Ramesh Damani Says Making 'Nibbling Bets' in New-Age Firms as Valuation Greed Pipes Down
The disappointment was that they came with stratospheric valuations that made no sense, Damani said,
India's new-age internet companies "got greedy" and "came out with very bubbleish valuations", according to veteran investor Ramesh Damani, who has started making "nibbling bets" in the sector.
"The disappointment was that they came with stratospheric valuations that made no sense, given what the likely trajectory was over the next three to four years," Damani told BQ Prime's Niraj Shah. "But now that you look at the trajectory, in the next 10 years or so, I think you'll begin to see the emergence of some sensible, more sensible valuations."
The market is not capturing the entire magnitude of the change that is taking place, he said.
"So, if you have ... 600 million to 800 million internet users in India, 95% are going to have access to a smartphone, and 95% are going to have the cheapest data in the world," Damani said. "They're going to use the phone and internet very effectively to order food, buy insurance, and book real estate or hotel deals. So, you cannot ignore these companies because that is the way the businesses will be transacted in the future."
These internet businesses can't be valued the same way brick-and-mortar businesses have traditionally been, he said. "You can value it on intellectual property, the software, the algorithms, and the logistics issue. I will suggest to you that yes, they have come down in valuations."
"You cannot afford to ignore that marketplace. So, we have started making nibbling bets in what you call the new economy stocks," Damani said.
Watch the full conversation here:
Edited excerpts from the interview:
Do you believe that India by virtue of multiple reasons, let alone just earnings power, is the place to be in?
Ramesh Damani: Interesting. I mean, if you ask me, do I follow the macro, the micro, I will always tell you it’s the micro. And I firmly belong to the Peter Lynch camp that if you spend 10 minutes on macro investing, you are wasting your 10 minutes out there, you better do bottoms and focus on the company, which is what I have done all my life.
But I think we are in a special point in time and place in India and maybe because Indians received this opportunity better than we would have seen if he was in Australia or in Africa. And what the macro allows us to do is to hold through these periods of disappointing earnings, a poor earnings cycle, a bit of gloom and doom in the market as we are talking right now.
The point is that the last three years the budget, for example, was focused on the pandemic and the recovery from the pandemic. This was the first post pandemic budget that the finance minister would give, and this is the central legacy, not legacy, but central policy question that the framers in India and New Delhi faced that there are two Asian rivals China and India and how does India in 1980, India used to be 64% of China's GDP, despite the rapid growth in the 2000s, we are now at 17% of China's GDP, we are lagging behind there.
But let's fast forward to the future. What is going to happen in the next 20-30 years is that India that currently has about 350-400 million people below 14 years of age, China has almost 120 million less than that, so, in the next several years, as they come into the workforce, what kind of policy response do we need to make sure they are employed and make sure that they are citizens of the world community where we work.
Now India's been very lucky to build a world class cyber software business out there, but that can only employ a fraction of the people. We need employment for the 360 million people who cannot be employed in by logic in this security and the software sector. We need manufacturing.
So, that’s where you found in this budget, the whole emphasis on capex, a whole emphasis on manufacturing. A lot of people were very disappointed with the Indian market because of a lot of foreign portfolio selling in India this year. People are selling, they are bearish on India, but the stat that some observers have pointed out, I think it's more important to look at, is the FDI and the FDI has been booming every single year.
There was a talk by Deepak Baghela, who pointed out a very interesting statistic. He said since independence, India has got about $950 billion of FDI but almost half of that has come in the last 90 months and it's come in a variety of industries, a variety of states and it's been increasing every year for the last five years.
That points to a resurgence in manufacturing, points to a resurgence in economic activity in India, that we are creating a whole new aspiration class. So, what the government has been trying to do in this budget and why the macro is important, is if you look at the big picture number that by 2045 or 2050 India will have 250 million people more than China and if demographics is destiny, we need this kind of people and that requires an awesome amount of growth in India.
So, the macro allows you hold on to stocks through what we're going through in a slightly bearish phase, slightly dooms day, some corporate troubles and so forth because as the old saying goes, you keep your eyes on the prize and eyes on the prize is India 2050 or India 2075. You want to look India at 100, how will it look like? We look at that then the macro allows you to hold on to those stocks.
