When the going gets tough, the tough gets going, says
Ramesh Damani. And the best way to describe the current equity market situation
in India is tough.
The past year saw the Nifty
touch 5,700 last July, but we also saw the painful crash to the lows of 4,500.
Over 11% has been lost on the indices, however, Damani is bullish on India over
the long term. "Cheap equity prices and good news don’t go hand in hand,
but equities will create wealth over the long term," he says on
CNBC-TV18’s special show Investor Camp.
He advices investors to look for great businesses, because
those are the ones which will generate free cash flow. He further adds that
investors looking to beat inflation should not invest in fixed deposits.
"Dividend yield on equities often meets inflation," he said.
Damani prefers buying individual stocks rather than buying
an index, and his preferred bets are media stocks. "Digitisation, TRAI
regulations and corporate interest will boost media stocks," he explains.
He is also positive on Infosys
, saying that the IT major will come out of its current tough phase.
On the flip side, he believes that government inaction is
hurting aviation and telecom stocks in the country. He is also pessimistic
about infrastructure names as he believes the current tight cash flow scenario
will make it difficult to make money in infra names. "I am not
particularly enthusiastic about gold
return either post its recent run-up," he added.
A: To honour Srinagar first, I am looking at Kashmiri
proverbs. I am going to butcher one for the Kashmiris here, "Ati: sha:h ti
Ati: gada:h". It means - a king for a moment, and a beggar soon after. The
reverse is also true. If you are a beggar, you can also be a king. That's the
way markets are. Fortunes change very quickly in the financial market.
I remember the period 2002-03 when there was so much
pessimism in India after the technology boom, but that resulted in one of the
greatest bull markets we have ever known in this country. The index went from
3,000 to 18,000; it's part and parcel of this market.
I hear all these people who tell me - I want to be safe in
fixed deposits, in interest bearing instruments, I want to be in bonds and I am
here to tell you it's a loony idea. With inflation at 10%, we are getting 8%
pre-tax, so you are not going anywhere.
The second big problem with investors is they expect market
returns to be linear. Please understand, market returns are not linear. You
want the market to go up 20% a year and we all will be very happy about it.
What I am trying to tell you is that maybe, in three years, the market will give
you negative 30% returns. In the fourth year, it would give you positive 80%
returns, so it will make up for all of that.
Market returns are never linear. We want them to be linear
but, they are never linear. They are sporadic. There will be good times and
there will be bad times. It was a bad time for the tourism industry here, a few
years back. But now, all the hotels are full. Similarly, there would be good
times in the stock market too. It is in the nature of the business.
Good times will return. I am not sure if it will return in
the next three months or six months, maybe it will be 2014. But, if you are
young, it's a lunatic idea to keep your money only in fixed deposits. You will
never be wealthy.
Q: What do you think will trigger this turnaround? Do you
think the same problems which have dogged us over the last many years will turn
or something external will provide the stimulus?
A: There is a great saying in the market that you can get
cheap equity prices or you can get good news. You won't get both at the same
time. If the news is good, if the industrial production is up, if the rupee was
strengthening, if there was good policy action taking place, equities won't be
cheap, equities will be costly.
In some sense, it’s a perverse logic that because the news
is so bad you are getting great bargains in the stock market and that's always
true. I am not sure if it will turn around, but I know the kind of bad news
that has been hitting the markets. It’s time to buy. It's not a time to sell.
I am not saying that you will make money in three months or
six months, maybe not even in a year. The Dow didn't go anywhere for 10 years.
But, as retail investors, you don’t have to worry about the aggregates. You can
pick stocks. You can pick businesses that will do well.
In this doom and gloom, Hindustan Lever is at an all-time
high. VST is at an all-time high. ITC is at an all-time high. These are all
companies you know. Titan is at an all-time high. So, go ahead and buy some
stocks. Stay invested. The dividend itself pays for what you get in a bank
deposit.
I don't know if it will turn in 2014 or not, but I am very
sure about that. You are going to be ahead if you invest wise in equities than
if you invest in fixed deposits.
Q: Would you still stay with these consumer stories, because
that’s the only game which has worked over the last couple of years?
A: They are not cheap. So, would I stay with them? I bought
them at a lower price and it’s easy for me to say they look good. There are
lots of other sectors available in the market that looks promising,
two-three-five years down the road.
To give you examples, I have been suggesting media stocks
for a while. Just look at the transformation that has taken place in the
industry itself. You have had a Cable Digitization Bill being passed. You have
had huge amount of corporate interest coming into the media sector. You have
the new TRAI regulations which are very favorable, generally for the industry
being passed.
