Raamdeo Agrawal, MD of Motilal Oswal Securities believes that markets are looking reasonable, post correction. In his view, valuations are looking more reasonable at 15-16x. He states that interest rate increase drains short-term liquidity from the equity markets.
Agrawal expects midcaps to remain at a significant discount to large caps. He informs that he would look at buying cement stocks for now. According to him, some realty stocks have over-corrected, and he expects these stocks bottoming at current levels.
Excerpts of CNBC-TV18's exclusive interview with Raamdeo Agrawal:
We have got knocked back a couple of 1000 points - how have you been approaching it?
I am feeling somewhat better because there was a feeling that this market had become very narrow. In any case, for the last 12 months, I have not done well overall in my portfolio.
So there was a feeling that markets are going up but one is somewhat disconnected from the market. So in any case, it was not that euphoria which we had in May-June last year. So since it has corrected, I think at 15-16 times, next year, things are looking much more reasonable. The reasons of correction could be anything but I don't see any threat to the current earnings profile of the markets.
How will it shape up for the next few months? Are you getting the feeling that the poison is out of the system, or will we have to live with some more difficulty as before the market find its feet?
I don't know, but there are two things. One is that our interest rates have significantly moved up in last 3-4 months from 7-7.5 per cent to 9.5-10 per cent. For even 3-4 years, I think SBI is giving 9 per cent plus kind of interest rate on deposits.
I have heard some numbers, which are even about 10 per cent for some deposits. So that clearly takes away a lot of short-term liquidity from the market to fixed income. So even if there is a recovery, it will be somewhat muted because people are not so gung-ho to get on to the equities so immediately.
Secondly, if you look at the budgetary proposals, our savings rate has gone up from 24-25 per cent to as high as 33 per cent in 2005-2006, which could be as high as maybe 34-34.5 per cent for 2006-2007 on the back of huge corporate performance.
So that leaves a thought that growth is almost structurally given to us. So in that kind of background, I would think that the return in the next one year would be more like what is happening for 2006-2007, which is more like anywhere between 10-15 per cent plus.
What is your sense - is the market correcting simply because of global cues/ apprehensions, or do you think the market collectively feels that there could be a little bit of a growth slowdown somewhere in the end of this year, which is probably not getting priced in at this point by analysts?
Growth doesn't seem to be slowing down. In fact, the acceleration is so much that if it gets a little muted and becomes much more sustainable, it will last much longer and it will be a much better quality of growth. So I don't have much concern on the growth side. But inflation is at 6.7 or 6 per cent and government is going overboard in terms of trying to kill inflation in the short run.
So I think those things unnerve the people and you don't know what else is ahead - whether there will be a cut in cement or steel prices and how many more cuts are going to come. Typically, at this point of time, these cuts actually hurt the analysts' projections to some extent.
So those are the concerns. But come April-May, I think the calculated inflation will be much more moderate around 5 per cent or little less than 5 per cent. I think that should change the entire psychological pattern in the market.
How much do you think growth can get tampered and would you have to adjust your Sensex earnings?
Post Budget, we have seen that Sensex earnings are not mentally impacted. But typically, we have seen that markets fall first and then the earnings fall 6-9 months later because the market somehow has a much smarter mind on these kinds of things.
My inner sense says that in terms of earnings and corporate performance, we are running at full potential, as the Finance Minister said. The issue is of removing the supply concerns rather than demand side. So the demand side is not so much of any issue, it's how much more what we can produce in the system. So it is much more doable at this juncture, I would say.
What's the problem with midcaps - you made the point of portfolios not doing well for the last one year; they continue to lag the big indices. When will it catch up because for the last 6 months, we have been hearing now is the time for midcaps to finally start outperforming. A clutch of them do, but as a universe, they are still not creating great wealth for portfolios?