India probably looked very promising, let's say maybe coming out of the 2008 crisis, if you will, because the growth of the young India, developing India was always there. But some consumer businesses did really well for the decade, some businesses- manufacturing, did not. How are you looking at the landscape in that sense because not everything will gain. So, what will be the first amongst equals?
Ramesh Damani: That's almost a very, very difficult question to answer. But I will try to do that. My job is to allocate capital and I personally tend to do that, the first rule is you need to be invested in this country. That's the first rule.
I think over a 10-year period, okay, the Sensex always deliver positive returns. It can be very volatile over a quarter, very volatile in a year, very volatile may be for a couple of years, but if you remain invested in high quality businesses, I don't think there's a 10-year rolling period in which you would have lost money in the Sensex. So, the first rule is you remain invested.
Now, what do you invest in? That is a more difficult and more challenging question. We tend to stick with the favourites, whether they are consumer, some new age economy, some technology. We have some new themes that maybe we can talk about later in the interview. But my first rule is that people will try and time the market and try and get rattled or shaken out by the force that will happen periodically. That is the nature of the beast.
Markets will always be volatile; you cannot avoid that. You cannot get linear returns in the stock market. Returns in the stock markets are lumped together and you need to understand that, and you prosper in that environment.
So, my first rule to people is before even talking about where to invest and what to invest, that's obviously great businesses with cash flow, that's pretty well invested. But the first is to remain invested, you must devote a portion of your equity to equity investing.
There's a lot of talk about how because of the focus on manufacturing infrastructure capex, that this could be a B2B decade and not as much a B2C decade. Now because you are a B2C fan, I am tempted to ask you, how do you think about this argument?
Ramesh Damani: Niraj, I am a fan of buying stocks cheap. I don't really think the B2C were cheap. So, we bought cheap, you know, the PSUs were cheap, so we bought PSUs. I am really a fan of buying stocks, not valuating them, because that's almost a guaranteed way to make money in the stock market.
So, I think we have to go through as you say bottom-up stock picking, and see which sectors look cheap to you. I mean, a lot of money has been made in the last year on PSU banks, which are the most traded stocks because it got to a point that was you know, significantly cheap.
Markets will tend to do these things in extreme, will take say a Tesla or Netflix at some point at some crazy valuation, and then bring them down to earth. At one point, if you recall, S&P Energy was less than a couple of percentage points of the S&P 500 and today it’s back to 10-20% of the market cap of Brookshire and Exxon has overtaken a lot of other new tech companies.
So, I mean, the first rule is not as a B2B or B2C. I mean that we may well be, but the first is to find stocks that are cheap … and I think that doesn't change. If that changes the stock market or the concept will be over.
Do you reckon that as a basket, India is fairly valued? Also, in light of the fact that this whole balloon around peak rates and then a cut for now has been punctured, that argument kind of hurts equity valuations per se?
Ramesh Damani: Yes, someone put in a headline very nicely, and he says that the unstoppable markets till last week, had moved and met the immovable Fed and guess what, the Fed won because of the threat of rate hike, the market is now taking that very seriously.
But again, there is the risk of that as you are focusing on the next quarter, the next few months and that will make me nervous clearly. But like I told you for this time, I am focusing on the bigger macro picture in India and that picture tells me that we are going to have a 1.65 billion consumers in the next 20-25 years, already the most populous country in the world.
It is a well-established fact that demographics is destiny in this country, or in any country as investment, where all countries are going through in terms of population.
So, I think the first point, repeating the point to you, is that I believe that there is a long-term structural market unfolding in India, and you will obviously go through many ups and downs, but the key thing is to keep as I told you, eyes on the price, that is, what India will look like, in say 2047.
The last couple of quarters due to various uncertainties all coming together, we have seen even management's not quite have a complete hang of what will happen in the near-term and therefore, sometimes the disappointments are writ large on the way the market punishes. Even honest companies which have come out and not made guidance’s or not quite lived up to what they had spoken about, are getting punished.
So, when you look at this, how are you thinking about it because it may have happened in some of the companies in your portfolios and the companies that you are tracking, but in companies that are not quite able to live up to, what have they spoken about?
