is that strength coming from the business model? Or is it coming from the tailwinds? Or is it just the gift of god? How from nothing, you become suddenly $100 billion? So, the entire kahani right from the start, when the person (who started the company) says, ‘humne banayi hai ye kahani’, ‘humne chaalu kiya hai’ (we have built this story, we started this).

Then I go to ask him what is his academic background? Then after that, we go back to even what is their parental background, and then we understand everything—that you're an engineer, you're an IITian, you went to IIM Ahmedabad, then you went to do some jobs, and then you came back from America to here and then you fell in love with this particular object and then you laid the foundation. So, from where did you get the money? Then he says no, I didn't have any money, but we modelled it like this, then the business started prospering and these were the challenges that the company faced at the early stage and we did this.

So, that ‘need’ is the mother of invention. So, ‘avashyakta’ is the mother of all inventions.

So, how the new entrepreneur has struggled (is crucial) as that struggle becomes his strength to go forward. (This process) allows us to figure out how to see the future—because in the stock market what you are buying is a future, not the past. From the prism of past we see it, we try to see the future. So like when you interview a candidate, you try to get as much past information about his value system, his upbringing, is he from the middle class, about his struggle and how he struggled, how competent he was, if he was a sportsman, is he a team guy, all those things we try to figure out.

Like that for the entrepreneur, how passionate is he or how much is he ‘involved’ with this passion called his own enterprise? That particular thing allows me to understand—because sitting from outside as an analyst how much can you understand this company? It is very tough to understand and numbers are there, but numbers are (just) a part. There is a narrative. So first, I try to understand the narrative and then from there, I try to understand the numbers, then I do a number connect with that, with what he is saying.

Many times what happens is, many people are very good storytellers and numbers do not match with that and many times where actually you strike gold is where the numbers are better than the stories. A lot of times, people are very humble, what they have achieved they would not show and then you find when you look at the numbers, that numbers are far better than whatever he was saying, his dominance is better, margins are better, cash flow is better every day but that number is much later.

First, you get as much as possible for 2, 3, 4 hours, we do factory visits and that is also a part of the kahani. Everything is done, then we sit and open the excel sheet because that is there always.

Once we get a picture of it, that this guy is out to build a Taj or something else, then we start visualising, and try to pass a judgement whether he can do it. That helps me understand the value of the enterprise as on today because the price is given to you, you do not have any advantage in understanding the price, you have all advantage in understanding the underlying value. So, this is the first step to understand the value of any company.

Niraj Shah: May I ask you, were are you able to see the full moon Taj and how beautiful was it?

Raamdeo Agrawal: We did go there and the daytime Taj is really nice. The expectation was far different than what it turned out to be and daytime Taj is brilliant and when we saw the sunrise Taj, we went at seven o'clock in the morning with the sun rising, right on the top of the dome, it was beautiful.

Niraj Shah: So, amongst other things, you've told me at times to read Ashwath Damodaran's book, ‘Narratives and Numbers’. So I tried to read a bit of that as well. He mentioned that he actually started the reverse, where he really started with numbers, valuations, etc, and eventually realised that the narrative was such a powerful thing. Now, my question to you is, while you would marry both of course, but is there a particular weightage that you give to the narrative versus the weightage that you give to numbers?

Raamdeo Agrawal: So, numbers have no meaning without narrative in my mind.

I have my frameworks to understand businesses, my own 40 years of experience, a lot of management books. So I look at every business model in the prism of four, five colourful frameworks. That framework will not come to be known unless we have a story.

Let me tell you a story. Let's go back to something which I do not own, so there is no controversy about that.

In 1995-1996, I read a research report about the two wheeler industry in India. So, Bajaj was ruling the roost and Hero MotoCorp or Hero Honda at that point of time was a company which was there but not making much profit, and they were just about taking off. The four-stroke engine was just about taking off.

Now my analysts went to the factory and they said, sir, every nine seconds, one motorcycle is coming out and it just does not stop, 24x7 it just keeps coming out. This is a wonder of manufacturing. I said, very good and then I read the book value migration. So, the value was migrating. At that point of time, I barely knew the company, but I am fixing it as a value migration of scooters to motorcycles. Now that suddenly made the story look very big to me and then we did the research and I personally visited the factory.

