'Successful investing is a piece of art' says Motilal Oswal’s Raamdeo Agrawal

India is growing at about 10% compounded, and you have to figure out which businesses are able to get a disproportionate share of the pie, says Raamdeo Agrawal.
India is growing at about 10% compounded, and you have to figure out which businesses are able to get a disproportionate share of the pie, says Raamdeo Agrawal.


What is hated is where the biggest opportunity lies, says Raamdeo Agrawal of Motilal Oswal Financial Services in an interview to Mint.

Successful investing is a piece of art," says Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services. Agrawal, and his team, recently brought out the 27th edition of Motilal Oswal’s Annual Wealth Creation Report tracing India’s successful companies. “There’s a lot of liquidity, the economy is bigger, and the opportunity size in India is growing at 12% every year. You can’t deny it," Agrawal said in an interview. When asked about investment opportunities in a market where valuations have soared, he pointed to a time-tested market wisdom: “What is hated is where the biggest opportunity lies". Edited excerpts:

At one time, the company that was constantly featured in your wealth report was Hero MotoCorp. Much has changed in your latest wealth creation study, which is in its 27th year. New companies have come in, and new business models.

Our problem is markets have become so expensive compared to what we have seen. In the 1990s, I distinctly remember, I used to stay in a building where junior Asian Paints executives used to stay, and I was pally with all of them. I knew it was a great company. But my parameter then was to not buy beyond 15 P/E. It used to be trading at 19-20 P/E. I said to myself—let’s buy at 20 P/E. By that time, it became 23-24 P/E. I was evolving to some extent, and the stock was going higher and higher. I remember I tried to buy a 23-24 PE, and it came up to 26 PE. One of my dear friends suggested we wait until the stock hits 23 PE, and then we’d buy. But we never saw it come down to that valuation, and now it’s 100 PE. So, we don’t know how to justify this 100 PE or 80 PE (Asian Paints’ valuation today) because we have seen 15-20PE. The guys who have started investing now have seen only 50-60 PE, so it’s easier for them to reconcile.

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If you had traded in real estate, you’d know that something which cost 150-200 per sq. ft now costs 1.5 lakh a sq. ft. It will be very difficult for somebody who bought at, say, 150 to buy at 1.5 lakh. Of course, there is inflation in realty, but in stocks, inflation is not the issue. That for whatever given earnings, you’re paying the current earnings at the current price.

But you’ll argue that PE is historical information. In that sense, if you look at, say, other markets, maybe the growth is limited, whereas here, the scope for growth is much more.

India is growing at about 10% compounded, and so you have that playground which is just growing at 10% compounded. In that, you have to figure out which are the businesses, which are the businessmen who are able to get a disproportionate share of the pie. HDFC Bank came into existence in 1995. At that time, GDP must have been about $250-300 billion. Today, the GDP is 10X of what it was. But during the 10X growth of GDP, a 1,000 crore company has become 9 trillion—so Asian Paints is up 900 times while GDP is up 10 times.

If nominal GDP is growing at 12% compounded, it will double every six years. That’s the power of compounding. From around 260 trillion, in six years’ time, it will be upward of 500 trillion. In that bigger pool of rupee economy, who wins? Who loses?

And that’s where you have to visualize which businesses and companies are going to have a great time. Like, say, in the banks, private sector banks are going to be better play in the next 10 years than PSU banks. In the near term, it is different, but per se, the competence is on the side of unlimited tech spending and leadership. And, so, in banking, my sense is the private sector will win, and within the private sector, it’s the likes of Axis Bank, HDFC Bank, ICICI Bank and Kotak Mahindra Bank where you will have to make the call. Which one of these is going to be a really superior growth machine, a superior money-making machine—bigger and faster? That’s the game of wealth creation.

So how do you adapt to these new circumstances? You mentioned Asian Paints.

