The central government is fully empowered with a clear mandate, but the directives from the Center must be well implemented at the state level. So there are a lot of things that are still not in the hands of Modi, say Raamdeo Agrawal, Joint CEO, Motilal Oswal Financial Services in an interview with Narendra Nathan and Sanket Dhanorkar.
Are we looking at a multi-year bull run?
I think the market has not yet properly priced in the potential of the economy. For the first time, a real nationalist came to power with a clear majority. There is a new energy source found all over the country. My feeling is that the market still doesn’t understand the difference between 300 seats or more for NDA and 272 seats or more for BJP alone. Look at how cabinet positions have been assigned – the BJP allies have had limited positions and their negotiating power has dwindled. All power is in the hands of the government. The political scenario is now very different. The economy is on the cusp of a historic positive change.
It’s the same vehicle, but the driver has changed. It is currently driven by a formula one driver. So the acceleration will be dramatic. It will become visible very quickly. Today, we are growing at 4.5%. Growth is likely to accelerate rapidly over the next few years. A lot will happen in five years. It will be interesting to see the index level at that time. In the process, investors will make tons of money, because the market will discount that growth two years in advance. It won’t wait until the fifth year. If all the domestic and global factors match, the market will go through the roof.
What challenges are there to the fragile economic recovery?
The current optimism is due to the fact that one key variable – the bad political setting – has been corrected. There is no doubt that the new government has been given full power in this election; The task was given to an extremely capable individual. Right now, everyone is optimistic. But one must have hot expectations. Finally, directives from the Center must be well implemented at the state level. Otherwise it would be a waste of money. There are many things that are still not in Modi’s hands.
Lots of other factors will also play a role. A good monsoon, favorable global environment, peaceful borders, etc., can change the whole scenario. But, only time will tell how many stars will align. So a lot will depend on external factors. I am also watching with interest how the new government tackles inflation, which is only a symptom of a deeper problem elsewhere. The government must address the supply-side bottlenecks. A weak currency cannot make a country strong. That’s why, inflation must go down. It will be the beginning of development, investment, etc.
The rally has, so far, been fueled by hope. When will fundamentals take over?
News headlines and making money are two completely different things. We should not be carried away by headlines. The focus should be on who will actually make the money. In most cases, it will be a company that is making money right now. It is very rare that a company that goes bankrupt today will make money tomorrow, unless there is a complete change in business dynamics. Today, we don’t have anything to go through. So wherever there are irregularities in the economy, they will return to normal levels. Right now, it’s just the promise of a better tomorrow. Some of these promises will have to take shape in the budget.
What are the top priorities for the new government?
India must become more business-friendly. Ultimately, the country needs to create jobs for its growing young population. Who will create these jobs? More than the government, it is businesses that will create jobs. Businesses can only create jobs if the business environment is friendly. Nor can they sustain growth without creating jobs. So the government has to become business-friendly. All barriers should be removed. We need businesses to take more risk because it will create more jobs.
Will mid-cap stocks continue to outperform large-cap stocks for now?
It really depends on the company. The mid-cap group has been lagging for quite some time; even smaller. It must eventually converge. Big hats are currently overvalued. Investor appetite is limited at these levels. Most of the action is in the low-quality, low-cost segment. Smaller investors are clearly buying low quality stuff, thinking low prices. However, even if it moves into high valuation territory, the low quality will remain the same. This is where the whole game ends. Sure, high-quality stocks are expensive right now. But that doesn’t mean you should have junk in your portfolio. If you find quality at a reasonable price, buy with modest expectations. Such names are few and far between. However, even if you get 3-4 such ideas within a year, you can still make money. The challenge is to have patience and keep the investment. Filling it up would be a disaster, but if it works, you’ll get a bag full of stuff. High-quality investors may underperform in an active market, but will emerge better over the course of the cycle.
Can we expect an earnings upgrade soon?
Maybe 12-15% increase in income this year. As the economy recovers, sectors, such as cement, steel and autos, will pick up pace. Oil and gas can also contribute to earnings growth. Currently, corporate profits are contributing about 4% to GDP, which is near the bottom of the table. At the peak of a cycle, this number can go up to 7-8%. Assuming 13-14% nominal growth in GDP, it will double in rupee terms to Rs 220 trillion over the next six years. Now the question is whether the current profit of Rs 4 trillion will amount to Rs 8 trillion or Rs 16 trillion. If it maintains the current rate, it will amount to Rs 8 trillion. If it hits the upper end of the band, it will go up to Rs 16 trillion. If this happens and the PE multiple stays the same, the market will quadruple. Profits will shrink as soon as the economy moves from 5-6% growth to 8-9%. That’s why the market has the potential to go up to the stratosphere from here.