Ramesh Damani: Warren Buffett put it best, better than I can at least, he said in the short run the market is always a popularity machine, a voting machine, but in the long run, it's a weighing machine, right?
So, a lot of people will be disheartened by a particularly bad quarter, or a poor earnings cycle, and sell the stock and sometimes that's a huge mistake because, as I said, you're looking at a market opportunity 5-10 years down the road, not necessarily the opportunity today, and part of that is some pain.
You have to feel some pain in the stock market, either you feel the pain of buying now and having the price go down or buying at a much higher price five years down the road, when things are perhaps a bit clearer to you in the financial market.
But the sense I get overwhelmingly, you may get a sense from a few corporates overwhelmingly that there's an underlying bullishness in management, about the structural reforms that are underway in this country.
You can see that by the number of FDI, I told you, the number of unicorns that India is popping, and the number of new business startups that we are doing is not even close compared to say what some of the other countries are doing because they can see the opportunity.
A capex cycle revives only when you feel the opportunity ahead is greater than the opportunity today. I don't know which audience we particularly zero in, there may be some people pessimistic, but generally, the feeling I get, the undertone that I get is that they see a great opportunity, great market in India, over the next 10-20 years.
How constructive are you about this whole capex theme, the beneficiaries of capex and the overall impact that such a such a thing has on the economy, growth, jobs, so on and so forth?
Ramesh Damani: It is because you need to have manufacturing. Personally, if you ask me, I am more of a new economy believer. I believe, for example, in the digital stack in India and you know, new ground doesn't require a lot of capex. It requires some computers, some concrete to build a house and wires and you are up and running out there and one theme manages.
To get to a theme to explain to you, a lot of press has been said about data being the new oil in India. There are people who will use data and a lot of people in India that are already using data, whether it's building maps or reservation systems, or just doing knowledge analysis from the data or just aggregating the data.
So, there is a plethora of companies already in India that are doing that. What I found interesting in some of these companies, is that the employee cost to revenue is about 60 to 65%, extraordinary high 65% of the employee costs to revenue, which tells me two things, that first is businesses all coming to India, this business cannot be done in Europe, cannot be done in America anymore because the cost of recruiting, if you can find the people there will be so high, to not make it productive. So, the business is coming to India.
So those are the kinds of new age companies that you want to be in for the new generation of technology business, for example. I don't know, maybe the old technology businesses don't deserve a high PE now because the service businesses gradually scaling. But these intensified knowledge BPO companies, you get cheap real estate in India, telecom costs are the lowest in the world and plus you get enough manpower to do these jobs, even that you're running at 60-65% costs, but this cannot be done competitively almost anywhere in the world.
So those look-like good places to see, like data companies, for example, in a spectrum of businesses, health processing, mapmaking, hotel online reservation. It has people who does do analysis for you on your data itself, or people aggregate data and send it to more sophisticated players, who can analyse that. So, across the spectrum, if you are asking for a new opportunity, I would see that.
Do I believe in the manufacturing story? Yes, I do believe in it. So, we have to do well in manufacturing. If India is to succeed in employing those 350 million people who are going to be coming of age in the next 7-10 years, you obviously need a manufacturing base to do that. And a lot of stocks in hold for years have actually done well compound over periods of time.
Again, not recommending it, but Tata Honey was the word, Laxmi Machine Works, we also keep compounding over. I am not sure where the next opportunity will be found necessarily in terms of sector. But in terms of a new sector, if you ask me, that's what I am looking at.
The way you were a tad disappointed with the way the whole flux happened around the new age internet businesses getting listed, had premiums moving higher and then suddenly seeing a large collapse. And this whole shaking up of confidence that happened around that because it was sector that is getting formed and suddenly there was this whole loss that's happened to investor fraternity?
Ramesh Damani: I think they got greedy. They came out at the top of the market in very bubble-ish valuations. We were not getting the great bargains that we were associated with.
Having said that, the most important to understand, new India is that the digital stack that India has built up, the UPI payment transfer that's taking place out there is one of the greatest transformational changes that is taking place in this country.
We are not capturing the entire magnitude of the change that is taking place. So, if you have, I don't know, 600 million-800 million internet users in India, 95% are going to have access to a smartphone, 95% is going to have the cheapest data in the world.