And you could get the entire Hero MotoCorp company for Rs 1,000 crore at that point of time. But then the company made a lot of sense when you look at it as value migration. It had only 15-16 P/E multiple, it was the market multiple—so you couldn't have connected the big picture. I think when you know the story, you can connect with the big picture, what it can be. If they have 60% market share or 70% market share of a growing pie, what it can be, do they have the capacity?

When you see Hero plus Honda -- these are the two stars from the world, I mean, Honda has 60% market share of motorcycles all over the world. So world number one and India major coming together; it was an invincible story.

But was there an opportunity? I think one thing you understand by knowing the story or what they're out to build is the size of the opportunity. How big is the opportunity? And can this management actually have the architecture to really seize the opportunity at that particular moment? So, the moment we realised that it's a huge opportunity, that they're going to make millions of motorcycles for Rs 1,000 crore, we checked with the dealers. We did a ground check, we found that there is a Rs 3,000-4,000 premium if you want to buy and want to get the bike today. Otherwise you have to wait for a month or so. Then we realised it's a seller's market.

Now, again, as the framework is emerging, there is no number still, it's all a story—it was value migration, it was a seller's market, customers were loving it and it was a dowry item. So that's how these three, four frameworks when they came together in the story then we said okay, numbers are all right, and in fact the number was I would say just 5% of the entire journey, 95% was the story.

Niraj Shah: I'm tempted to ask you, some of what you're saying for Hero is right now applicable to electric two wheelers, isn't it? They are being used as dowry, it's a great value migration theme probably. I don't know about the numbers really but also the fact that the incumbents are also trying to get into the game, as we've seen with TVS, Bajaj and of course Tata Motors on the four-wheeler side. I don't want you to tell us which amongst the players look good, but I think a lot of people might have this question that do you think the incumbents will stand a chance in the value migration theme or do you think the newcomers will take it up? Is that possible too? I mean, how does this fit in within your ‘kahani kya hai’ framework?

Raamdeo Agrawal: See, the kahani is developing, you have to see a successful guy and whether the new guys or the old guys succeed, it is all wide open. The old guys have a legacy to defend and they have a lot of cash flow, so that they can fight it out, but the new guys have nothing to lose. They have to just exploit (the opportunity), but whether there is consumer acceptance, whether there is an infrastructure for charging and all sorts of things, whether the range is right, the price is right, so those things (are crucial), but we are watching. If it emerges, it is a value migration story from IC to electric and it will become very big, it is no more a lab issue, there is no business model, nobody is making money out of electric. See the size of the opportunity is very large, value migration is there, but do they have net profit potential? There is no answer. Someday, somebody will definitely make money, but who is that guy who will make money? Is it the existing guy who is going to make money? Will there be some innovation somewhere? So, it is a very open field right now. But this story is developing on the value migration from IC scooters and motorcycles to electric scooters. Yes, it is happening.

Niraj Shah: Can I ask you, have you been tempted to make an investment in this EV theme? It's not making money as you said but there is a story out there. Are you betting on the story at all or are you waiting for some clarity before you do that, just wondering?

Raamdeo Agrawal: In the secondary market there's still no play. Pure play is not there but all the existing players are saying there is no Kodak moment. We are going to see to it that we transit well ahead of time. Our labs are full of EV vehicles, prototypes and we are just waiting for the right environment where adaptability by the consumers improves and the infrastructure is ready and there is a mindset to buy electric vehicles and do the charging at home or whatever. That acceptance is necessary because still not even 4-5% of the total sales is of electric vehicles. So, I think it is a while before it becomes a kind of tsunami. Then all the three or four competitors, all of them are going to pour out their own models and fortunately, there is no Tesla kind of a player in India in electric vehicles to say that I'm so differentiated. Even if you try, Tesla at least conceptually stands miles ahead. What are the other global players doing? So, Tesla is one and then there are 10 more guys standing in the queue. So, we have not seen anything like that in two wheelers. I mean, I have not seen anything like that.

Niraj Shah: I want understand from you, try and tell us, how does somebody who doesn't have the access that you do, try and gauge the kahani? For you, the access is much easier. For a lot of people, either the access is difficult, or there is no access. So, what are the soft signs that you look out for and can people do the same via maybe seeing interviews, reading annual reports, or reading concall transcripts?

