I am a bull in a bear market and I am fully invested: Raamdeo Agrawal, Motilal Oswal


There will be bouts of rallies and good companies which are doing well, will continue to progress. These will be few and far between because broader economy is in a slowdown mode,says Raamdeo Agrawal, MD & Co-Founder, Motilal Oswal. Excerpts from an interview with Nikunj Dalmia of ETNOW.


You typically love this kind of market because the news is bad and prices are great.
No yesterday was not good. Yesterday was quite scary and I am getting to feel that we are into papa bear market and you have to be very cautious and now you do not have to pre-empt any news fundamentally. After hearing everything, after analysing also if you are going to buy, you get 5% cheaper than before the result kind of thing. So this is a very different market than what it was just a year back you can say.

So bull market and bear markets are very different. I do not want to sound like a technical guy but if you see the last 30-35 years, there are three-four phases of bear market like when I started my career in 87 – 87, 88, 89 these three years were terrible years in the market and then from 600-700 Sensex we shot up to 4500 that was mother of all the bull markets led by Harshad Mehta bull run in 18-19 months between 91 to 92 end March. So that was one phase of a bear market and then it finally ended in a massive bull market.

The next seven-eight years were kind of gone nowhere type. There was no index. There was no ET Now. We did not know anything. What is Sensex and underperformance, outperformance. There was a massive liberalisation followed by collapse, then the industrial licensing was withdrawn. I did not realise what has happened but the world has changed.

The License Raj had gone.
Yes License Raj was gone suddenly. Liberalisation was in and globalisation was in and you suddenly started seeing consumer goods and services coming into the country, otherwise for a jeans or for a ball pen, you have to ask somebody from abroad and now in the last 20-30 years, things have changed. If you go to any of these countries — Europe, America and all — you do not find any gap between what you get here and what you can buy from there. That is a massive achievement. We did not have the forex then, maybe a billion dollars or two. We had some gold. Today we are sitting on $400-430 billion of reserves. There is a massive change in this period. We had a software boom in 2000 and then post collapse after 2001, 9/11 happened and then 2001, 02, 03 were terrible years.

We incurred losses in the two-three months after 87. That was very scary and very bad. On many days, there were no new highs. I used to pray that there should be at least five-six companies from my portfolio which should be on a new high. It was almost impossible.

Then we saw the mother of all bull runs and almost everything was in new high in 2008. From there, it now feels that we are into some kind of prolonged soft market.

Do you think for the next two or three years, we may not get new highs?
There will be bouts of rallies and good companies which are doing well, will continue to progress. These will be few and far between because broader economy is in a slowdown mode.

If interest rates come down further and if the government starts spending and starts heavy lifting, could we see a very quick revival or is the economy gone for next 12-18 months?
It is going to be a hard earned, slow turnaround. I am not a great macro guy but I am meeting 100-200 people almost every day — investors or mid-sized and large-sized corporates. We get to see some colour of what is really happening in the ground.

Actually one of the things is that there is a lot of negativity, more than what is the problem in the economy. You speak to somebody yesterday, I called up one dealer in Jabalpur and I asked how you are doing.
Sahab bahut kharab hai, yeh hai, woh hai (Sir, the situation is very bad), he said but I asked how good is your book? He said he has grown but everybody else has not done well. So what is the problem? He is saying that the problem is that of negativity through the channels, through the newspapers, social media. The buzzword is that there is a lot of problem!

Now when you have this kind of perception, even consumers think should I buy the car? Should I commit to new EMI? Is my job safe, is my bonus safe? That kind of fear is unnecessarily creeping in.

When a good business goes through a cyclical downturn, Raamdeo Agrawal steps in and he will start purchasing or he will be investing when sentiment has an impact on prices, but not in actual reality. Where do you think prices are suffering because of sentiment? The word slowdown is not a July phenomenon. Auto, FMCG sales have been slowing down for six, eight months now. How come the fall has been excruciating in the last six, eight weeks?
We have been seeing that earnings estimates are going haywire but it was going haywire in terms of 5%, 7% and things like that in December. Trouble started cropping up not so much in September last year. It was in the December quarter that there was a problem.

Initially we thought this will get over and New Year will bring better times. Then the slowdown caught on and till March, most of the manufacturers to save the 2018-19 books, pumped in and inventory got accumulated big time.

My general understanding is that in the first quarter of FY19-20, they made a wholesale correction in the inventory. Production got cut right now and so the retail sales were not as much down as the wholesale sales were down but you get to hear more about the wholesale sales. There is now a clamour that slowdown is almost double.

