Where do you see equity markets heading from here?Essentially post the election, our verdict becomes broadly positive on the market. As per general perception, markets have gone up 70 to 90 per cent from their lows. So there is always a possibility that the market could correct by another 10 per cent, may be another 15 per cent from here. But our medium-term outlook for equity is decisively positive for India.
Where is the optimism coming from? Where do you see the market improvement which is leading to the confidence?
Whatever the global situation is, in the short term, India is going to be part of that global system. So, there is going to be another downturn in the globe which may happen for whatever reason. We will also participate in that downturn. But as we are seeing whenever the recovery really takes place, India is one of the few countries where you can assume 6 to 7 per cent GDP growth for 4-5 years. It is the place which the whole world is looking at.
So in the recovery we will obviously be the fastest in the first to participate in the growth. And in the downslide though we will participate, but to that extend on an adjusted basis if you see form April 2009 till now our return is 29 per cent, merging market return is 18 per cent, and US market is 1.1 per cent. Clearly if you look at it in a 6-year timeframe, we are in a sense de-coupled or delinked globally or the inherent bullishness is getting reflected in these numbers. So India’s story remains very, very positive both for a local as well as a global investor.
Let’s understand the importance of liquidity in everything...that in a sense is very important. On an average, you look at about six to seven billion dollars from FIIs, and two to three billion from the mutual fund industry. If you really add up everything on a six monthly... that is the number of QIPs going to hit the markets.
I think this is a very simplistic way of putting these numbers. First of all, I do not believe that all the people who have announced the QIP will get the money. I think there are hundreds of announcements which are made by corporates. But I do not think all these are going to get the money. And these QIP to get subscribed surge should go to 6000 NIFTY, all over again people have to really scramble for shares. Any which way our argument is being fulfilled any which way. Secondly, don’t forget there is too much of insurance money which is coming into the market. As an investor I am very happy to see these corrections in the market. These are our chance and opportunities as Indians to employ our money into equity markets. So, if market goes up parallely in hind side, you see between October and December was a golden period to make investment in the equity market. In fact, these corrections have to be viewed as an opportunity rather than as a threat for a long-term investor. I am not here. I don’t even understand the market. I have tried to understand it, but have failed. I must admit that what can happen in 10 to 15 days, I don’t know. Its traders’ delight and better left to traders. But as an investor, mid and long-term call on India is positive. Every decline of any meaningful size should be used as an opportunity by investors to up their equity weightage.
I think this is a very simplistic way of putting these numbers. First of all, I do not believe that all the people who have announced the QIP will get the money. I think there are hundreds of announcements which are made by corporates. But I do not think all these are going to get the money. And these QIP to get subscribed surge should go to 6000 NIFTY, all over again people have to really scramble for shares. Any which way our argument is being fulfilled any which way. Secondly, don’t forget there is too much of insurance money which is coming into the market. As an investor I am very happy to see these corrections in the market. These are our chance and opportunities as Indians to employ our money into equity markets. So, if market goes up parallely in hind side, you see between October and December was a golden period to make investment in the equity market. In fact, these corrections have to be viewed as an opportunity rather than as a threat for a long-term investor. I am not here. I don’t even understand the market. I have tried to understand it, but have failed. I must admit that what can happen in 10 to 15 days, I don’t know. Its traders’ delight and better left to traders. But as an investor, mid and long-term call on India is positive. Every decline of any meaningful size should be used as an opportunity by investors to up their equity weightage.
Keeping in mind the importance of the month of July, the Budget and monsoon, not many people are talking about monsoon despite its importance for the economy. So once we wrap up the month of July, will we get the directional call for the next 6 months?
