Raamdeo on the place to search for new wealth creators

Posted On Oct 7, 2021 By admin With Comments Off

“Value migration from public to private sector organizations for the approval disbursal is happening and that is going to give a massive boundary to the banks which can do well, ” says Raamdeo Agrawal, Chairman, Motilal Oswal Financial Business. When we talk about history, the big variable part is inflation on one side and interest rate fluctuation on the other. That is how world markets have given double toe returns. We are staring at a different environment of excess liquidity and perhaps low-toned interest rates. How does future figuring and acceptances deepen because of that? Interest rate has played a major role because till 2000 we are talking more like doubled digit or 12 -1 3% -1 4 %; 15% used to be the NCD bonds. Then we talked about 10 -1 2 %, then we talked about 7-8% and now corporates are getting money at 4-4. 5% too. So there is unprecedented change in the cost of money. Even inflation has moderated in India to around 5-6 %. The marketplaces are very world-wide, Europe is at zero or minus, America is at about 1.5% 10 years newspaper and Japan is again flat. So the issue is that in a globalised environment, the money is pouring in from all regions of the world. The forex balance has gone to $ 650 billion and the interest rates cannot be very much misaligned. If the US 10 -year is at about 1.5%, we can only have 6.5% or 7% as your 10 -year paper. So if US proportions do not go up greatly then we look back at 6-7% interest rates for a long time and that is a fundamental shift on how we appreciate proliferation because this is a growth economy. The primary economist is saying that we will grow for the coming decade at 7 %. He expects the economy to grow at about 7% for the next eight, 10 years and so with 4-5% inflation, we are talking about 12% nominal GDP and the corporate earnings will grow at 13 -1 4-15 %. At 7 %, 6% kind of a discount rate, we can see the growth of 12 to 15%. So having an index PE of 25 -2 7 is not out of line. When you say this bull market cycle is different, what is so different? Every time the market cycle converts, you have also changed as an investor. Ten years ago you would have even got close to investing in a company which was loss make but now you have invested in Zomato? Yes, so “thats what” I am saying I am increasing the circle of competence and I could be wrong, I am not saying that I have become master of the game or anything like that but, essentially the growth capex is coming from P& L not from the balance sheet and that has to be understood. When one looks at a loss-making P& L, in a number of cases, they are actually stirring losses. What they are saying is that is the scene and they will always be impelling losings. One has to figure out which are the companies that are showing losings right now. But they have the potential to construct billions of dollars of profit in the next four, five years, six years old. One has to differentiate between the companies which will never prepare profit or will make very thin profit and the companies which are actually destined to make a lot of profit because they are not fundamentally addressing a$ 3 trillion economy, they are addressing a $90 trillion global economy and that changes opportunity size for these companies. We have to go and see in our due diligence whether these guys are competent and have the business model which is going to match the expectations. If I look at your far-famed wealth creation study — Infosys, Wipro, Kotak Mahindra Bank, HDFC — time and again these are the consistent wealth developers. Since you are talking about the digital start up world coming in, hypothetically if this is the wealth creation study of 2030, do you think the specifies now would be very different because between 2010 and 2020 the reputations have not changed? A spate of new identifies has now come. There are two categories; one is the largest wealth builders and the fastest wealth creators so the larger set has not changed much, I signify the changes are slower, they have changed but they are slower in the changes. But in the most wonderful, every time it is a different colouring. That indicates the most wonderful in 5 year. The fastest fortune builder firms are the companies which are flavour of the decade or flavour of the time. So, that flavour has been varying. If you go to see its first year 2000 study, almost all of them are tech companionships. The 9/10 fastest growing fellowships were the tech corporations and commonly the mortality rate in the fastest wealth creating corporations is highest because you time cannot sustain 200% compounding, 100% compounding for 10 years. 