I can choose from 2,000 stocks. There’s a lot of liquidity, the economy is bigger, and the opportunity size in India is growing at 12% every year. You can’t deny it. See, if my GDP today is 260 trillion and grows to 300 trillion, 40 trillion has to come from somebody. What is the job of the entrepreneur? To win over the given circumstances and make money. Money is not lying on the table. Notwithstanding several odds like the Sino-India war, the 1971 war, and bankruptcy in the early nineties, the economy has grown slowly but steadily. Now, we are on a much firmer footing. I think for the first time after 30 years, we have a very stable and confident political management who have the ambition to make India an advanced economy, meaning a per capita income of at least $10,000 or 4X-6X in the next 25-30 years. That implies 8-9% GDP growth as the world average would also have gone up by then too, say, $15,000 per capita. I think we are shooting for 7.5-8% growth for the next 25 years. One of the biggest benefits of this kind of growth is the currency benefit. Japan was 325 yen to the USD, it appreciated to 70, and now it’s 100-110. 3X gain came because your currency became stronger. That will come at some point in our case, given the growth potential.

Where do you see the next big opportunities?

What is hated is where the biggest opportunity lies. What was hated in the last five years—PSU banks, where half the opportunity is over, and maybe half is left. Now, digital is getting hated; it is half hated. It will go to its logical conclusion, and nobody will even like to talk about it.

Are any other sectors on your radar?

Whatever is unpopular; Unfortunately, the market is not that cheap right now, so it’s not easy to reel out. I’d say OMCs such as HPCL, BPCL, IOC and all PSUs are very cheap. They made 10,000-12,000 crore loss in a single quarter. Now, the government will make sure they make that much profit. But nobody believes. Look at the turnover of HPCL and BPCL. They are 5-6 trillion. But these companies have become unreliable, incurring a profit of 10,000 crore and making losses of 10,000 crore. That unpredictability has destroyed the value. All their losses came to the shareholders, and that destroyed their business model as they were not allowed to raise fuel prices because of its link to inflation.

FIIs have been selling. Will they continue to do so?

The market at 22 PE is in no way cheap …the 10-year average is 17-18. FIIs are 20% of the market, constituting a large portion of the index. All the liquid large caps are with them. You cannot ignore how they are thinking. They think that India is trading at a 50-60% premium to EMs. India is 3.5% of the global market cap, while the institutional allocation is probably 1%. India is headed from 3.5% to 5% of global mcap. Now they are selling, so they will go below 1%. There are a lot of catch-ups to be done. If India in a sustained way starts growing at 7-8% (real GDP) and corporate earnings start picking up, they have no choice but to buy India. So, FIIs have to be net buyers so long as we do well.

Has retail provided them with exits?

Obviously, for retail, there is only one market, called India, but for foreign investors, there are multiple markets. The increasing retail presence, providing liquidity to entrepreneurs, is a silent revolution. In 2020, we had 40 million demat accounts, and today, this has swelled to 110 million – every month, 2-3 million customers are joining in thanks to their digital onboarding. Very sustainable capital is coming in from retail. This capital is never going to go out. This equity inflow gives you risk capital. Once you have risk capital, then you have the banks who will give corporates the debt. What was the problem of post-2008-09? In the new projects, corporates had actually not brought any equity. When the shocks came, they didn’t have anything to fall back on. Today, there is no borrowing and too much equity. From hereon as the development picks up, you will have more equity capital and very rational lending and discipline. More than the bankers, the corporate players will also be very disciplined. For a business to grow, you require opportunity, entrepreneur, equity and debt.

How hard has investing in the market become with the influx of new players alongside the institutions?

Successful investing is a piece of art. Now the job has become more complicated because of multiple players coming in – very sophisticated FIIs, large family offices, smart investors with data analytics etc. coming in. So, you’re competing in the same bucket. Where was the data analytics 15 years ago? There was no data. Forget about the analytics. Ninety-nine percent of the market has become options, with an average daily turnover of derivatives being around 130 trillion and cash of around 50,000 crore.

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