Raamdeo Agrawal: Typically, websites do give history of the company, and now they have the IR department, if you are sincere enough and even if you're a very small investor, but you're taking keen interest in the affairs of the company, I think investment relations department, they’ll definitely welcome you, they are helpful in telling you everything. I do not think it is the size or the ownership which decides the access to the management and if you're very keen and a little persuasive, then instead of one call, there might be two or three calls. But I think if you have a burning desire to know the story of a company, I do not think it is very difficult.

Niraj Shah: What are the soft signs that you look out for when they are talking? I mean, the numbers are one thing, the narrative, you have your own framework, but are there some soft signs that you watch out for? A slip here, a good mention there that they leave out, how do they talk? Is there something like that in the kahani?

Raamdeo Agrawal: We are just waiting, it's a conversation and every conversation is different. So, you are trying to simply see it.

I do not go to work with any positive or negative feeling, I go with a very neutral feeling because it is a completely blank paper for me and that allows me to absorb anything at its face value in what they are saying. So when I compare it with the numbers, my understanding of businesses, economy, global economy, currency, commodities, competitive forces, my framework, all put together is in my head. He is telling me the facts, I process those facts with my framework and then that allows me to expect certain numbers, certain ratios. So that's the process.

Now in this exercise, some people are very smart in telling something which is not there. Like if their franchise is not very strong, if they say people are lining up, people are saying that our product is so much in demand, we are the leader, we are this, we are that, but when I go and see the numbers or something like that, or I ask somebody else with cross questioning and it does not turn out to be like that! That is why I look for a story. So, we are looking for confirmations.

I think one of the things I am trying to look for is the integrity of the management because rest assured, we can do a lot of number crunching, a lot of changes but the integrity of the management (is a crucial factor), particularly when a new company is coming up. With large companies, with an established 20-year track record, you do not need to ask them whether you are honest or not, but the company which is coming for the first time, at least in India, the real thing is this – do not take them on the face value as a company with the highest integrity.

In fact, many times I decide to pursue a story because somebody has told me they (the company) are absolutely above board as far as the integrity is concerned. You can go and check the competence, then we start the story with that. So actually, my integrity check is done and now I'm just filling the facts—but the objective is also to check how good the integrity is, what the competence is and also to check how the passion is? Josh kitna hai?

How much of a burning desire is there to achieve that because unless that burning desire is there, you cannot go through with 25% or 30-40%. If you are a $100 million company, you want to become a $1 billion company or with a $2 billion potential, you want to win the world? You cannot do it unless that desire is there. Now, the opportunity is there, but you can be very slack.

I have seen it in IT, it was like billions of dollars and in 1995-1996, all the companies were $100 million, $200 million or $300 million. Opportunity was huge. There was a $1 trillion kind of an opportunity into the next 10, 15-20 years, but only three companies came out—Infosys, Wipro and TCS, rest all folded up or they became mediocre or smaller. They just did not scale up but you could see the passion and the organised way in which these were approaching the opportunity.

See, what I am saying is that we know the opportunity, how big is the business opportunity for somebody. Many times when a business is completely new, you do not know what the business is. We do not know what the magic is that they are doing. So, you start from the number and go to the narrative. It can be either way, but mostly it starts with the story and then it ends up in the numbers.

Niraj Shah: When I read some of the excerpts from Ashwath Damodaran’s book, ‘Numbers versus Narratives,’ he mentions that, as important as the numbers are, he has found that numbers by themselves can be changed so many times. Therefore, the narrative becomes the bedrock on which you can do the number changing and therefore, over the period of time, the narrative has overtaken the numbers as its predominant reference point. Is it the same for you? Do you give it the same weightage?

Raamdeo Agrawal: Yes, we talked about it. I mean, sometimes, as I said, sometimes numbers are better than narratives and sometimes narratives are better than numbers. So, that is your judgement. Sometimes we are so stuck with the core of our own convictions, that we refuse to align with the numbers and that is where the accident happens. Because you are completely obsessed by the story and numbers are telling something else, then you don't make money in that.

Audience Question:
Anuj Prajapati has asked a question for you, Mr. Agrawal, he's asking that you are known as the face of growth investing in India, which investment themes do you think will have multi-year growth journeys ahead?