I think monsoon is, as you rightly mentioned, a big thing. Don’t forget we are only 15 per cent dependant on agriculture. I think a larger portion of our consumption is also linked to how our agriculture output is and ultimately we are 100 cr people and we need water for everything. So I think monsoon is a very important thing and we are relying on god for that. I am not assuming that as a significant threat, but that could turn out to be a threat which could possibly have even a bigger correction in the market what I earlier mentioned. Budget I think I am not too nervous. I think people who are sitting in the chair are reasonably intelligent people. They know what the expectation from them is, and I am sure they will deliver. Good thing is even market is getting nervous before the Budget. So there is not too much expectation in that is being built from the Budget perspective. Earnings, by and large, will be better than what they were in the last quarter, but again from a near-term earning perspective, is there any dispute that markets are reasonably valued? They are, but we are not making a case of markets going up from a next quarter earning perspective. We are optimistic on the next 2, 3 year earning perspective which is a call we have to take.
I think monsoon is, as you rightly mentioned, a big thing. Don’t forget we are only 15 per cent dependant on agriculture. I think a larger portion of our consumption is also linked to how our agriculture output is and ultimately we are 100 cr people and we need water for everything. So I think monsoon is a very important thing and we are relying on god for that. I am not assuming that as a significant threat, but that could turn out to be a threat which could possibly have even a bigger correction in the market what I earlier mentioned. Budget I think I am not too nervous. I think people who are sitting in the chair are reasonably intelligent people. They know what the expectation from them is, and I am sure they will deliver. Good thing is even market is getting nervous before the Budget. So there is not too much expectation in that is being built from the Budget perspective. Earnings, by and large, will be better than what they were in the last quarter, but again from a near-term earning perspective, is there any dispute that markets are reasonably valued? They are, but we are not making a case of markets going up from a next quarter earning perspective. We are optimistic on the next 2, 3 year earning perspective which is a call we have to take.
The growing point...
No I don’t think crude will go up above 150 dollars for us. Crude stays at 60 to 70 dollars, and we are fine. Commodity prices are still half of what they were at the peak. As long as they do not go all the way up, we are still ok. As far as inflation is concerned, you know India can and should afford 4 to 5 per cent inflation. I don’t think there is anything wrong with that number and there is a school of thought which is coming that there is too much liquidity being pumped in the world and the world inflation itself might go up. To some extent, there is merit in that argument but don’t forget that a lot of industries in the world are still operating at 50 to 60 per cent. So the question was not capacity. If prices go up, so the capacity will also get unlocked and that will start to work. So you can make all these arguments as to what will happen 12 and 18 months down the line on inflation front, but I do not think that is a terrible worry as of now.
No I don’t think crude will go up above 150 dollars for us. Crude stays at 60 to 70 dollars, and we are fine. Commodity prices are still half of what they were at the peak. As long as they do not go all the way up, we are still ok. As far as inflation is concerned, you know India can and should afford 4 to 5 per cent inflation. I don’t think there is anything wrong with that number and there is a school of thought which is coming that there is too much liquidity being pumped in the world and the world inflation itself might go up. To some extent, there is merit in that argument but don’t forget that a lot of industries in the world are still operating at 50 to 60 per cent. So the question was not capacity. If prices go up, so the capacity will also get unlocked and that will start to work. So you can make all these arguments as to what will happen 12 and 18 months down the line on inflation front, but I do not think that is a terrible worry as of now.
Last cycle in raising cash, have you followed the same cycle the minute it crosses 4300, 4400 in Nifty? You have raised enough cash. It will plough down when the markets come down.
We have not raised any significant incremental cash because you know I must admit I also realized one thing that you know given that we are not expected to raise significant cash because the flip side is that ultimately you can’t time the markets. So we have not raised any significant cash, but at the same time we have not deployed all the cash which we have. We have continued to reshuffle our portfolio which we have. Whenever we find that this reward has turned against us, we continue to sell those companies and raise cash and look for opportunities where we are deploying cash so net net we are haven’t raised any new cash as compared to what we used to have.
