Markets

‘Well-managed portfolios can triple over 5 years’

Avni Raja | Updated on January 22, 2018 Published on December 30, 2015

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Companies that benefited from the commodity price collapse are the ones to buy, says Raamdeo Agrawal





While 2015 has been disappointing, investors and analysts are betting big on 2016. Speaking to Bloomberg TV, Motilal Oswal Financial Services Joint MD Raamdeo Agrawal explains why it is still profitable to invest in companies which are beneficiaries of the commodity price collapse. The first point from where FIIs will enter into global equities will be from India, he said.








Excerpts:



Consumer retail has emerged as one of the largest wealth creating sectors. But at this point of time how should one approach that sector because you have still got very high quality companies which are extremely expensive?

The troublesome part of the investment process is that you need to have Moat and growth, which the market has not priced in. Because of this, not all consumer companies will make money and the return from this segment might remain subdued.

Huge re-rating has happened — companies which had PE multiples of 20-25 are now trading at 50-55. Over period of time, the PE multiples do get adjusted. If PE multiples remain heightened for a long period then you get the total earnings as your return. But if they get de-rated for some reason, your return would be less than your earnings growth.

One has to be very careful. When any company goes on to the growth trajectory it will be rewarded. If consumers get used to a particular thing it is default to make them change their habit. Opportunity to grow is very high. So I will not sell what I have but I will be cautious in buying or building up the portfolio of consumer companies.



The other sector conversely is metals and mining which have from biggest value creators become the biggest value destroyers. Do you think they can be wealth creators going to the future?

Personally, I would not but at some point of time it will be. What has happened in 12 years has been demolished in 18 months. What we are passing through is unprecedented. What is currently happening is the complete destruction of the franchise — whether it is iron ore, aluminum, zinc, oil, gas and coal — nothing is spared.

For some time at least it will require stabilisation. Right now it is still falling but maybe in six months or a year’s time it might stabilise because this will lead to lots of bankruptcies.

And, then, supply side will get squeezed and demand will suddenly pick up and somewhere equilibrium will come. So we have to wait for that period to happen. And if you know something very well in a company, and you know they are the lowest cost producers that are scalable and you are getting it for good price, then you should buy.



The other concept that you talk about is reverse value migration. One sector that comes to mind is public sector banks. How should one really approach this space?

You are talking about value migration. That has been one of the biggest value creators in India. In the last 15 years, the size and breadth of wealth created by this concept is unprecedented. In value migration, the world will always be looking for better business model.

One largest value migration is from Boston to Bangalore in information technology. In global pharma sector, Sun Pharma is making lot of money by value migration.

Same way public sector banks — they commanded 100 per cent market share in 1995. Then private banks started coming in and today they (PSU banks) are one-third of the entire sector.

So the value has migrated from public sector banks to private. So if PSU banks have to come back, they will have to change their business model. They (PSU banks) can become like Doordarshan or BSNL. But it’s a very large sector. Two-thirds of the economy runs on this. The government is under tremendous pressure. That’s why it is prescribed that if you can’t repair it, you should sell it. Whosever gets it can repair it and make it competitive.



Is the IPO segment now looking exciting after seeing some interesting listings in 2015?

This year has particularly been good. I think the most celebrated listing was IndiGo, which is market leader in the segment, and now is almost 50-60 per cent up. We are seeing quite a few high quality companies coming in. This is a tough time, so very bad companies will not fly. This is terrific time for investors to log in.



Markets are a slave to earnings growth. The year 2015 is one prime example. When do you see the earnings picking up or do you think it will take some more time? Will it be in 2016?

I don’t know. The market has become a two-speed market. It is a complete reset for the global economy with oil and all types of commodities down by 30-50 per cent — oil is down 65 per cent. This is clearly an unprecedented kind of adjustment.

The producers of commodities are in a bad shape and are on the verge of bankruptcy. That has hurt the total aggregate corporate profit. But the users of commodities are benefiting, but that path is slow. In FY17, things could be much better.





For 2016, any specific sectors that you believe are poised to outperform?

The biggest theme running across, whether it is consumer, automotive or pharma, are companies benefited by a burst in the commodity cycle with a good pricing power.

A company like, say, Britannia is in consumer segment but their raw material cost has come down because plastic packaging price has come down. So, their marginal profit is going to be expanded a bit. They do not have to pass it on.

Bulk of it they keep with themselves so that if inflation firms up they will be able to set it off against that. So these kinds of companies will do very well because right now they are still in slow growth mode. So you will find a slow top line growth in the next 12 months.

All the companies that have pricing power and are significant beneficiaries of the commodity price collapse are the ones to buy. If the power sector reforms really works out, then all the discoms will become profitable in three years.

This is going to be the biggest source of making money — they will be requiring lot of equipment to be bought and then you have the power generation companies, many of whom are nearly bankrupt today. These kinds of themes under the new government, under the new cycle of investment and reforms, and beneficiaries of commodity collapse and reasonable price — put all three together, you will get ideas.



Where do you stand on this mid-cap versus the large-cap debate? Given the value erosion in mid-caps, any bias on that?



No I don’t have any bias. If I get quality and growth, I don’t care about the size (of the company).





Any final word of advice for investors who are planning their investments for the New Year?



Currently, the markets are at about 70 per cent to GDP and we are underinvested as a class. But serious money is made here — 15-20 per cent return compounded is made in equities. So downside is limited, but upside nobody can tell.

On a five-year basis you have got a very good chance that the index itself will double and well-managed portfolios might triple. So downside is limited and upside is very attractive.

There is a good time to invest in a good quality portfolio. Do not bother too much about individual stocks. Serious investors must take help of fund managers and deploy the money or buy into managed portfolios.





Do you think FIIs will view the Indian growth story in the same way? Do you see flows coming back?



It is a matter of time. There is no other way. Either we do not grow, but if we do, they will take notice of this. The first point from where they will enter into global equities will be from India.



Published on December 30, 2015
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