Raamdeo Agrawal: India is the ultimate growth opportunity. The domestic market itself is very large and then on top of it, in a globalised world, we have a lot of businesses which are truly global in character. We are a $3 trillion economy; the world is a $90 trillion economy. So, the global opportunity is 30x, to the Indian opportunity.

Some companies are global by character, and some companies are local by character. All our tech companies, pharma companies, they are very global in character. In fact, truly global companies are Indian tech companies. 90-95% of the revenues are coming from Europe, Australia, U.S. and all those places, and they are still getting share out there. So, they are truly global and their opportunity is not $3 trillion in our Indian economy, it is the $90 trillion in the global economy, whatever happens, whatever the need for the software services is and whatever they evolve into—they're very large, and we must not compare with the opportunity size in India, in fact they will become global companies and they will dominate the world. They started in 2001, at $100 million or $200 million, today all of them are $10 billion, $20 billion. It is a single company’s turnover with $2 - $4 billion of profits and corresponding cash flow and it still growing at 15%. So, I don't know where exactly they'll end up. Will they do $100 billion dollars of turnover, and become $ 1 trillion-dollar companies? Most likely, we will get the first trillion-dollar company out of that global opportunity canvas.

The second is the local opportunity. There is again a big value migration from Boston to Bengaluru and I think every single code should be written in India. That is a potential - because you code it at $6-$7 and you sell it $60-$70. The resultant gap in the gross margin is very high and now, with Covid and work from anywhere, it does not matter if the clients are sitting in the U.S. and their value with Indian costs is in Bangalore, but the American value is in New York. So that gap is unbridgeable, I would say, and that remains permanent. The story is very large and very long lasting.

Second is I would say the banking, insurance, the financial services, they are much more than the local opportunity, domestic opportunity but the entire state owned enterprises are either stagnating or crumbling and that is being taken over by the shining brilliant new enterprises, private sector banks, private sector insurance companies, the opportunity size is very large because they are handling—apart from the daily flow, they are handling the savings of this country. In the last 10 years, we saved about $8 - $9 trillion worth of stuff and now in the next 10 years, we are going to save more like $15 trillion. These are the agencies like banks, then we go to insurance companies, then mutual fund companies, then we will go to broking companies, they we will go to custodians. So I think the people who are handling services of this nature, they are going to make a lot of money with a digital framework. So that is another large story I would say. We can go rolling it out one by one when we think about opportunities.

Audience Question:
Sanchit Balotiya wants to know how to manage when new ideas are available but capital is limited as everyone in the market has limited capital. So how to manage this because people don't want to sell current holdings for new holdings. Could you also advise if there is a story, which is good, don't be tempted to select for everything new that comes about?

Raamdeo Agrawal: Let me tell you the way I would do it in this situation because this problem is there with everybody.

Capital, howsoever big you have, is limited but with more capital, more ideas come. So, what happens is that when the ideas come, you have to really see how attractive the idea is compared to what you (already) have. Ultimately, even if you're holding say, 20% of your portfolio, you are holding a two and a half crore worth of ideas or a particular idea, which has been very successful. But today at current prices, what do you think, reassess it yourself and figure out how that idea (will evolve) in the next five years—what do you think it can do? Can it double in five years? Typically, after the stock has done very well, typically, the pressure in my mind would be more like, would it double in five years or maybe four years. So, there’s a kind of 15% - 18% kind of a return potential there, but you are getting something where you are likely to triple your money, 4x your money in the next 4-5years, it's just a brand-new idea. So, I would not mind trimming my allocation as I said two-and-a-half crores out of 10% or 25% of portfolio. I do not mind trimming it by 5% and putting that money into a new idea, but that ‘calibration’ is really your call. It is about the gap between the value price perception I have of the existing holding and the value price gap of the new ideas that come in. Many times what happens is that, you have the tale of five-seven ideas, which are actually not doing well or it might be below your purchase price and you do not want to book losses, but actually, in your mind the potential is not that high. I do not mind booking loss and moving onto the new idea.

Audience Question
Saurabh is asking, how does one investigate the underlying value of a company? I mean, this is not a value investing conversation, but would you want to take a minute and answer that if you can?

