The Hindu Business Line : `Be very tactful and tread cautiously'

THE stock market can be extremely treacherous, cautions Mr Raamdeo Agrawal, Joint Managing Director of Motilal Oswal Securities, on the eve of launching the latest edition of his wealth creation study, an annual exercise for the company.

But as he puts it in the same breath, the market may yet throw up a lot of positive surprises. Excerpts from the interview with Business Line:

The equity market has risen quite a bit, with many stocks attaining new highs. Can investors genuinely expect further upside?

Yes, the indices have moved well. And, yes, I do believe some steam is still left in the equity market. However, I also urge investors to be very tactful and tread cautiously.

In other words, if you do not have the stomach to take 30 per cent quotational loss and do not want to hold stocks for at least three years, you should look elsewhere and not venture into the risky world of stocks.

Do you expect some sectors to be re-rated even now?

Re-rating is quite likely to take place in a few areas. Take, for instance, two- and three-wheeler manufacturers. These companies are expected to get re-rated from their current 10-11 P/E to 15-17 P/E.

Similarly, multinational companies in the pharmaceutical sector will keep getting re-rated as the future unfolds for them under new patent regime. Telecom stocks are also expected to get re-rated from time to time as the full thrust of profitable growth becomes palpable for them in the days ahead.

What are the factors that could negate the rising trend from these levels?

The average equity watcher is not without his set of worries. At this juncture, the major ones stem from corporate profitability and interest rates. Fortunately, on both fronts, things look cool. At least for the next 12 months, they are likely to be more or less under control.

But as we know, the tsunami simply hit the tranquil shores a day after Christmas without giving notice... this analogy can relate to the market as well. The point is, trouble may well come from different quarters when they are least expected.

Therefore, one should have very tight purchase prices and should be generally willing to face a storm.

What are the key lessons thrown up by your probe into wealth creation?

For us, wealth creation simply refers to the measure of extra equity value generated by a company over and above the amount of capital invested in it by shareholders. Companies that have successfully created wealth in the past have certain common traits.

We have tried to throw light on these traits. All those companies that show a compounded annual growth rate of at least 25 per cent - that is, have added a minimum Rs 100 crore to their existing market capital, adjusted after dilution - are taken into account.

Our study conveys, among other things, that one should buy an asset when nobody is looking at it. On another front, exponential profits in commodity stocks may last a little longer than the market thinks it will. And for those who are looking for a strongly-worded dictum, do not get carried away by the fads around you in your effort to choose the right stocks.

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