Markets are fearful right now; it's time to be greedy: Raamdeo Agrawal

Too much money was chasing too few stocks, said Raamdeo Agrawal, co-founder and joint managing director, Motilal Oswal Financial Services

Samvat 2074 has been a volatile year for the markets, and the New Year promises to be exciting with a lot of events stacked up that can impact sentiment. RAAMDEO AGRAWAL, co-founder and joint managing director, Motilal Oswal Financial Services, tells Puneet Wadhwa and Vishal Chhabria that India remains a buyers' market as good stocks are now available at reasonable valuations. Edited excerpts:

Did you expect the market to fall as much as it has?

I had been uncomfortable with the fact that the markets were not correcting. Valuations had gone through the roof. That said, the pace of correction has been excessive and has surprised me. The markets had become used to large flows from mutual funds (MFs). While foreigners were selling, domestic institutions and fund houses were buying. Too much money was chasing too few stocks. The drop in MF flow is the first reason why markets corrected. Supporting high valuation in the absence of flows became tough. That apart, there were events like the crisis at IL&FS that dampened sentiment.

Is there more pain ahead?

The current market scenario is not very comfortable. While the frontline indices have slipped over 10 per cent each, market-wide losses are deeper. A bulk of the retail portfolios are down 25–30 per cent. The loss for foreign investors will be more given the rupee's fall. Moreover, the markets are concerned about the outcome of the state polls. Though better management of the economy helps, in India, politics does create volatility but does not change the fortune of the companies. The Nifty50 should hover around the current levels for now.

Have liquidity concerns regarding non-banking financial companies (NBFCs) been assuaged?

The IL&FS development was a bolt from the blue. There is a lot of collateral damage. The fear factor has crept in and investors will now take investment calls accordingly. This is a vicious circle where investors will pull out money from NBFCs and put it in banks. They, in turn, won't know who to lend this money to given the state of the economy. 

Can the recent correction go the global financial crisis (GFC) way?

The worst of the lot was the meltdown in 2008. Back then we did not know what was happening and the road ahead. It was an absolute meltdown. This time with IL&FS, however, it is different. Where there may be issues globally, there is no panic-like situation. This time around, the problem is more India-centric. The worrisome part, however, is that it is the financial sector – economy’s growth engine – that is in a crisis. 

Any investment-worthy NBFCs?

We are careful now and have taken the losses wherever needed. We need to see how the situation plays out. For good companies, the valuation at the current levels can be justified. I am not bearish on well-run NBFCs. There is a need to convert large NBFCs into banks and the regulators—and the government — must look at this possibility as well.

Are we still in a ‘sell on a rise’ market scenario?

The dichotomy of the market is that we only get good stocks at reasonable valuations in bad times. That said, there are a lot of moving parts. Oil prices, for instance, are one factor. We still don’t know whether the recent spike is here to stay or is it a fear factor on account of likely supply disruption due to US sanctions on Iran that kicks in during November. I think it is a buyers’ market now. Good stocks are available at reasonable levels.

What are the cash levels in your portfolio?

Ours is a fully invested portfolio. We feel bad now that we don’t have any cash to deploy at a time when the levels are attractive. As the market stabilises, more investors and money will come. Though investors are concerned, there are no redemption pressures right now. The monthly quantum of flow, however, has slowed.

What's your message to investors?

I have seen enough market cycles and feel this, too, is a passing phase. Oil prices remain a key variable. A $10 per barrel swing on either side can change a lot of things for the Indian economy and the markets. For a long-term investor, this is the best time to buy. As the markets correct further, investors can adopt the systematic investment plan (SIP) route and stagger investments. The markets are fearful right now; it's time that investors be greedy.
 

What are your expectations for corporate earnings?

The developments have not impacted the overall demand scenario in the economy yet. Fuel-sensitive segments like autos, however, should feel some pain going ahead. For 2018–19 (FY19), earnings growth could come in at around 17 per cent. 

What are your sector preferences?

Our sector preference remains the same as earlier. We like private banks, autos, etc.  At this juncture, not much change as markets correct, values will emerge across the board.

What are the key findings of your latest Annual Wealth Creation Study? 

Having extensively covered (quality, growth, longevity and price) earlier, it was now time to look at valuations. Investors tend to know about a company’s fundamentals and its value, but how much of it has been priced by the market is not always clear. 

Return on equity (RoE) and earnings growth are key drivers of a company’s intrinsic value. The important thing is the interplay between these two, and how do you value it which is the PE (price-earnings) ratio. Growing companies create value only when RoE is higher than cost of equity. 

What is the link between growth and RoE?

Our study shows that for companies growing at the same pace of, say, 20 per cent, every 1 per cent increase in a company with RoE of, say, 15-16 per cent will add 12 per cent to its market value. For companies with high RoE (say, 30 per cent), a 1 per cent increase will add just 2 per cent to its value. Thus, a good equilibrium between RoE and earnings growth is essential. Companies that can sustain high levels of growth and RoE tend to attract high valuations. 

Markets are efficient in terms of what is known. So, ability to forecast a company’s future earnings growth along with being able to buy the stock at a PE which is less than its growth rate (PEG or price-earnings to growth ratio of one or less), is more likely to beat the market significantly. 

How will the market react, should the RBI governor resign? 

It will be very unfortunate. Difference of opinion is part of the daily process, but it is a very inconvenient situation now with the two sides at logger heads. The government has been making the right moves whether it is liquidity management, but the regulator also has its own compulsions. For now, both parties have bought some time.