'I don't believe we are anywhere near a crash': Market Guru Madhu Kela

Market Guru Madhu Kela has said the ongoing rally in the markets is the biggest wealth creation opportunity he has seen in the last 30 years. Speaking with Business Today TV's Udayan Mukherjee and Aabha Bakaya, the ace investor said he sees no signs of any event that is pointing towards a crash in the market. Here are the edited excerpts:

Q1. I must begin by asking you how you are feeling about the market right now because it's been such a tremendous rally. Are you feeling comfortable, or like many people beginning to feel a little uneasy about how quickly we have come up?

Madhu: This is the biggest possible wealth creation that I have seen in my career in the last 30 years. This is huge in two terms, the quantum of wealth being generated and the time it has taken for the same. In the last 18 months, the global markets have seen $60 trillion of wealth creation and India has seen $1.7-1.8 trillion, this, in the backdrop of $35 trillion of new money that has got printed in the world. Investors are now worried about the possibility of a crash. I would say that after such a steep rise, a correction is bound to happen in an orderly manner. So, the market can also see a correction in the time to come. The reason for the correction can only be assessed after it has occurred. I would say, I do not believe that we are anywhere near a crash. I don't see any such event as of now that is pointing towards a crash in the market.

Q2. Could the composition of the rally be changing now? Over the last few days, it is quite evident that the expensive part of the market -- stocks like HDFC Bank, Asian Paints -- are moving much further ahead, but the value part of the market you know like Coal India and NTPC have started joining in. Do you see any subtle alteration in the journey?

Madhu: I am quite positive and bullish on the value part of the market. This is because they have been ignored for a very long time. I have not seen an appreciation in many stocks in the last 10 to 15 years. While few companies have continued to do well, their valuation has been compressed. The Indian economy is in a cyclical uptrend.

Globally, a lot of money is being printed and the interest rates are at a very low level. It is only natural that money will pour in India, whether it comes through FDI or FII flows or the private equity route that we have seen in the last 12 to 18 months.

When we have a cyclical uptrend, combined with low-interest rates in India, clearly the stocks linked to the economy are likely to do well. If I club this with the kind of under-ownership that many companies have and consider that they have not made money in a long time, there is a real case for these value stocks to come in favour again. When the performance of these stocks will start improving, the market will take notice. Even a small allocation to such sectors will see a significant rise in stock prices in some of these companies.

Q3. But what do you do with part of your portfolio, Madhu? I remember a couple of years back you were quite bullish on pharma, but now I mean stocks like Laurus Lab etc, which I think you own, have gone up.

Madhu: I am selectively positive on the pharma sector from a three to five-year perspective. This is because the China +1 story that we believed in, has not gone away. However, we have put a lot of incremental capital, let's say for instance in public sector banks and I continue to be positive on the space.

The synopsis for the thesis behind this conviction is that -- there were 28 banks, three to four years back. Now there are only 12 public sector banks left. Going by the intention of the government, there will be only eight left in the next two years. There is a significant consolidation that has happened. These stocks are very cheap, some of them are quoting at 1-1.2 times of operating profit and 0.5 times of book value.

If IDBI gets privatised, who is to say that some more PSBs will not get privatised in the time to come? These stocks are very cheap; they are well provided for. Most of these banks are provided 70-80 per cent of their gross NPL, in the last 5 years. We are seeing profit and loss account improvement in a lot of these banks. Last quarter saw an improvement and I am sure the next few quarters will be a positive surprise to the market. I believe all of this put together, makes a good case for a good investment.

Q4. Where do you find value in the broader markets and the themes you think can outperform?

Madhu: I see that in an economic uptrend, the economy-related stocks are going to do well. I have also been very positive and vocal on the entire real estate and real estate ancillary space. India is going to benefit from the China +1 strategy too. The current situation in China like the power crisis and the Evergrande event, combined with their government's intention to dissuade foreign investors from investing in large technology companies -- all augurs well for India. It's hard to rely on China for outsourcing services. In such a situation, India will be a big beneficiary. The Atmanirbhar Bharat scheme and many PLI incentives under it augurs well for manufacturing sectors that are competing with China.

Q5. Madhu, what are the specific areas in this China plus one theme which you are betting on? You know you could play differently, some are thinking of Dixon which is in outsourced manufacturing, and some are playing through the speciality chemical route. What is it that you prefer?

Madhu: If you look at the metal companies. China has been exporting 60-80 million tonnes of steel every year. We believe that incrementally, these exports will become negligible and, that in turn, will benefit the Indian companies that are exporting. This is why the prices of steel have been very high in developed markets and it has been relatively lower in China, followed by India. In my career, I have not seen steel companies exporting 40 per cent of their production. Thus, such companies will benefit. Also, because the local prices are lower, the steel-consuming companies will benefit. This is like a buffet out there. One has to do bottom-up work in these companies and understand them. I cannot suggest basing these investments on the China+1 strategy alone, thus, bottom-up work is required to understand the tremendous opportunity in this theme.

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