They're going to use the phone and net very effectively to order food, to buy insurance, to book real estate deals, to book hotel deals. So, you cannot ignore these companies because that is the way the businesses will be transacted in the future.
So, the question then to ask is, have some of the businesses the valuations come down enough to make it interesting? You can't value it on brick-and-mortar businesses, you can value it on intellectual property, the software, the algorithms, the logistics issue, and I will suggest to you that yes, they have come down in valuations.
If you have the courage to go and pull in whole hog in this valuation, but with the big picture era, million Indians with a smartphone and cheap data plans, how are they going to order food, order books, order groceries, a lot of them will do through the net. So, you cannot afford to ignore that marketplace. So, we have started making nibbling bets in what you call the new economy stocks.
The problem, the disappointment was Niraj, as you correctly pointed out, they just came under stratospheric valuation that made no sense, given what the likely trajectory was over the next three-four years. But now look at the trajectory in the next 10 years or so. I think you'll begin to see the emergence of some sensible, more sensible valuations.
At the same time, Ramesh, you are also straddling the sphere of, let's say PSU stocks, some of which have been beaten down in the last one odd month, but which are not necessarily as digital and tech savvy as some of the private players are. So, you are doing an interesting mix of value-buying versus long-term futuristic buying so to speak?
Ramesh Damani: My first criterion is always looking for stocks that are cheap, and I am pretty much agnostic, and I get actually a bit peeved when a lot of analysts come on your channel and other channels and say, oh, don't buy PSUs. That seems like a ridiculous statement to make.
In the stock market your job is to discover valuation. Now there are bad PSUs and there are good PSUs and there are also bad public sector companies that have gone bust. I can name any number of examples and the good and the trouble that a lot of people make is that they club all the PSUs together, whether it is commodity, whether it's telecom or whether it's actually defence and railways. So, clubbing a lot of bad and good companies together and coming up with a result that justifies your expectation, as opposed to doing stock picking.
I have said this many times before repeatedly, I used to stock up Bharat Electronics, I still do. I am not recommending the stock. The stock was in 2000 maybe at a Rs 400-500 crore market cap, it is Rs 60,000 crores today. After being handsomely dividends along the way, it used to be at 5-7% yields for long periods of time. Never dived in equity and produce great businesses, the high tech the kind of business they do, they have a moat around that the nobody else in India at this time can do the kind of electronics work they do.
For voting you need the machines. If you want defence, you need the machine, if you are an air force pilot you need the radars. It is almost a critical business. So, in the same span, a lot of businesses in defence, in railways and we are looking at are absolutely critical pieces over the next 10 years.
You want to fight China for example, you know, you always think of a land war with China. But now you realise that you have a huge peninsula coast, a lot of the traffic between China and the rest of the world flows through the Malacca Strait. So how do you fight them out of the sea by a presence in the naval field, who does that? You have to ask yourself these kinds of questions if you're going to be a geostrategic player, and China and India are going to be at each other.
You cannot afford to give them complete override control of the Malacca Strait. You need to engage them maybe in the Himalayas, but also in the Malacca Strait, and there are only five six shipbuilders in India who are building the destroyers, the aircraft carriers, the frigates they need to take on that challenge.
So, I think there's a good opportunity we found in the stocks, in my opinion at throw away valuations. I think some of them have been rerated. But I still believe that you know, there's a ways to go perhaps.
Have railways been completely rerated, because after a long time, you hear this, you see this spring in their step, you hear the optimism in their voice, you see numbers in the order books, which are much higher. But these are stocks that have perennially been shunned because they are flattered to deceive a number of times.
Ramesh Damani: I don't know why they were shunned. I mean, I go to each of them, the order books are maybe five to seven times the sales, they pay you a dividend yield of almost 5-7% on the current stock price and they have been reasonably consistent in producing a good set of numbers. And if you look at the market caps to the opportune size, they seem a bit puny to me.
So, sometimes, people’s despair is my opportunity, because I could sense the opportunity there. I still think that some of these businesses are very attractively valued, these are irreplaceable businesses and you're getting them at, I think at really good valuation. So, I would hold on to them.