Raamdeo Agrawal: We must know what the 90% rule of success of that particular business is. So, in understanding value, is it in the circle of your competence? Can you figure out, do you know, what the 90% rule of that business is? Once you know that, like in real estate, it is the location, location, and location. Now, what is the importance of that location in looking at a house when you're buying it? So, once you know that this is a location I'm looking for, it is on the riverside or seaside or whatever, in your mind value is very different for a piece of land, which is overlooking the Taj Mahal. Then there will be a price. So, he (the seller) will say ‘x’ price you are expecting a ‘2x’ price, but he is quoting the single ‘x’ price, then you go and buy. You have to really figure out what the value in your mind is because value, if it is a business enterprise, is determined by current profitability, growth, longevity of growth, since the profitability will determine your free cash flow and the growth will decide how big the cash flow’s stream will be and then the summation of that. So, in the next 10 years, if something is going 25% and 100% free cash flow, the investor will make 42 times of the current profit. But if the profit is Rs 10 rupees today, he will make Rs 420 in next 10 years. Now, you might get this company for 10 bucks, 20, 30 bucks or 50 bucks. It depends how much you are getting it for because the price is there. See, what I have seen is that the market is truly a place where it has stories undiscovered, or it is hated or it is not known to the people. You can get a Rs 100 thing for Rs 5 or Rs 10 and in a particular depressed market, the valuation is even more attractive. So, the price is known to everybody, but you should know how to judge the value of a company.

Niraj Shah: Since you spoke about so many fundamental parameters, there are questions always raised around the story behind all of these new age tech leaders, like Zomato, Nykaa or Policybazaar coming up, etc., and they are all very different businesses, I agree but do you like the story behind that? India is a great market, they are the pioneers and the leaders as of now, they may not be making money currently, or some of them might be some of them might not be. Do you like the story behind this whole tech first themes?

Raamdeo Agrawal: The story is fabulous, stunning, because the digital infrastructure allows you to do some businesses which is not possible without the digital infrastructure. It is a very conservative characterisation. The opportunity size is big, this is a large country and has a very concentrated character. You do not have too many players in a particular field once the background is that digital because this digital capability is unlimited. So why do you have more than one or two? Like I said, with Zomato, there are only two players, Swiggy and Zomato. So again, they might be having 90% of the delivery capability in the country, but the opportunity size very large. See, I am still not talking about value, I am talking about the opportunity. The story is very good but when you see the numbers, then you get to the numerical side of the value. So that is different I am not commenting on that, but the story is very attractive. That is probably why the story is running ahead of the numbers and that is what makes a lot of people uncomfortable. The discomfort is not with the story, but the discomfort is with the number. But numbers—you can understand it only when you understand the story.

Niraj Shah: Have you been able to try and second guess, the current story behind all that's happening in the commodity space? There are shortages, there are price hikes, which a lot of people say will cool off as well. What's happening here?

Raamdeo Agrawal: It's too much money chasing, too much liquidity, low-cost money chasing and a lot of speculation in the commodity space also. See if you print a lot of money, what is going to happen? All the asset classes are going to go in there. So, the easiest one is cryptocurrency. See with the liquidity chasing, the fundamentals do not matter. As the liquidity is chasing, it overtakes the underlying value because then it is a speculative bubble and even now the world is pumping $300 - $400 billion of printing every day till the tapering starts. You are in the swimming pool, they are still putting more liquidity. So obviously the hard assets like real estate in U.S., stocks all over the world and now commodities, wherever you can have speculation, money will find its place. They will go and try to squeeze the short sellers and try to even corner the commodities and take the price wherever it goes, then the game is on – it is on the digital platform because a bulk of commodities are trading like stocks. You can buy papers and there are so many hedge funds, there are specialist funds who will give you 2x, 3x of what is underlying. So, I think it is a financialization of commodity markets and financials because of zero interest rates and a lot of liquidity. Twenty years back, the way commodities used to behave, that is not the situation now. It's all financialised commodities.

Niraj Shah: So, I reckon it is difficult to give or take a completely comprehensive view in these times on that topic, then?

Raamdeo Agrawal: They are cyclicals, so they are in the right side of the cycle right now, they are climbing after 10-12 years. Now, people call it a super commodity cycle or whatever, I would say nobody is an authority, but the guys who are practitioners, they would have a much deeper view with the role of China in this commodity cycle. They are withdrawing (despite) the power cut that is there. I think a lot of things are playing out. The post-Covid demand cycle is yet another (variable), the demand is coming up. Second is logistics are broken down all over the world. So, the cost of logistics is very high. If you are producing in China and you want to consume in Europe, you have to pay a lot for it. So, the guys who are producing it in Europe, which were zero, which was unworkable (earlier) have become suddenly very viable. So, a lot of things and the economics have changed because of the challenge in the global logistics.