We have not raised any significant incremental cash because you know I must admit I also realized one thing that you know given that we are not expected to raise significant cash because the flip side is that ultimately you can’t time the markets. So we have not raised any significant cash, but at the same time we have not deployed all the cash which we have. We have continued to reshuffle our portfolio which we have. Whenever we find that this reward has turned against us, we continue to sell those companies and raise cash and look for opportunities where we are deploying cash so net net we are haven’t raised any new cash as compared to what we used to have.
You think time has come when you can start looking at large companies where balance sheet damage has been large but when liquidity changes, large caps get the fruit and mid caps get the bread crumbs. Do you think it is time to revise mid-cap stocks which have been tarnished 80 to 90 per cent?
Undoubtedly, let me repeat undoubtedly. I think ultimately market has already given 80 to 90 per cent return. A lot of large cap companies are fairly valued. There is lots of value and portfolio value will come from alpha. Basically what stocks you are able to identify and the time-frame for which you are able to hold them. It is already visible. You see from the bottom and you see from where we are today. You will see there are so many stocks which have given 200, 300, 400 per cent return and there is still debate going on in televison whether it a bull market or a bear market. So I think you know the reality is that on an individual company basis, if our time-frame for 3 to 5 years is bullish, we will continue to follow that model and continue to find the larger mid cap names. Let me emphasize, we are not looking at very very smaller companies, given the size doesn’t make sense, but we are still looking at larger mid cap companies where we could deploy decent amount of money and hope that in 3 to 4 years they will definitely give us much larger return than the appearing groups in the large cap in that segment.
Undoubtedly, let me repeat undoubtedly. I think ultimately market has already given 80 to 90 per cent return. A lot of large cap companies are fairly valued. There is lots of value and portfolio value will come from alpha. Basically what stocks you are able to identify and the time-frame for which you are able to hold them. It is already visible. You see from the bottom and you see from where we are today. You will see there are so many stocks which have given 200, 300, 400 per cent return and there is still debate going on in televison whether it a bull market or a bear market. So I think you know the reality is that on an individual company basis, if our time-frame for 3 to 5 years is bullish, we will continue to follow that model and continue to find the larger mid cap names. Let me emphasize, we are not looking at very very smaller companies, given the size doesn’t make sense, but we are still looking at larger mid cap companies where we could deploy decent amount of money and hope that in 3 to 4 years they will definitely give us much larger return than the appearing groups in the large cap in that segment.
For mutual funds, exit load and entry load are important factors. They are important as far as the chain is concerned....
There is an all around confusion that how distributor has been an overall link in getting the sources to the industry. You know our money or most of the mutual fund money has come through distributors. In the new arrangement, the distributor has to change charge to the investor rather than getting their commission from the industry. I think that in due course of time, the investor will realize what a value and distributor does play a very very important role in this entire value chain. But there is a value proposition which the distributors are putting and they will start to recognise that they need to make their commission for putting this value proposition.
There is an all around confusion that how distributor has been an overall link in getting the sources to the industry. You know our money or most of the mutual fund money has come through distributors. In the new arrangement, the distributor has to change charge to the investor rather than getting their commission from the industry. I think that in due course of time, the investor will realize what a value and distributor does play a very very important role in this entire value chain. But there is a value proposition which the distributors are putting and they will start to recognise that they need to make their commission for putting this value proposition.
Where do you see earnings or business cycle generally as theme not revival, going forward.
I think there is one area which I am not talking, not from a short-term perspective. In the medium to long term, we think you know currency will appreciate because in India if hypothesis plays off, we are expecting that lot of foreign money will come in. What format that will come in we do not know, but clearly there will be a lot of money which will come in. So companies which are depending on foreign exchange and currency for their earning growth will get impacted in mid and long term.
I think there is one area which I am not talking, not from a short-term perspective. In the medium to long term, we think you know currency will appreciate because in India if hypothesis plays off, we are expecting that lot of foreign money will come in. What format that will come in we do not know, but clearly there will be a lot of money which will come in. So companies which are depending on foreign exchange and currency for their earning growth will get impacted in mid and long term.
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