I am not really particularly concerned that they have PSU tag. There are capital allocation problems, of course there are, but if you believe in the changing India, you believe in digital governance, you believe even they will change over time and you know, where do you get a blank cheque in private companies or wealth management, I just find that their hypothesis is a bit outdated.
Asset management companies, wealth management companies, a play to consider?
Ramesh Damani: I mean, it's obvious that they are played to consider now. Will the traditional broker face a problem in a competitive environment because you are now moving to a digital player? Yes, they will face a player out there.
What the regulatory environment says against holding, the demat holdings, I am not sure about all that, but I think there's a long-term dream that instead of having 3-4% ownership of equities, the population that moves to 15-20%, I want to make the numbers before you, I think the numbers will be astounding because India is blessed with 1.4 billion people, in the numbers can be astounding.
What are the alternatives that Indians have? Indians invest in gold. Here is a newsflash, inflation with 40-year highs and gold was down last year. It is not keeping up with inflation. So, this doesn't seem to be where you want to invest. You see, the ticket size keeps increasing. You have Rs 5000-10,000 a month, you want to invest, please welcome to the stock market. That's the best, safest place to do it.
You do not want to buy stocks, buy an ETF that tracks the Sensex and Nifty. That is absolutely fine. But these are going to be gigantic, genomic markets over long periods of time. So, I would say certainly invest in India and if you invest in India, you can also look at the infrastructure people like you are mentioning, the insurance company, the depository, the brokers, why not? They all have good growth ahead.
I want to understand the mental model that goes behind thinking about a business 15 years out because a lot of people are now hearing on television, about a lot of experts saying, invest from a long-term perspective, but may not have the right mental model, or the yardsticks to be able to do that. Can you help us with that?
Ramesh Damani: For sure, a stock you are familiar with that I have invested in, probably a good template to understand. If I am not mistaken, in 2004-2005 the entire Indian liquor industry was available for maybe $100-150 million. But at that time the people who wanted 50% of the beer market, 50% of the liquor market and some other companies were available for pennies on the dollar, if you like that.
Now, if you were stepping back from 2004 and say that I am looking at 2024, you could have figured out that so many people in India would enter the drinking age over the period of time. There was no social ban as such on drinking in India, generally an opened-up culture, though in some parts of India there were some restrictions but generally it’s an open culture.
You know, one thing, the minute you get a job, and you have friends, you want to have a happy hour and to have a drink … so, it's a universal lubricant. People need a place to get together to enjoy and have fun. So, it's a universal lubricant, unfortunately misplayed in lot of Hindi films. People enjoy a glass of wine, a tipple or two over drinks. In the long-term market that we could foresee in 2004 that as India evolves the market will rise and it has evolved as stocks are 50x 100x from those time.
Can they still double and triple, I believe that it can. Unfortunately, what has happened is, it did not come under GST, because the state makes so much revenue from alcohol, they are not going to put it under the GST. So, you're still dealing with 35 different states, collection regimes, some states banning it, some states not banning it. But as you say, I am looking at India of 2045, I am not looking at India 2025. I am looking at India 10-15 years down the road, maybe leaving these shares as a legacy for my grandchildren.
And to come back to the example, every bull market tells you a story. 1992 bull market talked about India’s liberalisation, 2004 called the tech boom in India. So, what this bull market is calling you that we have a demographically geocentric issues in India, demographics explain to you, geocentric have explained that India and China will be rivals. That India will take on China. It needs to really kickstart a lot of things that are going on, which we see evidence of that happening right now.
So, I think looking at that point of view, what are the sectors to invest for 10-20 years? Yes, I think the data will be new BPO, that will be a sector I am investing. Investing in a lot of insurance companies because all these companies will tend to prosper in the great boom that you see the next 20 years.
But more importantly, I am not trying to peddle any sectors, more importantly, what I'm trying to peddle is the importance in remaining invested in this country and you have to ride the volatility. I cannot help that unfortunately; it is part of the beast. If you had come and invested in 1992 as I did, we would have gone through multiple crises. We went through Kargil, global financial crisis, you know, the plague, the Covid, any number of things out there. But I came when the Index was 600, two years ago it was 60,000, so, it was a great journey.
I think the next 10-20 years will also be a good journey, provided you remain invested and if you can't find stocks, buy an attractive fund. That is the easiest thing to do.