Niraj Shah: Do you fear that the story, which the post-Covid world opening up and economies booming—that story could unravel very quickly when taper begins? A lot of people have this question about what could happen post-taper, is it possible to try and talk a bit about that?

Raamdeo Agrawal: You can talk about anything, but my understanding of global macroeconomics is extremely limited. But what I see is that, I think Covid is now done. I mean, there is 97-98% chance that Covid is done on the backdrop of the vaccinations, so even if there is a third or a fourth wave, it will be muted because the vaccines have countered the veracity of this thing, and now the governments know, the hospitals know how to treat the cases. Hence, I do not think the economic response or the political response will be the way it was for the first or the second wave. There won't be any closures for the economies, that could be closures for a street or a building—something like that can happen. But now, the world will learn to live with Covid. They will have boosters or they will have some oral stuff or some innovations will keep coming, the medical world will give you innovations, and I think the world will be better because 6 billion people have already been vaccinated. You are vaccinating 30 million people every day, all over the world so I think that at the fag end of vaccination itself in six months, the world broadly will have 70-80% vaccinated. So, my sense is that and that tapering will also coincide with that—the financial stimulus came into the being and that showed the power of central bankers. They are bigger than Gods. They started printing money, they are still printing money, so they can take care of anything in the world. My sense is, as bankers, they can get confident about the post-Covid world, and the jobs come back, inflation comes again because if you don’t taper, the households will be burnt. The demand slows down and inflation will just go out of hand, so that they do not want. At the same time if you do it a little early, the whole edifice will collapse. So, its being in a circular kind of a situation, exiting will be not a smart thing. Let's see how they talk it out, and how they facilitate. But now that they've given enough notice, I do not think it is a surprise that tapering will happen in December or January. In fact people are just waiting for the date. The moment the date comes, probably the markets may rally. Currently we are living in a fear of the tapering date coming in and once the event is out of the way, then, you do whatever you want to do.

Audience Question
Since you spoke about exiting, I'm taking a question from who has asked, what is your framework for selling or exiting a narrative?

Raamdeo Agrawal: Ultimately, we are also human and you have read some 30-40 books or 50 books, and you have some 5-7 things which work but it is quite possible that story does not play out and your interpretation of the story is wrong. It happens many times, I met a company in packaging, which has about, 75-80% market share. Clearly, they are the kings of what they make. I heard this story and I fell in love. We invested in it also but later on, after five years with 75% of this thing, then you are in the seller's market. Your working capital cycle is very small, you can call your money whenever you need it, you do not have to borrow, you work on the client's money, those things are supposed to happen, it did not happen. Even till now, it has not happened. So, what do you do? Then we will have to sell. So, a lot of times, there are exceptions to the rule, and you have to realise that is where you get into a three-year cycle. For any story to be tested, give it a three-year framework. If it does not work in three years, have a serious re-look and just exit.

Audience Question
A contrasting question from Brahmadevan is, how do you decide on position sizing and more importantly, the criteria for ramp up? What within the narrative makes you believe that, hey let's ramp up? Is it the numbers then, do the numbers take over then or something in the narrative can also change?

Raamdeo Agrawal: You do research for initial position sizing. I don't like to buy less than 2-3% to start with and if the ramp up is very fast, because growth has that magical thing. One is growth in the earnings. Second, the market is scaling the P/E multiples up. So, if the P/E multiple goes from 15 to 30, and the earnings growth just about 25-30%, you imagine, it almost goes to 2x-3x, so you have to, and meanwhile as you buy it, your listening increases, and then you're doing a lot of micro thinking about the company and the opportunities. Many times in good stories, in fact the conviction increases, the validations come in the quarterly performances, what's really happening and what are the new plans and what the management also keeps. See in businesses, one of the advantages that I have is that I'm a businessman, I have seen it from being a simple sub broker to building Motilal Oswal to current levels. One of the things in businesses is, even entrepreneurs don’t know what they will finally become. It is the journey, entrepreneurship is a complete journey and an entrepreneur is pushed by his own successes. Success makes businessmen do crazy things and success breeds success. So, when he is successful, he tries to scale it, that success is being scaled up and wherever he fails, he absorbs the shock and moves on. So, what successes lie ahead? That's why macro is very important to assess the opportunities which are coming on the way. Market does not price it that efficiently and entrepreneurs also do not know it. We do not know macro and micro either, where it is going to happen, how far away it is and how big can it be. So, a lot of these things just go on in the mind. So, in 1997, I was very clear about value migration from Boston to Bengaluru, and I knew it, but our own mind is so small. We did not know it would be kind of a $1 billion opportunity. We thought if you are doing $200 million and if you want to do $1 billion in next five years, that itself is a huge ambition to have, to do $1 billion. Then having achieved $1 billion, can the company go to $10 billion? That is a very different thing. What has brought them to $1 billion cannot take them to $10 billion, and from $10 billion, can it go to a $100 billion in the same way? So companies also have to keep innovating.