One must understand very clearly that midcaps would trade at a significant discount to the largecaps, more particularly in challenging times like now. One year ago, in the golden rally of midcaps, I think midcaps had become more expensive than largecaps. So that correction had to happen. When you get into this kind of correction mode, it gets overdone and from there, again the rally starts.
So one doesn't know when it will happen. But the performing midcaps, in cement and many other stocks, one had suffered very heavily despite terrific corporate performance. But in investing, you don't know about the precise timing.
For instance, Birla Corp is one stock which underperformed the largercaps within the same segment. It has come down from 11-12 PE multiple to more like 5 PE multiple and the performance is much better than even what I thought. So it is all a problem of the so-called market segmenting the stocks between midcaps and largecaps. I don't have any clue when exactly this rally will start in midcaps.
When we spoke after the correction in May, you said you weren't sitting on too much cash, so you didn't get too many buying opportunities. Are you getting that now and where would you start looking first?
Unfortunately, the situation is the same even now - in the sense that I had about 4-5 per cent cash and in the first flush of decline, I ended up buying. So I don't have any cash and whatever little is there, I may go out and buy some more cement stocks. In any case, you have not made money on all midcaps, whether it has corrected or not corrected, didn't matter much.
How about Hero Honda? It is not falling too much anymore. On bad days, you can actually see a little bit of buying coming in between Rs 650-700. What's happening there?
If you look at the February numbers, in motorcycles, they have become almost 54 per cent of the market, which is one of the reasons when you try to come back from 44-45 per cent to 50-52 per cent. As per the game theory, if number two is willing to give up the margin, number one doesn't have any option but to surrender the margins.
So that's what has happened and my sense is that pricing, as far as the stability of margin enhancement is concerned, is clearly a function of what both the players want to do. If Hero Honda doesn't want the margin to be higher than 10-11 per cent, it will never go up. Even Bajaj cannot take the margin higher, and if Bajaj doesn't want the margin to be higher, then Hero Honda also cannot take it.
Where do you stand on the real estate debate? Do you think these stocks have reached attractive valuations?
I think some of the stocks have over corrected. There could be some kind of bottom formation happening from here, and even the sense will prevail upon them. When the markets were going up everyday, we used to hear that a particular company has a certain number of acres in its land bank and suddenly now, it is not visible. So in May-June last year, it was the retail excesses in the market. This time, it looks to be a corporate excess in terms of all these companies announcing so many earnings enhancements stories by the day.
A quick word on FMCG where stocks like Lever and ITC have collapsed but yet they are not seeing any meaningful recoveries. So where do you stand on those?
I was asking this question from few marketing managers. The economy is going at 14-15 per cent in nominal terms and 9-10 per cent in real terms. Our great FMCG companies are finding it difficult to even grow value terms in double digits.
One of the things, which was coming was the cellular phone handset and the expenditure on cellular bills is working out about 2.5 per cent GDP which was 0 around 4-5 years back. Nowadays, it is becoming bigger and bigger of the disposable income at individual level.
So I think somewhere very clearly the savings at a household level has not changed significantly and 2.5-3 per cent of GDP going into that, its clearly telling the disposable income of the individual, so somewhere the FMCG is suffering from that but my sense is it should bottom out from here in terms of growth rates.
Isn't that a bit counterintuitive - if you are bullish on so many other segments in the economy and you are saying that growth will not be pinched, disposable income will only come down further once interest rates go up, EMIs and virtually everything is going up and to top that, the mobile bills you spoke about - what makes you pessimistic then on FMCG, which is probably the least discretionary item in terms of consumables and optimistic about a whole lot of other things which a family consumes?
I don't know. I am not able to rationalize. The growth rates in FMCG, pharmaceuticals and growth rates in most of the mass consumer products whether it is motorcycles or FMCG, are not connecting with the current state of the economy and we cannot go on like this for a very long time. So my sense is that we will pick up and when the low growth is built into the price, I think that will throw a good opportunity for investing. But one wants a very clear view of the future, which I at least don't have.For more such reports, log on to www.moneycontrol.com
