By Ruchit Purohit & Malini Bhupta
Corporate profits are booming both globally and in India, and it is the foundation of markets. Currently, even if the Nifty-50 index hits 15,000 amid the volatility, it will set the stage for a 20% upside for the next year, says Raamdeo Agrawal, chairman & co-founder, Motilal Oswal Financial Services, in an interview to Ruchit Purohit & Malini Bhupta.
Geo-political tensions, inflation shooting up, and rate hikes in March — how do you see these factors impacting markets in the near- to medium-term?
Last two years have been very good for markets. February was the all time high and then in March 2020 we made the bottom. Since then for 20-22 months, we had a one way run and it was further aided by the retail participation worldwide. In India particularly, the demat base went from 40 million to 80 million in December 2021, which was unprecedented, and the active accounts went from less than 1.5 crore to 5 crore, which shows that actual participation has been 3x.
If you see the weekly expiry on the NSE, it is happening at $3 trillion. All of this is linked, somebody is underwriting, selling in options, then F&O, then cash, which is all interlinked and so the market has expanded and it is aided by the bull run as liquidity was there and corporate profits also did well. After two years of a good run, clouds are coming. The response to Covid was monetary with central banks printing unprecedented money. Once the unwinding happens which way the pendulum will go we do not know. Earlier, inflation was under control when we entered Covid, however, right now inflation is very high.
Powell had earlier mentioned that inflation is transitory and monetary action would not be that harsh, however, they later figured that it has been climbing, and if the next reading is 8.5, they will have to move and then it will start becoming structural and employee cost and other factors will touch the roof.
My sense is that corporate profits are booming both globally and in India, and that is the foundation of markets. Bond yields are likely to move up and hence multiples will be challenged. The market’s PE will contract. You will get the first signal when FPIs start buying. In the last two years they have sold $20 billion and we don’t know how much more is remaining. There are four factors for markets: Corporate profits are headed up and interest rates are headed up and so multiples are headed down.
Third, retail participation is increasing and so also the long-term outlook for FPIs remains positive, when they turn, you will see stabilisation in multiples and earnings will keep on growing. Even if markets fall to 15,000, it will set the stage for 20% upside for the next year. Amid all of the FPI selling and movement in bonds, a multiple of 17-18 is viable and current prices can be defended at the index level.
Markets are used to cheap money and QE has to be unwounded as it has pushed up asset prices even when the corporate profitability was in single digit. What will be the impact of this on markets?
Honestly, no one knows what impact will it have, even US Fed doesn’t want markets to collapse, nor they want a recession. Everybody is looking at what is happening as of now. You see the Russia issue now, no one will stand against them just to avoid a full-fledged war. However, what I know is that the world will continue to work and markets will continue to witness corrections, however, no one knows how much will it correct. On the index front, the fair number from my view is 17,000 to 18,000.
For the long term, multiples of 17 to 18 are sustainable in India as the growth potential is very high and the China+1 policy is helping. Further, the geopolitical concerns will also result in inflows and trade flows to India. Despite all of the negatives across the globe, the world continues to become prosperous everyday and the $100-trillion economy now will turn to $200-trillion economy in next 10-15 years. A bulk of this will come from developed nations, however, India is likely to go from $3-trillion economy to maybe $10-trillion economy.
All these factors will lead to growth in business and it will further boost corporate profits, resulting in a rally in the markets too. Right now we are in a corrective phase as markets saw excess due to some new-age companies coming in the last year like Zomato. However, these companies are wonderful and will become very large. The start-up culture is here to stay.
After the paytm stock tank, we have heard that all the PE rounds they did earlier escalated the valuations and retail has suffered due to this, what is your view?
Retail also fell for it and got sucked into it by supporting them. In our wealth study report, we have stated about hype cycle and these companies have created hype but are yet to deliver profits and cash flows. I feel that the worst is not over for these new-age tech companies.
On the LIC IPO, usually the insurer bails out the other IPOs but who will do it in their own case?