There is a slowdown. The inflow of the customers, footfalls and all are lower and half of it could be only because of the general negativity in the system. There is pessimism. There is no mood of optimism. The government is trying to tax too much. Even the insurance costs are up, as did the higher registration costs. Then came the electrical vehicles (EV) and there was disruptive talks by some officials that EV will come and the old system will go away. These things are not helping the businesses, particularly in the environment of slowdown.

Then came the NBFC crisis which is basically last mile funding system and authorities are aware of the problem and they are taking whatever steps they can take. But that also has to come around. Some alternative mechanism of last mile delivery has to come up. Without that, how will you take care of last mile because the banks go up to the branch. Beyond branch, who gives loan for a house costing Rs 10-12 lakh? It has to be done by specialised NBFC. But the entire architecture has broken down because there is a doubt now on the rating agencies, on the banks and the NPAs and so the whole thing is somewhat disoriented right now.

It will fall in place slowly. The good guys who have maintained themselves well and have capital adequacy, who have underwritten very well, will survive and they will come back but it is a cyclical process.

Right now, markets are confused. There is a section in the market which feels that this is a temporary slowdown and there is a section in the market which feels that this is a structural slowdown and the demand and the economy is going into a tailspin for the next two or three years?
See I do not know about the timeline. There is a slowdown. It is not going to happen that next month you do three things and suddenly there will be a boom, no.

So FY20 is a washout?
No, no, government and authorities have to do what they have to do. Let the market, entrepreneurs, consumers take their own time to come back. But let us not expect that the results will be dramatically known overnight and markets can dramatically change overnight. July was down by 7-8%, even yesterday it was very scary — 2% in one day. So, markets can move much ahead but there are two different things; one is the economy and second is the perception of the economy through the market. The perception can change quite dramatically in a month’s time.

If I have to make a prism of greed and fear, greed is out but in terms of the fear gauge, are we in fear or are we in extreme fear?
I would say fear. I would say yesterday was extreme fear.

Is there scope for prices to come down, 10-15% cannot be ruled out?
Yes, why not? It can be quite fearful.

My single source of optimism or pessimism is from the company’s outlook for business. I do not understand how globally it will play, global macro, local macro are all difficult to figure out but when I talk to a company how the company is going, we can build up what we can do.

Common friends tell me that every time they feel disappointed or they have concerns about Indian economy, they call on you because in a sense you have this image that 24×7, 365 days in a year you will be bullish. But for the first time over the years, I have interacted with you, you are not sounding bearish but you are sounding hesitant to me.
No I am a bull in bear market. I am still bullish and I am fully invested. I will go down with the market only. I am not a guy who is sitting on 10% cash and things like that so that is not the issue. My status has not changed but the conditions in the market have clearly undergone change.

What does the current market conditions mean for future returns for the next three years, five years?
Lower it goes, higher it will be for the future.

Do you think this is more like a base preparation for next bull run?
Yes see every market after seven-eight, six-seven years… See when this government came, there was a complete hopelessness kind of situation. The market started rallying in October 2013 when I think Modi ji was nominated as prime minister elect nominee in Goa…

By the BJP…
Yes, that time the index was about 6,000. From there, the rally started. In the next five years, we had a rally going from 6,000 to 12,000. It was a nice 15% compounded and individually stocks have gone 10x, 20x whatever but it was a nice five-year run. There has to be a correction because the corporate earnings have not grown. Corporate earnings have grown only 5%, 6%. So obviously there has to be a massive correction across the board. Our index PE multiple, Nifty went up to more like 25-26 which is now about 22 or something, 22-23.

Are we reasonably priced, are we cheaply priced?
No, by the historical average about 15-17, say 17-18. Though interest rates are much lower now, that can account for a little higher valuation because now we are into trajectory wise. The interest rate is much-much lower. Earlier, 8-9% was norm, now it accounts 5-6%, still talking lower. Clearly, that can accommodate little higher valuation than usual valuation but look at the corporate profit to GDP, it is less than 2%.

The market cap to GDP is 70% today, yesterday it was Rs 139-140 lakh crores. GDP is Rs 200 lakh crore, so we are talking about 70%. US is 150% and so can it go to 60%? Yes. My corporate profit goes further down and my GDP keeps growing at about 10-11%. Obviously, markets will remain here and the GDP will keep climbing. The market cap to GDP can come down to more like 60%. These are not sustainable levels.

