Madhu Kela, Head of Equity Investments, Reliance Mutual Fund, sees the Nifty setting a new high in the next 12-24 months on account of higher fund flows and economic fundamentals starting to move up. He advises investors to buy midcap companies which will perform and create value going forward. "Over the next 12-24 months, investors will see a lot of opportunities if they buy and hold." He recommends investors to buy stocks on dips.Speaking on whether the Nifty can retest its previous lows, Kela says he does not see the Nifty breching 3,800-4,000 levels. "The only thing which could take Nifty to that level is if something globally happens."
On the recent spate of initial public offerings, he believes India Inc should have priced those issues at least 10-15% cheaper than where they were priced. However, he was quick to add that they stll makes sense from a long-term perspective.
Here is a verbatim transcript of the exclusive interview with Madhu Kela on CNBC-TV18. Also see the accompanying video.
Q: Do you think we formed a base now for the Nifty, we should not look too much southward of 4,000?
A: Yes. Going by what is being presented as of now and going by the trend of last six months, I would argue that the 3,800-4,000 level must hold because in the crossing over, 3,800 was a very big resistance to cross over. In the fall also, 3,800-3,900 was a very big support. Market took that support many times before decisively going down.
Q: Do you see in the course of this summer globally that Nifty retesting 3,900-4,000 kind of levels and if yes what could get it there because it is not going there, it is just taking support at higher levels of 4,300?
A: Too many people are waiting, I am also one of them because we keep getting money and we definitely have some cash.
Q: A lot of cash or a lot of it has been deployed?
A: No, I don’t think there is a lot of cash now. We have deployed it. For the last three-four months, we are deploying it.
I think the only thing which could take Nifty to that level is if something globally happens. The last two-three weeks for the monsoon have been reasonably good. So, there is something which has to go wrong globally for the Nifty to go back to 3,800-3,900 levels.
Q: You think the monsoon has discounted that for the moment?
A: Yes, because most of the part of the country has quite well rains in the last two-three weeks. In the south, there is excess rain. In northeast, northwest there are rains. North remains a matter of concern. For the country as a whole if you have one-two more good weeks of monsoon, then this fear may have been discounted.
Q: June, July, August we have spent in this broad range of 4,000-4,700. Do you think we are ready to breakout now or would that be surprising to you?
A: For various people market means various things. For a day trader, it is very important to time it for the day. For investors, we look for a consistent period of outperformance. Whether 4,700 is taken out in the next two months or it is taken out next month that is less important to me than saying that are we really heading for a new high in the Nifty in next twelve to twenty-four months. I think we are heading for it.
Q: Twelve months or twenty-four months?
A: Twelve to twenty-four months. The direction is very important and the most important thing for forming that judgement is you see the amount of liquidity which is being thrown in the world, which is running into trillions of dollars. Now, you are starting to see the real economic fundamentals also start to move up. Every data point which we have been observing for the last three months in the West has surprised and is optimistic. It is better than what the world was expecting. So, if you have a slow but decisive fundamental recovery and money coming into emerging markets because of the dollar being weak, then we should definitely head towards a new high in the next twelve to twenty-four months.
Q: In that sense, where are we compared to the last bull market? If you look back and think about 2003, 2004 where have we reached if this is indeed a multi-year kind of a bull cycle which has begun again in your eyes?
A: I think markets have seen a very sharp rise. Let us accept that because in March we were at 2,500-2,600 and now we are at 4,500-4,600, so it is like 80-90% rise. I do not think that there is too much beta. Can the pace of the rise which has happened in the last six months continue? To me, the answer is no. But will you have opportunities? This is the most interesting phase of the market where you take those stock specific bets and market is very skeptical about the run and valuations have run up. So, people do not have conviction to buy. This is the time if you can get those ideas and create alpha for your portfolio, I am finding it to be very interesting place to be in.
Q: You are saying that the easy money on the Nifty might have been made?
A: Stock specific there are humongous opportunities. In my opinion, if one is right in predicting the bull run and predicting India, you could find even companies today which are in the vicinity of Rs 5,000-15,000 crore market cap, that could go up 3-5 times over the next few years.
