Four stalwarts of the Indian equity markets provided an interesting and memorable discussion at the Motilail Oswal?s 13th Wealth Creation Study. The theme of the discussion was ?Great Good Gruesome? in which companies and investments were being slotted within these three distinctions. Excerpts of the discussion held by Ramesh S Damani, a member of the Bombay Stock Exchange, Sanjoy Bhattacharya, the founder partner of Fortuna Capital that manages the hedge fund ?Aristos? based out of Mauritius, Rakesh Jhunjhunwala, partner, Rare Enterprises, chartered accountant and one of India?s best known equity investors and Raamdeo Agarwal, managing director and co-promoter, Motilal Oswal Financial Services Ltd are given below.
Rakesh Jhunjhunwala, defined what he felt was the key characteristic of great and good companies in his opening statement proclaiming, ?Great and good companies have to have a large and untapped market, for them to flourish.?
Agarwal explained this study was quick to add that he felt, ?It is not important to catch a great company young as everyone feels, but to catch them at a good and reasonable price, that is important to make a good investment.? Jhunjhunwala then went on to describe what he felt were some characteristics investors today should look for, ?Every great company has some sort of business priority which they stick to and expand on. In fact, there is the most opportunity at such times when the market is the darkest. This is a real time to invest in great companies, especially as there are so many solid Indian companies around to invest in.? And, playing to the audience sentiment he added, ?What Indian investors do is go buy multinational corporations, which have the worst corporate governance.? Bhattacharya, on the other hand, as matter of fact went on to explain, ?I believe we live in a country where growth is bound to be there. Even if the US was to go into recession for three to four years, which is a lot more than we all anticipate, our demand will remain at 12-13%. I feel cash flow is important, and if you want great companies, one should look to capital allocation.? Damani, who was playing the moderator and host for the discussion and keeping things lively and humorous, questioned Bhattacharya, ?How will we sustain ourselves alone, are we self sufficient?? Of course, Bhattacharya admitted, ?We were not an island nation isolated and self sufficient but maintained Indian growth and demand will not be as much affected as the rest of the world?s.? However, he did go on to hint at a certain company whose capital allocation he felt required a look into as it is holding them back, hinting, ?There is a certain reputed company, whose name I shall not mention, whose capital allocation skills have held them back from being even better, they spend capital on buildings to live in than on further dividends or investments.?
Agarwal while taking on Damani?s questions about some of the companies whose names came up during the meet, explained, ?Bharti is a company that has a high growth rate and a huge cash flow as well. However, these have come at the cost of a high capital expenditure, and, the fact that they don?t pay out much dividend. On the other hand, Tata Tele Services Maharashtra Limited, made a lot of basic mistakes. They bought the wrong technology, paid too much money to enter the very limited market space of Maharashtra and Goa as well as made the mistake of starting off with the CDMA technology.?
Earlier, while Agarwal was explaining his studies he mentioned some interesting pointed about the distinction between the three type of companies. He felt that a gruesome company would provide low or negative returns over a substantial period of time and no matter how much equity capital was being employed. A good company on the other hand would provide investors with attractive returns all throughout a particular time period, without really changing as per the capital employed either. Great companies on the other hand, give out high returns that keep on increasing with time and capital employment growth. He believed, ?In investing, price covers a multitude of mistakes.? And, described great companies as companies, which provide a high return on equity, as well as keep growing.
?Good companies provide an attractive return on equity and are steady while gruesome companies have a low return on equity, which may fall further, and will also keep needing capital to sustain itself,? he added. Agarwal also had earlier mentioned, ?I do not feel 25% EPS growth rate is sustainable. I feel FMCG, pharma, auto, construction, and infrastructure, will be big sectors in the next few years. The banking sector has the potential of becoming the most consistent source of wealth creation. This will be an attractive segment in days to come.?
Jhunjhunwala recollecting this said, ?I feel a 17% growth for corporate India is very sustainable. It is after all just 4-5% more than our overall GDP growth that we hope to achieve. The macro-economics of falling oil prices, subsidies in the commodity prices and falling rates are going to affect the country as a whole. Today itself, due to the sudden slowdown in demand, most manufacturers are looking for volume over price.? Bhattacharya, on the other hand, seemed fed up with another speculative prediction that they were asked to make and stated, ?I don?t think forecasting should be something we get carried away with. Forecasting is for entertainment only! There are a bunch of really good companies at very attractive prices available. An example is Bluestar one of the lesser companies in the list of big Indian companies, but none the less being sold at a very reasonable price.?
Though this maybe true, one should research about the company themselves before investing, as soon after explaining Bluestars lovely record, Bhattacharya admited to Damani that he did hold stocks of that company himself.
Jhunjhunwala on being questioned on the current market mood and sentiment exclaimed, ?I have never seen such pessimism in my life, as I have seen this year in the market. Which is shocking since there are still opportunities present in the market, the bong market for instance is so good right now.?
Agarwal, on the other hand, logically explained, ?Indian stock markets have the characteristics of a great period of wealth creation by a period of wealth erosion. This time I thought we were more stable and it would not happen, but the cycle continues as seen from 2007 to 08.? The ever optimistic Jhunjhunwala added, ?The price deflation in India, which we are witnessing now will spur growth again and revive the dying industries and markets.?
Bhattacharya too was highly optimistic and all their positive energy seemed to only further grab the crowds? attention and proved almost infectious at times. He went on to say, ?I think we will see an Asian company become far more competitive, especially when competing with foreign companies. In fact, I would not be surprised if in 10 years hence, there will be an Indian company that is the biggest in the world.?
Of course, by now, the audience was really feeling the vibes of belief in our Indian markets as the experts shared their views and Jhunjhunwala was like fuel to this fire, he felt, ?This is the transition from the west to the east, from Hollywood to Bollywood.? Bhattacharya also warned, ?The government and people running the country need to promote the growth, corporatisation and business, if we are to sustain our growth levels. Also, companies need to do capital allocation well and efficiently. However, this will soon be a lesson to learn for Indian companies, for competition drives one to rationality.?
Jhunjhunwala added, ?Whoever you maybe, the economies and cycles remain the same. Americans can?t only keep consuming and need to now learn to save if they wish to truly revive themselves.
For once, the crisis starts leaving and change sets in, we may or may not be the leaders but we will have a surer model than China.?
?The size of risk and concentration of risk was so large that it was a disaster waiting to happen. They will go methodically and try and repair their balance sheet,? were Agarwal?s views on the American financial crisis and their abilities.
Lastly, the discussion winded down, with all the experts being asked to make a speculative call on the index, as to whether it will hit 21,000 in two years or five years.
Bhattacharya and Jhunjhunwala both concurred the index should definitely hit the 21,000-mark in two years, while the ever-cautious Agarwal, felt the index would take over two years but there was a very good chance would reach 21,000 in under five years.