100% compounded for five years will be like 100 ages. The question is that the level of stretch in valuation is very difficult to justify by fundamentals and when people realise that it is not possible, then things come hurtling down. So, this is going to get repeated in digital corporations. I have examined it happen with the soya corporations, tech companies and real estate fellowships. “Its time” for digital companionships. In the past, you have invested in Asian Paints, HUL, Nestle– all classic customer dealerships, immense ROCE corporations. They is not elevate capital. If one makes a basket of top three consumer corporations and top three buyer tech firms, which basket will create more wealth? Second one. Why do you say that? Because the opportunity size is so gigantic. Three global buyer tech fellowships are the best example. The pace at which the consumer tech corporations will encompass the whole country or the whole world, can’t be does so with the old shopper companionships. Old consumer fellowships has so far been expanded their delivery and their growth rates are very close to the normal GDP growth rates. So they will struggle to grow even at nominal GDP. For all these specifies, double digit growing is very aspirational — 10 -1 2 %, 13% which is basically your nominal GDP growth rates; even “thats been” incited with the help of some kind of inorganic possession. These companies are very competent with massive free cash flows. Almost 100% of profit is free cash flow so there is a tremendous value creation for the stockholders. But these companies are available at 80 -9 0-100 PE multiple. So they will make as much as these three tech business but today the growth in the profits from a humble Rs 100 or 200 crore to maybe Rs 2,000 crore, 5,000 crore will happen in digital companies and not so much better in the old-fashioned fellowships. Read likewise: Sell will correct and mini accidents are likely: Raamdeo AgrawalMy impression is that the aged firms will continue to keep going at 12 -1 5 %, whereas these companies will be increased at the rate of 40 -5 0-60% and maybe even 100% for a few years and then operating leverage will kick in and they will grow slower. The next 10 times are more tropical period for the digital companies. When one invested in the IT sector, the idea was to buy a application fellowship because the sector did well but Zomato’s business model is different from Nykaa and Nykaa’s business model is going to be very different from Policybazaar. You can call them digital companionship but how does one understand which is a good digital company? One of the new challenges with the digital firms is that they are different. Every single company is different. Two corporations are not the same at all. Zomato is different from Nykaa and Nykaa is different from some other corporations. They are addressing exceedingly niche opportunities and since they always conduct in the digital infinite, very quickly there is consolidation even while emergence is there. So there are typically “re going to be” two or three actors. It is almost like a winner takes all in that particular space. They are going to be very unique and right now they will be doing it in India and they have a possible to go global likewise. Once the framework is clear on how to look at digital corporations, then one has to go to the specific company and try to fit that corporation to that fabric and figure out whether it fills your objective or not. You have feed a portfolio which by and large is tilted towards financials- private banks, insurance. The marketplace is telling us that financials are not part, high growth companies are not going to banks for asset. UltraTech Cement wants to do capex but they are generating so much of cash flow they do not go to the bank. Same is the case with Tata Steel. What happens to fiscals? For one, private capex will start. There are a few firms like Tata Steel and they have a terrific cash flow for a few years. They is not need bank substantiate but they are the companies which actually took all the credits in the last 5-7 years. There is likely to be other segments like infrastructure or cement companies and a lot of consumer corporations. So, I do not know from where that loan requirement will come but as the economy picks up, if as a country we can deliver 7% to 8% the highway China does it in whatever we do, rest all will be taken care of. There are not many growth economies the size of India. When we go from$ 3 trillion to$ 6 trillion in the following seven, eight years, it will require Rs 150 -1 60 lakh crore of approval. The form could be different but we will need credit. Economic development is on the back of credit intensity. Ascribe ferocity of incremental$ 3 trillion will be far higher. Now where are the banks which are going to do it? There were five, six banks which can underwrite and even the government is saying now we want to fold up all the PSU banks into four or five SBI type large banks. So five PSU banks and five private sector banks — all in all we will have 10 banks which will subsidize maybe another Rs 110 lakh crore usefulnes of credit, which is a huge opportunity. So importance movement from public to private sector organizations for the approval disbursal is happening and that is going to give a big shape to the banks which can do well.