I think, over time, these companies will start doing well.
Right now they are not reflected in the price. The rural consumption for
example in India - we had a good monsoon last year. You have a good monsoon
again this year. A lot of people who go to rural India talking about a great
boom going on in those areas are sell outs. So, look at rural housing
companies. Look at rural building material companies. They will all tend to do
well.
There is a basket. I have always picked stocks rather than
an index or an aggregate. My advice to all of you is, pick a business that you
trust. Something that you understand and believe in. You will be much better
off than just blindly going by an average.
Q: A lot of people in this room would have been buying gold
as most Indians do that. But, gold started doing very badly over the last few
months. Would you stay in gold?
A: It's had a good run. I have been a big votary of gold for
a period of time. But, I am no longer enthusiastic about it because it had its
run. It's gone from USD 400-500 to USD 1,600-1,800 over a period of time.
Generally, if you have fear of inflation, it's a good bet.
But it's extremely non-productive. I would recommend it only for certain
periods. It doesn't pay a dividend. There is a huge storage cost. It's not
necessarily the most productive investment you can have and it’s not
necessarily cheap now. It has caught up with inflation. So, I am not
particularly enthusiastic about it.
Q: What's the mood among the smart professional investors?
We can see what the mood is in retail. But, in the friend circle that you have,
serious high net worth investors, are they also beginning to give up?
A: There is no doubt. There are actually people who say
almost in a joke that maybe, tomorrow will never happen. Maybe the markets will
continue to be bad and they shake themselves up within the next 30 seconds. A
lot of professional people that I see on Dalal Street everyday, the
arbitragers, the IPO people, the traders are actually hanging in the towel and
leaving the market.
There is a lot of pessimism out there and it boils down to
the same reasons. No one has a different set of reasons. No policy coming in
from the government. No major reforms expected before 2014 and industrial
slowdown due to high interest rates. The reasons are well known, but I don't
see anyone getting out of the equities at this point.
The fundamental rule is that if you are an Indian and you
want to be rich, you want to be wealthy beyond your status in life. How are you
going to get there? If you get into fixed deposits, you are not going to beat
even inflation. You cannot get rich that way. If you have lot of money, you can
invest in real estate. It has done well. Maybe it will continue to do well.
The only way to do it in India, other than running your own
business would be to buy equities. Shares go up. It's amazing. People don't
understand. You got to buy stocks in 1992-93 for a few 100 bucks and the stock
went to Rs 13,000 after four bonuses. There are so many companies in India that
had gone up 40x, 50x.
How many of you use Godrej soaps? Did you know that the
stock has gone up 50 times in the last 10 years? There are great companies in
India that go up and build wealth over a period of time, paying you dividends.
Even I am scared. It’s not that I am not scared. It's not
that I don't sell the stock. But 30 years of investing and 30 years of reading
has taught me that when the going gets tough, the tough gets going. You have to
stick to it, there is no other way.
Q: Consumers have done very well and a lot of people who
want to make serious wealth deter from buying an HUL because they can’t see it
going up five times in the next 10 years. Can you think of any of the bombed
out sectors which might lead the next bull run where you can get 18x, 20x on
your investment?
A: I am skeptical about these issues. I think media will do
well. You are from media. You would be cynical about it. That’s part and parcel
of the business out there. I can't figure out the valuations of media. I lived
abroad many years. I know the valuations of those companies out there. I know
the valuations out here and everything positive has happened.
You have had industrial houses taking interest, you had the
digitization bill passed, which is a huge plus for the industry. You have had
the TRAI regulations which seem fair.
Rural housing will tend to do well. But, I think consumption
would continue to do well. My basic bet is, consumption will do well. If this
India story is about to happen, Indian consumption has to do well. You don't
necessarily have to participate by buying only a Lever, a Glaxo or ITC to name
a few. There are various ways to skin a cat.
You can buy a glass container manufacturer. You can buy an
asbestos roof manufacturer. I am alluding towards all these companies. The
central hypothesis that I would like you all to understand is that things can
go terribly wrong in the next couple of years or three years, but at the end of
the day, I am extraordinarily bullish on this country.
I think we have left socialism to the past and the path
ahead is good for us. Typically, this is what we do in India. We go three steps
ahead and two steps back. It doesn't faze me that we are going through this
kind of process. But, ultimately we will be fine and the romance of India and
the promise of India is that you are going to create a huge middle class in
India, which is now maybe 5% of the population, will be up to 30% of the
population.