They need to price it smartly.
India has always enjoyed premium over other Asian peers in the last 10 years, but the valuation seems to be narrowing and other peers have outperformed India in the last couple of months, do you think this a long-term trend?
It will continue to be perpetual. India is among the very few big countries. We have a population of 1.4 billion people, large number of corporates, higher exports and more engines opening up with the China+1 policy in the play. The biggest growth engine is going to be exports. The amount of scale that India can reach is unlikely with other countries. Textiles, chemicals, and IT are doing well. Additionally, entrepreneurs and corporate governance remains better in the country. All of these factors will push India’s premium among other countries. Overseas investors will continue to be long-term bullish and the allocation of overseas investors has to eventually come back to India. Right now, they are reducing their allocation in the short -term. However, when they turn net buyers, the retail will also join the party. Hence, getting the position back will be difficult. My advice for investors in such market conditions is not to sell but to hold positions as no one knows when the correction will halt.
In IT companies, growth has been in single digit and post the pandemic the growth trajectory has changed but have they fully transformed from per hour billing companies to transformation partners?
They are still per hour billing companies. Infosys, Wipro, and TCS are still services companies. Even in the wealth study of ours, we stated that, there are two types of companies, one is companies whose business model is currently good and profitable but they aren’t digital. On the other hand, there are digital companies like Pharmeasy, Zomato, who are fully digital but the business model is weak and making losses. The future lies in the companies like MO, Reliance to become digital and digital companies to become like us. However, amid all of this, everyone in the race needs someone like Infosys for services and hence these companies will remain relevant and requirement and demand for these companies will go through the roof.
The Adani group companies, you had it in your wealth study too, but there is no coverage or tracking of these companies by institutions — what is the miss over here and where is the problem?
Less said better. I can’t explain how companies in the group can sustain multiples of 103 and 82. However, the company’s financial looks sound, the stock prices can be a trouble but not the financials of companies.
Going forward, how do you see the Index change in the next five years?
Whenever the big trend happens, in the short term it is overhyped, but in the long term it is different. In 1991-92, when the IT came, there was a lot of hype but then it collapsed in 2000. Back then, the total corporate profit from IT was 1%, today it is 25%, and we will see similar change in digital companies and it is very consolidating. These companies will create huge monopoly and India’s digital movement is starting now and all these companies will become index candidates in next two-three years.
What happens to a lot of existing companies on a disruptive space? Lets say EV?
The migration from IC to EV is a disruptive migration and will give a birth to large number of EV companies. The transportation will remain and 20-30 lakh cars are to be sold every year, out of which how much is EV is not something we don’t know. On the other hand, EV remains expensive and hence affordability has to come in the space for masses to buy these cars. The existing will remain and will continue to sell petrol and diesel cars and the business model is sustainable, however, I am not sure about the stock price. The transition will be painful, but let me tell you there is no car company like Maruti and everybody has a plan going forward. Even with the current predictions, by 2030, 30% of the total production will be EV but 70% will be IC. In my view, India should produce 6-7 billion cars by 2030 and even if 10% of that is EV, it will be a big thing.
What about aviation as a sector in India?
Its good and now Air India has gone to Tata, so there will be a sensible play between top two guys. IndiGo right now is the uncrowned king with more than 50% market share. However, the sector will continue to remain as volatile as in the past.
In Fintechs, globally there has been a negative approach to banks amid new-age technology, do you see BFSI being challenged?
I don’t think. One should see the power in the boardroom. Banking is not about fintech, it is about risk underwriting — either you know or you don’t know. So the main business is lending and in Fintech it is just about lending small amount of money, even to ones who don’t deserve it. So these are likely to get wiped away in one storm because they are unsecured. In a country like India, where people are poor, what will you even recover? So banking is all about underwriting and they are also using technology. SBI is the best fintech company I will say. You go and ask people if they want to take money from HDFC or some other company? It will evolve and there’s no disruption.
