The Hindu Business Line : Sceptics are turning into believers

Follow the elementary rules of investment, choose good companies, be consistent, patient and methodical, and you won't lose money. You lose money only when you are rash, greedy and in a hurry.

MR SANDEEP SHENOY, STRATEGIST, PIONEER INTERMEDIARIES

Though in the short term the equity market might correct, even as we are seeing "euphoric highs" now, the long term is positive, as outsiders are looking at India with great optimism and confidence, Mr Sandeep Shenoy, Strategist at Pioneer Intermediaries, Mumbai, told Business Line recently.

Excerpts from the interview:

Post-Budget, how is the equity market valued?

The market is never fairly priced; it is either the depth of despair — such as on May 17, 2004 — or euphoric highs, and we are probably at a euphoric high right now. It can become a spectacular high, but caution is the watchword.

If you are not an adept or astute investor, stay away till rationality sets in. It may take one, two or six months. Don't feel you're missing out. In the stock market, nobody misses out. Ultimately, one who makes pretty good CAGR (compounded annual growth rate) of 15-20 per cent over five years is a winner. So be happy with 15-20 per cent CAGR and allow the law of compounding to work in your favour.

This is not to say there are no good companies, but getting good companies now will be difficult. We have to be very careful because the free lunches and the low hanging fruits are gone.

So what are you telling your investors?

Be patient; if you don't know how to control your greed, play safe. If you are an astute investor, play the market but I wouldn't recommend this for everybody; the percentage of astute investors is very, very low.

And where should they invest?

I'd say look at browbeaten sectors... the oil PSUs and the PSU banks, particularly those with regional and rural interest such as IOB, Syndicate, Allahabad or Vijaya Bank. Or Ranbaxy, which is in the doghouse now, but will surely bounce back. Look at Dr Reddy's; it has found its place after two or three years. Investors will have to look for such companies.

Sheer hard work, focused research and consistent and logical investment philosophy is what sets apart companies like Motilal Oswal. They have risen to the top because of their single-minded focus on investment philosophy and did not deviate despite swings in the market.

Therein lies a lesson. If they can do it, so can others. Never try to reinvent the wheel; follow the leader and you have plenty of them in the Indian market.

What about the FMCG sector?

That's more of a catch-up rally. Do they have pricing power? No. The Cavin Care guys are nicking at the heels of the biggies; on the one hand, unlisted foreign majors are coming and, on the other, companies like Cavin Care. It is a well-qualified player that knows how the industry works. When multiples of Cavin Care come in, it will create problems for the FMCG majors. Today, the top end consumers are paying more for snob brands but the middle-classes are extremely price-sensitive.

Companies such as HLL have reached a glass ceiling, but we also know HLL is one of the finest run companies; 20 years back it was selling vanaspati. Today, it sells soaps and shampoos and five years later it could get into over-the-counter drugs. We don't know. But, frankly, as an investor, I don't want to take a call.

What about ITC?

Now that's different; I wouldn't call it an FMCG. It has got paper, cigarette and hotels; hotels are doing extremely well. Paper has turned around and agro is going to become a jackpot down the line. It has huge cash flows; I'd pick it as a leader of the future.

Also, look at the manufacturing companies as somebody would from outside India. We might think 23 per cent ROC (return on capital) is not too great, but a Japanese might consider it a jackpot. We've got $1 billion auto companies with 13 per cent operating margins. Bajaj Auto, for instance. A Japanese or a German investor might say: Here is a company doing 200,000 vehicles a month with 16 per cent operating margins (OPM). He can drop it down to 10 per cent OPM, move to the global market and make half a million vehicles a month.

We might look at Bajaj from a maturity point of view... how much more can it make? But the foreigner looks at it from an opportunistic point of view. Investors will come from different regions of the world; when Hero Honda or Bajaj Auto move out of India, they will explode. Manufacturing efficiency is there and designing abilities are slowly coming in. And the vehicles in the East Asian countries are not technologically far superior; probably this is the only country where we have 100cc two-wheelers giving 90 km a litre and people say: `Only 90km!' We've got technologically good companies and outsiders will have a different outlook on India.

Coming back to the "euphoric highs," is it liquidity that is driving the market?

Absolutely, both internal and external. This is the prime mover — justified or not, I'm not qualified to say. That is an economist's job. Will it last? Who knows? What we know is that the professional matrix of the top 50 companies has improved to tremendous levels. Look at Tata Motors and its working capital management; or Tata Steel, probably a billion dollar cash flow.

We've got SAIL, which is probably the best turnaround story in India; 50 per cent due to its own operations and 50 per cent due to global phenomenon. We're blessed in our natural resources in mining and metal sectors where the India advantage is becoming extremely clear.

In steel, aluminium, copper and zinc, the trickle down effect of these companies will be there in rural areas. IT has transformed urban India but these companies will transform hinterland areas, where even the NGOs will not go... Sceptics of India are turning into believers.

So you are bullish on the India story?

Of course. Take the Left supporting the UPA Government, for instance. Everybody had a question mark on them, but the Left has brought to the table what nobody else did. You know they are going to be consistent; if they oppose, they oppose. Full stop.

When you start from ground zero, the only way you can go is up. Left has discipline and it is consistent. You can live with that. You can't live with 20 partners who are inconsistent and fighting. The Left has put extreme pressure on the government but has never blackmailed the government. It started as a Damocles' sword and there was scepticism at every level.

When the Sensex touched 6000 and then 7000, we said the valuations are stretched. We Indians never believe our own manufacturing story... our own strength. We were sceptical about Infosys first and now about the PNBs or the Bajaj Autos of India. But, today, more than one-third of Inofys is in the hands of the FIIs, who have their own logic. So, in the long term, the market will be good.

So investors should have a long-term horizon?

Of course. Earnings will go up but there will be a slow and steady re-rating of the market because too much expectation has been built in. This may happen over the next 12 months, but the long-term outlook is good. Follow the elementary rules of investment, choose good companies, be consistent, patient and methodical, and you won't lose money. You lose money only when you are rash, greedy and in a hurry. There are no short-cuts, allow your profits to ride, and losses are part and parcel of the stock market. It is your ability to handle losses that makes a difference. If somebody tells you that he's not lost in the market, you're probably meeting a yeti... an enigma. Or a dinosaur.

Response may be sent to rasheeda@thehindu.co.in

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