A: Stock specific there are humongous opportunities. In my opinion, if one is right in predicting the bull run and predicting India, you could find even companies today which are in the vicinity of Rs 5,000-15,000 crore market cap, that could go up 3-5 times over the next few years.
Q: When will midcaps recover? We have had a big run in the Nifty but many midcaps or even non-index largecaps are trading at 20-30% of their peak value. If you are saying that in 12-24 months the Nifty will get back to a new high, when will these stocks outside the index get back to their old highs?
A: Market is narrowing, so now everything will participate. You need a sizeable company. A company which is having Rs 2,000 crore market cap was like a midcap. Now, that Rs 2000 crore has become RS 6,000 crore and Rs 8,000 crore for many midcap names. If you compare it from the peak obviously they have not recovered to that extent, but if you see the leadership, if you see companies which are able to perform and create wealth, those companies are getting narrowed. As the market matures, obviously they will get even narrower. I don’t think one should expect a big bang, full-fledged recovery in midcaps. I see a lot of midcaps performing. That is where the real challenge is that are you able to identify that real alpha in this market to make that extra buck which is to be made out of this market.
Q: There were a lot of risk associated with the kind of stocks that you are talking about in 2008, balance sheet risk etc. Do you think the time has come now for investors to say I will not hide in a cocoon because I have a fear of losing my money, I will go out and take a little bit of risk now and by these kind of stocks that you are talking about?
A: I think people by and large will resort to this because if you look at the world, it is such a big paradox because so much liquidity is being thrown. At one end, people are struggling to protect their capital. In America if your money is in dollars and in the bank, your money is getting lost. So, emerging markets have done 50-100%. Similarly, index stocks have gone up like 50-100-150% in large companies and now some of them look richly valued from 12-18 months perspective. People have no choice but to look at qualitative midcaps. Let me make a distinction here. Just because we made a lot of money identifying these small companies and they became multibaggers, not everything which is small will become a multi-bagger. So, these are characteristics of these companies. If you bet money there, some of them still have a lot of value.
Q: You have been deploying a lot of cash over the last two-three months, you have been buying midcaps yourself aggressively in your portfolio?
A: Yes, we have been buying companies which have growth characteristics. In our scheme of things, if I think that the Nifty goes to new high, can this particular company if I am buying it at 10-12 P/E multiple and has a 30-35% kind of earning visible growth over the next three-four years, can we buy those kind of companies which are still at a discount? Everyone is not able to raise money, you are getting these opportunities, promoter themselves are wanting to sell some of these companies to you because they need capital.
Q: We went through a phase when the first big rise in the market happened when a lot of fund managers including hedge fund managers underperformed the index because largecaps did so well. Do you think in the next year or two, it could be turned around, where people with good portfolios beat the index quite a bit?
A: Absolutely. That is my firm conviction that you will end up beating the broader market if you do the right stock picking and hold it with conviction. The backdrop of this rise is that we have seen such turmoil times in October and December-January that everyone is very scared. People are not participating with a full heart in that sense. If I buy thing at Rs 100 and it becomes Rs 120-130, I am very tempted to book profits. People have forgotten in one sense what a bull market is like. Because everyone has underperformed, everyone is trying to catch up, so let me make these 10-20%. For sometime these 20-30% trades will work, but after that once you buy a stock, you sell it and then it comes off. You think it will come off a little more but if you are not able to buy it and if it goes higher than what you sold then mentally you are closed. You cannot buy that stock.
Q: That is why I have asked you about 2003-2004 because this exact phenomenon played out, people traded for a while and they missed the big 4-5 times kind of moves which happened over the next couple of years. Do you think we have entered that phase where if you buy and hold today, you can actually make multiple returns not just trade these 20% moves?
A: Over the next 12-24 months you will see a lot of opportunities if you buy and hold. If you have conviction, ultimately all of us are operating that given these circumstances you are buying a particular set of stocks, if situation changes then we will stand to change. But as things stand, if people will build a portfolio for next 12-24 months, they will stand to gain.
Q: How did you think the last few initial public offerings (IPOs) were priced because that is one conduit where a lot of people start getting in when they have been out of the market for a year because of a bad fall? Do you think they have left adequately on the table?
