Market isn't discounting Modi in a big way: Raamdeo Agrawal

Interview with Joint MD, Motilal Oswal Financial Services

Even as the market is at an all-time high, the rally is not broad-based. And, the retail sector isn't participating. Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services, in an interview with Vishal Chhabria and Jitendra Kumar Gupta, talks about what could bring back retail investors, consolidation in the broking industry and earnings expectations. Edited excerpts:

Though markets are at all-time highs, the euphoria is missing. Retail participation is missing and only a few sectors/companies are doing well. What do you think of the situation?

Retail investors are very smart. It's not that big money is being made and retail investors are missing; that will never happen. We are at all-time highs as in 2008-roughly Rs 70,00,000 crore in market cap. At that time, the rally was broad-based; now, there is a lot of polarisation towards tech, consumer, pharma and non-cyclicals, at the cost of cyclicals such as real estate, construction and public sector banks. The Rs 15-20-lakh-crore increase in market capitalisation has gone to non-cyclicals. But broadly, things are fine and earnings have risen 50 per cent during this period.

For the euphoria to return, things have to change. Say, if the probability of making money is 70-80 per cent, retail investors come. Between 2003 and 2008, the probability was 80-90 per cent, But between 2008 and 2013, it was 20-25 per cent. So, it was a tough time for everyone on the Street. Hence, they (retail investors) decided 'if it is so difficult to make money in equities, let's make 10 per cent in fixed income', which is where the money went.

This is the first year of 13-14 per cent returns---from last Diwali to this one. If the perception builds from this Diwali, one can make 13-14 per cent returns, retail investors would come back. But till now, the situation is negative. Retail investors don't seem to be coming back. However, a small beginning has been seen, as smart money like high net worth individuals are coming back. I think that's where political change can be a game changer for markets. Retail could come in on hopes of a change. State elections would give some indication.

At current levels, are valuations comforting or expensive? What are the risks?

There would always be a market segment in which valuations are uncomfortable. You have to find stocks where valuations are cheaper. Currently, however, valuations of 15-16 times are very reasonable. Going forward, depending on positive/negative developments, private equity levels could rise or fall. For now, at least till December 8, markets are unlikely to go down by a significant value. There are many risks, but since valuations are reasonable, these can be contained.

Do you expect the rally to extend to other market segments?

The earnings' breadth isn't expanding. The rally may look broad-based as other stocks participate, but the question is would these companies earn money? Beaten-down stocks would fall when markets retreat or due to negative news. A sustained rally would happen only if earnings improve, which doesn't seem likely as of now.

What do you think of the market outlook through the next 12 months--from this Diwali to the next?

This period would be better, irrespective of which government comes, even if there is a fracture. We should be at higher levels, whether significantly or by a minor level only time would tell.

The market has started to discount the Modi factor.

There have been many major opinion polls. I don't think anybody will get it right. All the translation is with the old period, while all the data you have is 15-odd-year-old. In this period, you have not seen an emergence of a leader such as Narendra Modi. So, whenever there is a big surprise, as in the case of Akhilesh Yadav in Uttar Pradesh, the market would be surprised.

Though the current rally is also due to expectations of Modi coming in, currently, the market is not discounting Modi in a big way, as some people are still apprehensive.

How has the earnings season been so far. What is the outlook for FY14 and FY15?

Expectations are Sensex earnings would rise by about Rs 100 a year---to Rs 1,280 for FY14 and Rs 1,400 for FY15. But these things don't remain so. There are political changes; there would be policy changes; there would be economic/fiscal changes. Therefore, things could look different.

Some public sector banks saw asset quality pressure easing in the September quarter. Is asset quality pressure bottoming out. And, is there value in these public sector banks?

All the big defaulter names are already known. While there is no big improvement in defaulted loans, a lot of NPAs (non-performing assets) are provided for. For asset quality pressure to increase, you would need new names (defaulters) to crop up, which doesn't seem to be the case. It looks like asset quality pressures are bottoming out. There is deep value in public sector banks.

Do you see any consolidation in the broking industry, given some brokerages are shutting?

It has been reported many high-profile broking outfits are shutting shop. But without announcements, too, a lot of outfits, especially smaller ones, have shut. Without people coming to know of it, the industry size has halved in recent years.

What has happened is after the massive expansion till 2008, overheads have shot up. But where are the customers? They have lent their names, but they don't trade. So, it has become difficult to sustain expenses.