‘Successful investing is a piece of art’

Once upon a time the company mentioned in your wealth report was Hero MotoCorp. A lot has changed in your latest wealth creation study, which is in its 27th year. New companies have come and new business models have come.

Our problem is that the market has become so expensive compared to what we have seen. In the 1990s, I clearly remember, I used to live in the building where the junior Asian Paints executives lived, and I corresponded with all of them. I knew this was a great company. But my parameter then was not to buy above 15 P/E. It was trading at 19-20 P/E. I told myself – let’s buy at 20 P/E. By then it had become 23-24 P/E. I was growing somewhat, and the stock was going up and up. I remember I tried to buy 23-24 PE and it came down to 26 PE. A dear friend of mine suggested that we wait till the stock reaches 23 PE, and then we will buy. But we’ve never seen it come down to that valuation, and it’s now at 100 PE. So, we don’t know how to justify this 100 pe or 80 pe (Asian Paints valuation today) as we have seen 15-20 pe. People who have just started investing have seen only 50-60 PE so it is easy for them to adjust.

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If you’ve been in the real estate business, you know at what cost 150-200 per sq ft now costs 1.5 lakh a sq.ft. It would be very difficult for someone who said, to buy at 150 1.5 lakhs. Of course there is inflation in realty, but inflation in stocks is not an issue. For whatever given earnings, you are paying the current earnings at the current price.

But you would argue that PE is historical information. In that sense, if you look at other markets, the growth may be limited, whereas the scope for growth is much higher here.

India is growing at about 10% compounded rate, and so you have that level playing field that is growing at just 10% compounded rate. In that, you have to figure out which are the businesses, which are the businesses that are able to get a disproportionate share of the pie. HDFC Bank came into existence in 1995. The GDP at that time would have been around $250-300 billion. Today, the GDP is 10 times what it was earlier. But during the 10 times growth of GDP, a has become a thousand crore company 9 trillion – ie Asian Paints is up 900 times while GDP is up 10 times.

If nominal GDP is growing at a compound rate of 12%, it will double every six years. This is the power of compounding. all around 260 trillion, in six years’ time, it will be on the upside 500 trillion. In that big pool of rupee economy, who wins? Who loses?

And that’s where you have to imagine which businesses and companies are going to have a great time. Like, say, in banks, private sector banks are going to do better than PSU banks over the next 10 years. In the near term, it’s different, but really, capacity is on the side of unlimited tech spending and leadership. And, so, in banking, I think the private sector will win, and within the private sector, it’s the likes of Axis Bank, HDFC Bank, ICICI Bank and Kotak Mahindra Bank where you have to take a call. Which one is really going to be a better growth machine, a better money-making machine—bigger and faster? It is a game of wealth creation.

So how do you adapt to these new circumstances? You mentioned Asian Paints.

I can choose from 2,000 stocks. There is a lot of liquidity, the economy is large, and the size of opportunities in India is growing at 12% every year. You can’t deny it. see, if today my GDP is 260 trillion and rising 300 trillion, 40 trillion has to come from someone. What is the job of an entrepreneur? To win over the given conditions and make money. Money is not lying on the table. Despite several obstacles such as the Sino-Indian War, the 1971 war, and bankruptcy in the early nineties, the economy has grown slowly but steadily. We are in a very strong position now. I think for the first time after 30 years, we have a very stable and confident political management, which has an ambition to make India an advanced economy, which means at least $10,000 in the next 25-30 years Or per capita income of 4X-6X. , This implies an 8-9% GDP growth rate because by then the world average would also have gone up to, say, $15,000 per capita. I think we’re shooting for 7.5-8% growth for the next 25 years. The biggest advantage of this type of growth is currency gain. Japan was 325 yen to the USD, it rose to 70, and now it’s 100-110. 3X profit as your currency strengthened. It will come at some point in our case given the potential for growth.

Where do you see the next big opportunities?

That which is hated is where the greatest opportunity lies. The thing that was hated in the last five years- PSU Banks, where half the opportunity is gone and maybe half is left. Now, hating on digital is happening; That’s half the hate. It will go to its logical conclusion and nobody would even like to talk about it.

Are there any other sectors on your radar?

whatever is unpopular; Unfortunately, the market isn’t that cheap right now, so reeling it in isn’t easy. I would say OMCs like HPCL, BPCL, IOC and all PSUs are very cheap. they made 10,000-12,000 crore loss in a quarter now, the government will make sure they make that much profit. But no one accepts. Look at the turnover of HPCL and BPCL. they are 5-6 trillion. But these companies have become unbelievable by making profits 10,000 crores and is doing loss 10,000 crores. That unpredictability has destroyed the value. All of their losses came to shareholders, and this destroyed their business model as they were not allowed to raise fuel prices as they were linked to inflation.

FIIs are selling. Will they continue to do so?

Market at 22 PE is not cheap by any means…10 year average is 17-18. FIIs account for 20% of the market, constituting a major portion of the index. All liquid large caps are with him. You cannot ignore their thinking. He feels that India is trading at 50-60% premium to EM. India accounts for 3.5% of the global market cap, while the institutional allocation is perhaps 1%. India is poised to account for 3.5% to 5% of the global mcap. Now they’re selling, so they’ll go below 1%. There’s a lot of catching-up to be done. If India starts growing at a sustained rate of 7-8% (real GDP) and corporate earnings start rising, they have no option but to buy India. So till we do well, FIIs should remain net buyers.

Has retail provided them an exit?

Obviously, there is only one market for retail, which is called India, but there are many markets for foreign investors. Growing retail presence, providing liquidity to entrepreneurs, is a silent revolution. In 2020, we had 40 million demat accounts, and today, this has grown to 110 million – every month, adding 2-3 million customers due to their digital onboarding. There is a lot of durable capital coming in from retail. This capital is never going to go away. This equity inflow gives you risk capital. Once you have venture capital, you have banks that will make loans to corporates. What was the problem after 2008-09? Corporates did not actually bring any equity in the new projects. When the tremors struck, they had nothing to fall back on. Today, there is no borrowing and a lot of equity. From here as growth accelerates, you will have more equity capital and very rational lending and discipline. Corporate players will also be more disciplined than bankers. To grow a business you need opportunity, entrepreneurs, equity and debt.

How difficult has it become to invest in the market with the influx of new players along with institutions?

Successful investing is a piece of art. Now the task has become more complex as multiple players are coming in – very sophisticated FIIs, large family offices, smart investors with data analytics etc. So, you’re competing in the same bucket. Where was data analytics 15 years ago? There was no data. Forget about analytics. Ninety-nine percent of the market is options, with average daily turnover of derivatives being approx. 130 trillion and cash approx 50,000 crores.

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