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Motilal Oswal Financial Services Ltd has come out with its 25th Annual Wealth Creation Study, in which it seeks to highlight fastest, biggest and consistent wealth creators of the past 25 years on Dalal Street along with a comprehensive checklist for bottom-up stock picking. The company’s chairman Raamdeo Agrawal talked to Mint Money on key findings of the study, market outlook for 2021 and the expectations from the upcoming Union Budget. Edited excerpts:

What were the key findings of the 25th Annual Wealth Creation Study?

There were only 100 companies that beat the Sensex’s return of 9.2% in the last 25 years. This shows how difficult it is to be successful on a long-term basis. But the good thing is that a lot of companies got listed along the way after 1995. These new companies now make up as much as 50% of the current total market capitalization. This proves that you will keep getting new opportunities.

However, the journey of the past 25 years for the Indian corporate world has been quite challenging. Just 9.2% return in 25 years while accounting for an average inflation of 6-7%, meaning a real return of 2-3%, is not good.

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In the last 25 years, the fastest, biggest and consistent wealth creators belonged to different sectors—IT, energy and banking, respectively. Will there be a new sector that will emerge in the next 10-15 years?

To look at what kind of sectors will emerge in future, we looked at China, which is at least 10-15 years ahead of India in terms of the size of the economy, digitization, per capita income and demographics, among others. There, we found that out of top 15-20 companies, more than 50% are digital, while in India we don’t even have one digital company. That is the new frontier that will open up. There are many such companies in the private equity stage, but many large ones are going to get listed, and they will present new opportunities. At the same time, some commodity companies such as cement and steel in cyclicals might make a comeback.

Business-to-consumer (B2C) companies also look interesting. There are two kinds of businesses—B2C and business-to-business (B2B). The consumer-facing businesses are almost two-thirds of the entire corporate population. I think two-thirds of the future winners will be from consumer-facing companies.

The study showed that corporate profit-to-GDP ratio is at all-time lows (2.3%) and the Sensex earnings per share (EPS) for FY14-20 has remained flat. How should we read this data?

In 2002, when the corporate profit-to-GDP ratio was at around 2%, it was so depressing that we thought we are in the wrong business. Today, we have come back to the 2.3% level, which according to me is the classical bottom. Next year, India’s GDP is expected to grow by around 15-20 lakh crore, of that there will be no incremental profit to the corporate side on an aggregate basis. The government has not created a very conducive environment for the companies to make money. It might be companies own fault as well. But atmosphere is not conducive on the whole for the companies to make money.

However, things will improve when the growth will go back to the 10-12% levels in FY21-22 and the revenue base will increase. My sense is that this is the bottom, and the corporate profit will go up from now on led by telecom companies.

The price to earnings (PE) level is close to all-time highs. Would you recommend a cautious stance for the next year? Also, is it time to take some money off the table?

If earnings are going to grow at 30-35% next year, then the PE levels don’t scare me, but if I believe that earnings are not going to grow from here on, then it is better to sell stocks and go home. However, my style is not to take money off the table even at 6,000-7,000 or 12,000-14,000 kind of levels. Right now we are in an upward trend. Last year Nifty50 was at the 12,500 and right now we are at around the 13,500 level. I don’t think this is the time to turn away from the market.

Foreign investors are bullish even as domestic investors are selling. Do you see this trend changing anytime soon?

It will change and it will shock people. One of the biggest themes right now is that the global money printing press is on and the cost of liquidity is zero because inflation is not there. If global inflation starts raising its head in a serious way, then the party will be over. We are in an unchartered territory. Everybody talks about V-shaped recovery in the economy, but nobody talks about V-shaped recovery in inflation. This is my biggest worry.

How would you sum up market’s journey in 2020?

We have seen the hell as well as the heaven in 2020. This was a year when we saw all-time highs and a massive slump. I have never seen getting elated and getting depressed about the market within a short time. It has been a humbling experience in terms of how incompetent or incapable we are in predicting the markets.

What would be your advice to the investor entering the market right now?

New investors need to go through their own toil, because if we are finding it difficult to beat the market then imagine how difficult it will be for the new investor. They can pick either choose to pick stocks on their own or can go for mutual funds or systematic investment plans (SIPs), which are more for an evolved investor.

But it is tough to make a lot of money in this market and it will be very competitive for a new investor. He or she has to be smart and remain below the radar and must focus on companies where institutional presence is not there.

What are your expectations from the Budget 2021?

The government has been setting expectations, but it needs to build the infrastructure further. They must come with innovative ways to find resources and not just get bogged down by fiscal deficit numbers. We are close to $600 billion in forex reserves. We are sitting on a pile of cash, with more money waiting to come in and this is the time to take bolder steps.

The government must come up with a clear road map for achieving the $5 trillion target, and they must refrain from changing this goal in anyway. Without major infra spending, we won’t be able achieve that goal.

All in all, this will be an interesting Budget and I will look for a clear road map for achieving the $5 trillion target.

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