A: No. It is a little unfortunate part of the corporate India story that ultimately people know what is good for them in the long run but they cannot resist the temptation of the short-term pricing. If they leave some on the table, it is very good for them as a group and also for the broader market because retail investor is just creeping in. He is a poor fellow who has been out, has lost so much money that for 12-18 months he has not crept in. Some of these IPOs were filled even at a retail level by two-three times, you allow him to make money then he will come in the next IPO. I would have loved these issues to be priced at least 10-15% cheaper than where they were priced.
Q: Did you participate or you just let it be?
A: We have institution compulsion. If I had a choice, I may have skipped some of them. But in our overall scheme of things, it still makes sense from a long-term perspective. We participated, but did we participate with vengeance that this is my idea and I want to put a lot of money to work? The answer is no.
Q: What about the qualified institutional placements (QIPs)? Are you letting a lot of them pass or are you participating?
A: No, I am letting a lot of them pass. We have been selective. The problem is that there are ten merchant bankers and everyone is advising the management on the best price one can get for the issue which is never good for investors because we don’t want to buy the best priced companies, we want to buy a risk return reward. We have participated in a few of them and we have made money. I wouldn’t say that we have a closed mind that I don’t want to participate in QIPs but we want to participate wherever we can see risk reward.
Q: You spoke about liquidity and a lot of money which is coming into emerging markets. If that is true, then commodities should also do well once again, are you backing commodity stocks?
A: Yes. By and large, we have a overweight position on commodity stocks.
Q: Across the board?
A: Yes, in a lot of portfolios.
Q: Not just metals, even sugar etc?
A: Yes. We have some bets in sugar. Let us say you take three-four countries which one is positive about ‑ China, India, Brazil and Indonesia. I don’t understand too much of Russia so I am keeping that aside. These four countries put together is like 50% of the world population and these countries like China is at USD 6,000 per capita income, India is at USD 2,800, Indonesia is at USD 3,900 and Russia is at similar levels. Over the next five years, you will see at least 30-50% rise in per capita income of these countries. On one hand, you have a subdued growth in these developed markets and on the other hand you have per capita income rising in these countries. With such a large domestic base, money will flow in bunch to these emerging markets. Within that, I think India will be a very big beneficiary because if you have a standalone story then to go and pitch to USD 500 billion pension funds becomes difficult. But if you are part of the bunch, then allocation of money to India will become much easier.
Q: What is the sense you get when you speak to fund managers globally now? Have they reinvested or are still short?
A: A lot of them are still skeptical, underweight, playing it very fearfully. I don’t think a lot of people are still yet to pay with high conviction. I bought X at Rs 40, I sold it at Rs 60, but I don’t think that is the real conviction is what I am able to see.
A: A lot of them are still skeptical, underweight, playing it very fearfully. I don’t think a lot of people are still yet to pay with high conviction. I bought X at Rs 40, I sold it at Rs 60, but I don’t think that is the real conviction is what I am able to see.
Q: Are they at least feeling that they have missed out or not?
A: Yes, 100%. We felt that because we were sitting on cash from November 2007 to February. So for 14 months we protected our funds. You get little carried away with your own success and so is the case with lot of people who have been right in predicting the last downfall.
Q: So, you are saying even you have not moved as swiftly as you wanted to?
A: I would have left more swiftly but at least we have an open mind. I think markets have made us much more humble in last 15 years to accept that yes we were wrong and have to carry on with life. So, we are carrying on with life, we are looking at opportunities on a daily basis and have taken large bets in the last four-five months in select companies. We have invested money wherever we like.
Q: You bought things in pharma which was considered a defensive sector, what attracts you in that theme?
A: That has been my biggest call and it has done very well. Even today, the opportunities are 3-4 fold. The penetration level in the pharma sector is very low. Insurance is picking up. You have people who are getting insurance, there are better medical facilities, so the consumption of medicines and medical-related services in the domestic market with this rising per capita income will go up sustainably higher over the next 5-7 years. There is opportunity in the contract research and manufacturing side. You can higher a PhD for Rs 50,000 do your work here. I see a big opportunity like USD 50-60 billion of spends on an annual basis. Can a substantial portion of that move to India? The answer is yes. In a multinational space, if you see, we have started to adhere to patent laws in 2005. It took one to one-and- a-half years for the multinational companies to be convinced that yes we are serious about it.