Niraj Shah: Motilal Oswal as a house, I'm just saying some of the other export opportunities where the world is their oyster. I've seen you guys starting to cover a lot at least your institutional research desk—I know you look at the money management side a lot closely, but just saying that speciality chemicals is now starting to come up a lot within the research work that Motilal Oswal does. I'm wondering if there are themes like that which are export oriented, wherein you believe that the opportunity size is not comparable to IT really, but is that a multi-year opportunity here, wherein India has trends and the world is the marketplace?

Raamdeo Agrawal: Some of these things can come, which can be research driven, where the research intensity is there. I think they have a very good chance, their client relationship, their privacy in terms of declining the IPRs and also the core pharmaceutical side. I think India has a huge processing superiority and the chemicals processing is very important for the throughput. I have seen very small companies also having some wonderful processes, and because of which they are able to yield a much better finished product level, and hence the cost is lower, and the quality is better so they can command better prices. Somehow there is a lot of comfort with the global multi-nationals to have sourcing from India. I met a company that has been sourcing for 20, 30, 40 years and they say that our relationship is frozen, like nobody can challenge our relationship, because their end-product is dependent on our intermediates and our intermediates may not be the best in the world, but that is what the client wants. Those kinds of relationships, and many more of these kinds of relationships will get built. See one of the things in fact, because of this boom, the current bull run which is on, and what is going to happen is that maybe it is not that much in context, I am just saying that because the markets are elevated, the IPO market is elevated and this time, since it is on the back of retail moment, which is going to go on for 2, 3, 4 years, the IPO market is not going to close down in two-three months, and that will not have an impact on the money which is transferred from the secondary market to the primary market, i.e. to the real economy. That transfer in next one- or two-years’ time is going to push up the economy to different levels of growth, if it is handled well. It is for the authorities also that they do not disturb it and nurture this bull run.

Niraj Shah: So many people are asking about the realty sector. what do you feel about the story behind real estate in India, it's starting to come up after a while. There are so many global guys who are so bullish on Indian real estate. Do you like the narrative and the story of the real estate sector in India currently?

Raamdeo Agrawal: It is the biggest business in the world and India is actually seen as a piece of brown land, you know, they do not have houses. Houses, offices, we are here to build, and we’ve done nothing in terms of the potential for this particular industry. The issue is with the players, the regulations and the way the books are being managed. That is where the discomfort comes in and that is a problem with the story. Firstly, scalability part of it, the entrepreneurs themselves, they do all sorts of things, they are not very focused on delivering volume in a particular segment. The same guy will do multimillion dollar apartments, then go to affordable $100,000, apartments. We have to find some credible player. Now, what has happened is thanks to collapse of fixed income, the global money is available. These global measures, they do not want to take the project risks, they want to fund the assets. They are the guys whose cost of money is maybe 2-3% and they want to yield 8-9%, which is a fantastic opportunity for them. For now, they really have capital for this industry but for a credible player, it is literally underbid. How this new game is going to start, and who is going to scale up? See, demand is going to explode, the players are going to consolidate like the booking that has happened, the same thing is going to happen here. But really creating a successful business model, where is that? I am still looking for one.

Audience Question
A viewer is asking about how he's always kept listening and reading the India's per capita income will be growing multi folds. Do you believe in that narrative? You've always spoken about it but do you think now is the time that this will happen? How is it possible, he is of course wanting some examples but that notwithstanding, do you believe the narrative behind this thesis of rising per capita income?