We are going to create 30 crore people in the middle class
which will demand a lot of good things, which are consumer items. Over a period
of time, you will do well in consumer stocks.
Q: What's happening with some of these consumer facing
sectors like hotels or airlines because they should be benefiting from a
consumer boom, but they are just all over the place?
A: Airlines is a pretty well advertised case of a complete
mess. But look at what has happened. Look at the fact that Kingfisher has been
basically closed down and Air India is on a strike permanently. Look at what
happens to the air fare. I wanted to get my wife here, for example to Srinagar,
but the cheapest round trip fare I found was Rs 28,000-30,000. Fares have gone
up.
We are all paying the price for government inaction in this
matter. The airline industry is the lifeblood of this country now, we need it.
The government is letting the airline industry die.
You look at the telecom sector - MTNL, BSNL are pretty much
dying. But, the government is not doing anything about it. The stock prices of
MTNL used to be Rs 300 in 1992, it is Rs 25 today. The government has
absolutely abandoned its responsibility to Indian shareholders.
BSNL used to be the pride of government of India in terms of
revenue, excise collection, network. Today it is heading fast to becoming a
BIFR case. That is where the policy inaction is showing bad apples.
Although, airlines are pretty well advertised as a disaster
case, typically, airlines go through a period of low profitability before they
emerge. It will take time.
Q: What's happening with the public sector? This government
inaction has also coincided with some serious underperformance in the PSU
basket. You used to be a votary of PSU stocks, disinvestment candidates. Are
you disappointed?
A: Yes. I have reduced a lot of my holdings. It comes down
to the fact that the government doesn't have a mandate from Dalal Street at
this point. It doesn’t care. There is a very famous headline. In America in the
1970s the New York City actually went bankrupt and a bill went to the US
President to bailout New York and he said, forget it.
You do handle your own problems. It's not the job of the
federal government to bailout the state government. The local newspaper in New
York had a headline, "President Ford to New York City, drop dead." I
think that's the headline you are seeing at Dalal Street, drop dead.
We don't care what's happening in Dalal Street. We don't
care about economic reforms. We are concerned about winning the next election
and whatever policy measures to move that, whether it is taking Ambedkar
cartoon controversy to a new level or doing a NREGA which is actually hurting
the industry. But, we will do that and it implies that nothing is going to
happen till 2014.
Q: What about infra? I don't think you have ever been
enamoured with that idea but that’s a big sector for a lot of people. Would you
be bearish?
A: It is hard to be bearish but it’s tough to make money in
that sector because your cash was always lying in inventories, in projects. You
finish one project, you move on to the next project. The great businesses of
the world are the businesses that have free cash flows.
It's a very simple concept. What it means is that if a
company earns Rs 100 and it can distribute Rs 80 as dividend, it's a fabulous
company because that means you are getting your money back in terms of
dividend. Infrastructure companies don’t distribute it back because they get Rs
100 and put it into the next infrastructure project.
Same with the hotels. You do well in a hotel, you build a
second hotel. The great companies are the ones with great cash flow, the ones
that generate enormous amount of cash and sometimes, negative working capital,
because the money comes in advances from stockists and vendors. Then they take
the money and return it back and that’s why you see the FMCG stocks doing so
well.
Q: Talking of cash flow generating companies, what’s going
on with say something like an Infosys? One of the great companies of our
generation. We used to speak such a lot about it in the early 2000s. Do you
think the best is behind?
A: No, I don't think so. I think they are going thorough a
rough patch, no question about it. One thing that I am more optimistic about
than ever before is the technology base that we have in this country. I shudder
to think that country India would be without a technology base.
There is one article, if you are interested, I would
strongly suggest you go on the net and read. It’s by a gentleman called Marc
Andreessen. He was the one who founded Netscape for the first time and he wrote
an absolutely brilliant article called software that’s eating the world. I
would strongly suggest that all of you who have invested in tech to please go
and read that article.
Software is going to dominate our lives like it never
before. It's industry after industry. Geology, banking are all software driven
industries now. How you map for oil is done by software. How you check into an
aeroplane is done by software. Infosys is a great company, great pedigree,
great genes. They are going through a tough period but, I am almost certain
they will snap out of it.
Source: http://www.moneycontrol.com/news/market-outlook/lunatic-idea-to-investfds-insteadstocks-damani_703641-1.html
Posts