If you look at the multinational pharma companies, they are available at ridiculously low levels and at historic low valuations. Will it pay off in six months, I don’t know, but will it pay off. In my timeframe of 3-5 years, I am very convinced. Even now you can get into the pharma sector. A lot of these companies are listed at 10-12-13 times PE multiples with a growth rate which could be 20-30% over the next 3-5 years.
Q: Which one of these spaces are most attractive, because not all companies do all of these strong domestic formulations or contract research which you outlined?
A: It will be purely stock picking. Basically, there will be companies which will be in contract research and manufacturing and you have a great management and you buy it and there will be players who would be very strong in domestic side of business and there will be ones who are committed to a MNC. The only caveat which I would like to tell you is that all of them want to delist and want to own 100% of their companies. So, you have to be with the person who has clearly spoken that I am for minority shareholders.
Q: In delisting, candidates can give it back to parent, is it?
A: Yes, but at the price at which they want to buy this. They feel that if the price is Rs 250 and if I pay Rs 400 then I have done justice to the minority shareholders, but no one is near to paying what their long-term potential is.
Q: In the last bull market, the big money was created by infrastructure and bank. Do you think it’s a good chance that they deliver again in this run or you are not as bullish on these two?
A: I think it will be selective. We had a big bull run in technology between 1998 and 2001 where in a lot of people bought it and about 400 tech companies got created. After the burst, we saw that even Infosys or Satyam will die. So, they took some time for the dust to settle down but that list of 400 became actually 15-20 companies for the next bull run to take on. I see a similar kind of a thing happening at some point of time in infrastructure, though it is too early. We haven’t yet played out the full bull run of the infrastructure sector, so you will still have a lot of companies participating. What the Finance Minister has indicated, if you see 9% of our GDP going into Infrastructure, that’s a very large number even though it is 3-4 years down the line.
Q: When you say infrastructure, do you include real estate there or not quiet?
A: I would be still very skeptic on real estate because we really don’t understand them. They bought land 15-20 years ago and I am paying the current market price of that land in my spreadsheet. Within the real estate sector, you see some big winners. Our search is that can we really pinpoint those companies and can we buy at the right risk-reward and at the right price.
Q: Are you now saying that in every big dip in the market I just get more and more invested and I ride this for 2-3 years?
A: Yes, that is currently my motive. We are always open and examining what could go wrong. We are working on more things as to if A, B, C, D, scenario emerges, can it last for one month or three months or even more. One big concern which I have is on Europe where still the banks are leveraged 50-60 times. A country like Switzerland is leveraged 3-4 times as a country as a whole. So, will this fizzle out at some point of time in the market, yes it will. Am I able to see that today, I am not able to. So, we have a list of stocks which we want to get invested into and buy into every dip, but at the same time we are keeping our mind open that if the global worry plays out at some point of time, can we readjust our portfolio?
Q: What would the top 2-3 things you would watch for which would tell you that things are going wrong globally and you need to move a lot of money to cash again?
A: One will be Europe which I would be very carefully watching. Second is this whole thing about China. There are lots of tail winds right now. The loan growth is like seven trillion yen in the first half of the year. The big bet about China is that if the global market recovers and if the export side of this story recovers much better as compared to what it has been in the last 6-9 months and they continue to stimulate the domestic consumption, then we might be able to play off. But that still needs time to play out. We have to watch whether the Chinese exports which had hit an all-time low in October-December of last year can really pick up. In the meantime, can the Chinese economy be sustained on that one engine which is domestic?
Q: In the pit of your stomach, do you get that feeling that we are in a bull market again?
A: Yes. I had mentioned that earlier too. The good thing which I think which humbled me personally over the last 15-17 years is that you have always the right to go wrong in the stock markets. What is important is how early do you correct and how much more time you spend on your own hypothesis, disregarding the world as it is developing. We went wrong for 2-3 months and we could not invest in those months as we could have invested, but we took a note and I am very clear that every dip in this market is a big buying opportunity.
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