What is your view on profits?
It is not looking good right now. There is no impetus for the…

And that is across the board?
I mean broadly. Private sector banks are in a very cosy situation. The competition from NBFC also has gone down to a great extent. They are in lender’s paradise. They have got great powers….

…and they have market share gain.
They have the liability. They can create their own deposit. I mean the economy is doing well. I mean 5-6% is not bad. The economy is still growing and they have the peak of the customers and so they will have very stable margin.

So private sector bank is one end of the market, especially corporate banks. That will do well.
Yes.

Just about a year ago, year and a half ago, Maruti had a PE multiple of 40. It had reached almost Rs 10,000. Do you think we may not see those levels and those PE multiples for Maruti in a long time now?
No, everything will come back. I do not know how long it will take. The reality is that it is Rs 5500 or 6,000. So from 6,000 to say Rs 12,000 would take about three years.

At a time when we are talking about a real disruption which is coming from EV, do you think that will peg the PE multiples or that will compress the PE multiples?
They could be the winners in electrical vehicle also. It is a little away at least for India because it takes about $5000 to get a worthwhile electrical vehicle and you need infrastructure now. Even worldwide also, it is not that big a push in terms of total number of EV cars sold and then they give subsidy.

I do not think our government has that kind of fiscal space to give lot of subsidy to car buyers. We are little away and we buy what 800-1000 CC cars which are very lowly priced. The real thing is that as the EV picks up worldwide, the crude prices will come down to more like $30-40. At that point of time, it will be very affordable for the IC engine which has lots of parts and which creates a lot of jobs. The government should seize that opportunity. In fact, we must push the old technology as far as we can push and then let EV grow on its own merit, come back and take over eventually in 15-20-25 years. Whatever happens in the world will happen in India also. But why we disrupt the current business which is going on very well.

Stay Invested Till You Make Money


I will take the clock back by 10 years. In 2009, we were coming off the financial crisis and we were eating Maggi in the same room, I said what is your market view? You said, ave you stopped eating Maggi? You said even I have not stopped eating Maggi and that is the reason I am investing in Nestle. So it is not that Indian consumer will completely fade away. The cyclical sentiment may be poor but eventually a year or 18 months from now, both demand and sentiment will improve?
You have to figure out are you an investor or a speculator. Investor means few years. Nowadays I do not say even three to five years, I say till you make money. This is new because the guys who came three years back they have not made money. Now, we are saying that till you make money because I have seen it takes two years, three years depending on when, but you make tons of money. Every bear market or a soft market gives birth to amazing bull market.

So this correction if it lasts… jitni badi mandi utni badi teji to woh hone wala hai (The bigger the slowdown, the greater will be the surge). I mean I am seeing that for the last 40 years. Now how much is going to be the correction, where it will bottom out and all only chartists and all those guys can figure out I have no idea. But what I am saying is that the journey from current $3 trillion to 5 or $6 trillion, doubling of GDP will happen in the next seven, eight years for sure, okay that will happen despite all the gloom I still believe that if not in 2025 in 2026 we will be $5 trillion or maybe even $6 trillion.

Time we do not know but the destination we know?
Yes. So the discretionary spend build up will happen. All this pessimism will continue maybe for three months, maybe six months and the fantastic monsoon, a little more reasonable oil prices, a little softer policies from the government and we will be again back.

The sectors to bounce back again would be the same sectors which are getting affected?
You must buy what you understand because saying that consumer stock is very expensive there is no point in just piling on to that. There are a lot of tech companies, some specialised pharma companies, some consumer companies, even auto companies which have corrected. One of the things which I have learned is that the portfolio is made up of two types of stocks; secular and cyclical. You cannot apply the buy and hold and do not bother about selling the stock when it is cyclical would be very dangerous.

Metals are cyclical, you cannot buy and own them permanently.
Yes, so you have to know how to handle secular stocks and how to handle deeply cyclical stocks. This time, I got completely hammered by my good amount of auto holdings which turned out to be cyclical. It was cyclical but I did not know it was coming and it was coming so severely. We had to take 40-50% knock from Eicher, Maruti. We had 7%, 8% allocation each and just between these we had 15%, 15%. It has come down to say half so 6-7% decline in the entire portfolio has happened because of these two. So yes, we have suffered. We are learning. The stock market is a continuous learning machine. In the next round, we must position it rightly. But this decline will throw up opportunities in a lot of sectors.





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