Raamdeo Agrawal: The global GDP is about $90 trillion, the global population 7 billion so we are talking about $12,000-$13,000 per capita global income. We are at about $2200. It is for you to judge whether this country has potential to go to at least the average, forget about above average. I sincerely believe that this country deserves much better than the average, but at least let's go to the average, it's a very large country, and even if you go to say more like even $5000-$6,000, which is more than doubling that is going to happen in 8-10 years, let's not think beyond that. Going from $2.5 trillion to $5 trillion is very achievable and if we keep growing at 7.5% to 8% -when you say 8% what are you talking about? It is $150 - $160 billion additional per year, when U.S. talks about 2% or 3% on their $60,000, you imagine what the number is that you're talking about. So, we must see and contextualise when you say 8% of $3 trillion dollars, it is about $250 billion, that is a quarter trillion for the whole nation in a year. When China says 6% on their $15 trillion, it's almost a trillion dollar. China's incremental growth in absolute terms, is 4x of India though the percentage looks as if we are doing better. You have got to understand the numbers and the compounding. I am very clear, with the digital prowess we have, we have a stable government, we have a democracy, we are one market. Once the government is hell bent on delivering this 8-9% growth, that should be the economic end of this government. I am hearing now more and more about this economic agenda because that solves all the problems—political and geopolitical, but what about the other agendas? That is completely on them but if you get the economics right, then you have the freedom to pursue other things.

Niraj Shah: Is there a risk to this whole economic narrative, by virtue of the socialistic angle being brought in by the political powers that are in place because we are entering a busy election season as well next year?

Raamdeo Agrawal: See, do not bother a lot about what a lot of people say or what the politicians say, because they have to say that so as to fit their political agenda. This is a very large economy, what you do economically, if it is a Rs 200 lakh crore economy, say, 1% of GDP is about Rs 2 lakh crores. So, you might make disproportionate noise for allocating that 0.5% or 1%. Then you might call it social or something, that does not matter. What matters is what to do with the rest of the 99% of the economy. That may not be at political dispensation. So, we have to see on the ground in total what the government does. That narrative could be one, the numbers might say something else, but actually on the ground they might do something else entirely.

Niraj Shah: It is off topic, yes but so many people are asking about it, how did you train your mind when you were younger, when you made mistakes? Some mistakes that you made, etc., all of that, and two of the people are asking that maybe you did those mistakes as a veteran of the markets now is easier to identify. But how did you train your mind when you were younger and more susceptible to some of these?

Raamdeo Agrawal: Nobody is born with all the frameworks and everything. Reading is one thing which helps you a lot. I mean, every book you read, you get one framework. The Americans are very smart, they get one framework from that essay, they go to make it into a $25 book and from that one book you can only learn one thing. But while reading those 200-350 pages, you will realise and that is how you keep. If you have read 50 books, you should be lucky to get 50 frameworks, typically, out of two or three books, you get one framework, but those frameworks are eternal. That is why it is very important what you're reading, and how you are setting the readership. That is very important and second is, what I would say in my learning process or evolution is getting the guru right and getting the guru in time because it's like swimming. You go to swim, I do swim, but if you don't have a coach to start with, your techniques will be wrong. The big problem is, the moment your technique is wrong, you cannot swim, and you don't like swimming but the moment your technique is right, you will love swimming. So, it is to do with the stock market also. In the stock market, you’ve got to get a good guru and a guru which matches with your basics. You know what you want to do and how you want to do it and there has to be love at first sight times, the matching. The guru will solve a lot of your problems. Only Guru is that one place to solve all your problems. So that is the guru and you’ve got to get your guru, right. Then the guru plus books, I think, and the market, which is the guru of gurus. You keep experimenting, you keep learning and sometimes you are disproportionately rewarded well. So, then you want to repeat that particular experiment. Now I have had one or two mishaps with highly growing, but it could turn out to be a crooked management. I realised that the crooks are going to go to hell, and the investors are also going to go to hell with them. At any cost, you have to avoid the crooks and there are too many of them. So, you learn as you go along but I don't think there is any other way other than books, your friends and gurus or whoever is there to guide you. They will keep guiding you and markets will guide you the most.


Bharath R is a senior website producer at BQ Prime. He ...more
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