Raamdeo Agrawal, Group Chairman and Co-founder of Motilal Oswal Financial Services, is a veteran of the stock markets who has seen many a cycle in his long career. The author of an annual wealth report—which he has been passionately spearheading each year for nearly three decades—the 66-year-old believes that even though this is an election year, the political overhang on the markets has diminished. In an interaction with Business Today’s Ashish Rukhaiyar, Agrawal says that this is a fascinating time for investors to be in the stock markets because volatility has gone down as domestic investors, including retail, are providing huge support to the markets even as foreign investors have turned net sellers again in the current calendar year. Edited excerpts:
Q: How do you view the political overhang on the markets since we are in an election year? The state election results a few months ago did give an indication that the BJP is in a strong position…
A: The political overhang has diminished. While you cannot eliminate the uncertainty till the results are out, people have seen the trailer. The view one gets is that there is hardly any opposition.… [But] let’s not forget that… political parties will put in their best efforts for the General Elections. If you do a region-specific analysis, the view one gets is that the [Narendra] Modi government is acceptable in the North belt. What one has to wait and watch is what happens in southern India. Can they [the BJP] get a few seats from the South through [their] allies? Whatever they get from there will be a clear bonus for them.
Q: But how is the stock market looking at it? We keep hearing views that the BJP coming back to power is already priced in.
A: It is already priced in. But if the current government does not come back to power, then there will be a huge fall. There wouldn’t be any big gain if they come back to power. I would say around 80-90% of the expectation is already priced in. The probability of the BJP not coming back to power is very low. But even if the market falls, in a year’s time it will bounce back. The momentum is there due to stable policies.
Q: How do you see volatility going ahead? Foreign investors have turned net sellers in the current calendar year till date, though domestic investors have become a strong counterforce…
A: The ongoing retail equity revolution is one of the biggest economic events, and I believe this is the second revolution of India after the end of the licencing regime. Just imagine, there [are] 100,000 new customers coming to the markets every day. Which other industry is witnessing such a phenomenon? This was last witnessed in the mobile phone segment years ago, but even there the ticket size in terms of spends was very small compared to the ticket size in the markets. You have people coming with a few hundreds or thousands for an SIP, and you even have people who have lakhs and crores to invest directly or through the PMS route. The only catch is that social media is making us very impatient. We want to earn very quickly. But that is also the biggest opportunity for people like us. Because we have patience of 10-15 years. The biggest differentiator between now and may be 20 years ago is the patience among the customers.
Q: Would it be right to say that the retail equity revolution has made the Indian markets more resilient?
A: There is continuous buying by the domestic investors [and] because of that there is not much volatility in the Indian markets. People have more confidence now… markets will fall or rise in a single-digit range… Interestingly, there has been no change in the overall returns… The value of the market has gone up for the investor due to low volatility. Also, one needs to understand that there are three broad categories of participants in the markets—FPIs, DIIs, and promoters. Around 50% [of the universe of listed companies is held by] promoters and 20% are FPIs with the balance 30% with DIIs and retail. Now, retail and DIIs are buying, with FPIs alternating between being net buyers or sellers. But who will sell in such a scenario? It will either be corporates from the unlisted space, or follow-on offers from the listed space, or blocks from promoters or private equity. Because of this, the market is expanding rapidly. This ongoing equity boom is causing money to move from the secondary market to the primary market. There are so many public issues happening, then there are QIPs (qualified institutional placements) or blocks (selling through block/bulk deals).
Q: And you believe this would continue for some time?
A: It is like a party is on and it will continue for 5-10 years. If you look at the additions in terms of new demat accounts, there are around 3 million new accounts being opened every month. My guess is that around 25-30 million demat accounts will be opened this year as well. So, the next four to five years might see 250-300 million new investors... Till the time new investors keep coming in such numbers, you don’t have to worry about the… market. There will be no major correction unless there is some Covid-19-type event. Corporate earnings are growing, retail inflows continue and FPIs are not selling in huge quantum. Based on all these parameters, it is a fantastic time to be in the markets.
Q: New investors are coming to the markets but the equity penetration in terms of geography seems limited...
A: Maharashtra, Gujarat, and Rajasthan are like old blue-chip states from where investors have historically come in big numbers. But now we are seeing huge traction even in cities where there was hardly any penetration in terms of equity investors. There was no equity investment culture in many cities earlier, but now there is such a vibrant investment culture there.
Q: You have been coming out with your annual wealth creation study for nearly three decades. What are the changes you have seen over the years and what keeps you going?
A: There has to be dedication and passion. The processes are the same, but the markets have become much more digital and transparent. Information flow is massive. The landscape has entirely changed as far as the market size is concerned. And not just the market, even the size of the economy is changing and that would obviously impact the market. But we also mature over a period of time and every study takes me higher as it is a learning for me as well as we go deeper. We look at five-year data and then identify a theme.
The market is silently changing. Earlier, if you bought a low P/E stock, you would get good returns. But recent studies [have shown that] some of the stocks with the lowest P/E have given the lowest returns. The market is becoming more intelligent. It is not just looking at P/E, but also at growth-adjusted P/E. This trend started after 2015. In our latest edition, we also used ChatGPT for the first time ever.
Q: What were some of the key learnings of the latest study? PSUs, along with mid-caps and small-caps, have found prominent mention… you have said that mid-caps and small-caps can deliver hockey stick returns…
A: One of the learnings is that after two decades of sustained decline, PSU stocks are making a comeback. In 2004, 50% of all wealth created came from PSUs, but then it fell to near-zero, and it has again come back to 10-12%. It is a reversal of trend. The government is giving big orders in sectors like infrastructure, defence, and railways. There is ‘Make in India’ as well. As far as mid-cap and small-cap stocks are concerned, if someone is looking at 10-12x returns over the next 10 years, then he or she should not be buying large-caps, but [buy] mid-caps.
Q: You have also mentioned that management change is a key move prevalent among those that deliver hockey stick returns…
A: If a company is not doing well, then there should be management change. When there is a new management, there is new energy, new ideas, new thinking and new execution and it can create wealth. But one needs to keep in mind that managing a management transition successfully is not an easy thing to do.
Q: You have also introduced the concept of economic profit in the latest edition, and said that it is much more important than simple net profit. Can you elaborate a bit on this concept? And is this common globally?
A: It is a new concept that we have introduced in the latest study. In between, there was this concept EVA—Economic Value Added—that became popular but then faded away. While conventionally earnings imply accounting profit, we believe that economic profit captures the true profitability of a company and is a far superior metric. Accounting profit does not factor in the net worth, or the equity used to generate that profit. Simply put, economic profit is accounting profit less equity charge, with equity charge being net worth multiplied by cost of equity. Our study also showed that portfolios comprising only economic profit companies have a high probability of outperforming the market. It is not that it is globally unheard of, but it still not very common. But the market knows this and is smartly pricing it.
Q: Around two to three years ago, your annual wealth study focussed on digital companies. How do you see that trend, and is there a difference in the way one looks at digital companies and the traditional ones?
A: It is a fact that no other sector has expanded like the digital sector. But it is also a fact that they are yet to achieve profit and then will come real economic profit. For digital companies, there is a huge fixed cost on the operating side because they do not have any physical structure. There is an upfront cost associated with customer acquisition. You may have millions of customers, but those customers are acquired through digital channels. That is a cost. And, hence, we are ready to look at those upfront losses. That is a fundamental shift (in the way one should look at digital companies) with a faith that in the next two to three years, they will make tons of money; and once they start making money, they will be comparable with the biggest and the best companies.
@ashishrukhaiyar