Why ValueQuest’s Ravi Dharamshi Is Bullish On Indian Markets
While investors brace for uncertainty, ValueQuest Investment Advisors’ Ravi Dharamshi says there’s no choice but to stay bullish on Indian markets in the medium term.
He cited two key factors that will aid domestic markets: India Inc. has deleveraged and corporate profitability will grow, increasing its share in the GDP. And central banks and governments will continue to stimulate the economy with easy-money policies.
Dharamshi’s optimism comes as a severe second Covid-19 wave ravages the nation. Several states announced restrictions, slowing down business activity. And the nation’s vaccination programme, a key factor for the market’s optimism, is faltering amid a shortage of doses.
“I am not saying that the virus is going away,” Dharamshi, founder and managing director at ValueQuest, told BloombergQuint's Niraj Shah in an interview. “I am saying from the market’s point of view, there will be no third wave.”
But Dharamshi cautions that the odds for the Indian market may not be the same as 2020. “You cannot rule out a six-month correction or a consolidation—whether it is a rotating one or happens across the market.”
The NSE Nifty 50 index has risen 11% year-to-date and is trading at life highs. The Nifty closed 2020 with gains of over 15% after recovering from the Covid-induced 20% rout in March.
For Dharamshi, the Indian markets were behind the curve in anticipating growth. That growth is coming through and the markets are now a step ahead of fundamentals, he said. There is nothing to say that fundamentals are going to turn for the worse, he said, and the domestic equities are too far ahead for any capital destruction risk.
The overall profit cycle is improving, according to him, which is fitting for new capital expansion. When that happens, the pie expands and the number of sectors participating also expand, Dharamshi said.
Watch the full interview here:
Read the edited excerpts from the interview here:
Way back around May when Ravi Dharamshi joined on this very show he’d mentioned that Covid was not the pin that would prick the bubble, but actually the accelerator the world economy needed or the Indian economy needed. Those words were prophetic in that sense. Question is, has that change now that we are in the midst of the second wave with the possibilities of God knows how many more waves and what do they do, if at all to the markets? Because while we’re just out of a very severe second wave, the equity markets have gone about unfazed. Ravi, what is your sense right now about what kind of issues or what kind of opportunities can this health scare around India create for the investing fraternity?
RAVI DHARAMSHI: We are in the midst of human tragedy so talking about economy and the market sounds a little bit out of touch and inhuman but, such is life and markets being the discounting mechanism that they are of future cash flows, they don’t have a human or an emotional side to it. So, taking that into account, let’s go right to your question. I think, as we spoke last time, clearly Covid was an accelerator of trends and not the needle that would prick the bubble but the second wave of Covid is even less so. The reason I’m saying this is because when the first time around it happened in February, we were completely taken by surprise and I’m talking about surprise from the markets point of view and actually everybody was surprised, whether it was the government or any healthcare worker, everybody was taken by surprise. They had no idea what to expect. It was a complete lockdown versus what is happening right now is maybe partial and local. There was no vaccine in sight at that point of time today there are eight to 10 options of vaccines available, yes there are supply constraints, but it is not like it is going to remain like this forever. In a couple of months’ time even the vaccine situation will ease. Also, besides the vaccine, there are other drugs and other tools that will be available soon enough in this battle against Covid. The second level thinking that was missing during the first wave was that the central banks and the governments will provide a safety net stimulus to get the economy moving. So, the first wave was totally unexpected, immeasurable, and we had no idea how long the duration it would be. The second wave, on the other hand, is expected, measurable and we have some idea of how long this will last. So, the impact on the markets incrementally reduces to that extent. In fact I will go a step further to say that there will be no third wave. I’m not saying that the virus is going away. What I am saying is from markets point of view, there will not be a third wave so to say. Obviously, the healthcare infrastructure needs to prepare for the worst but that does not mean that the economic impact of that will happen. I think incrementally, I’ll give the same example that I gave the last time. Brexit in 2013-2014 was a big issue. By the time it happened in 2019, actually, the Brexit was far less of an issue and the market did not even think twice about it. So that’s exactly what is going to happen if at all there is a third wave. In fact, medically, I believe, even a third wave can become less likely as there is a very promising drug that is on the line that can actually take care of the pandemic.
You are a pharma expert, just very quickly what is this drug that you are referring to?
RAVI DHARAMSHI: I think there’s a drug called Molnupiravir. It is being talked about and Natco Pharma is one of the few ones but it has not had a tie up with Merck, which is the innovator. So, then another five companies that have signed a licensing pact with Merck. But the point being, this drug Molnupiravir is an orally, administered drug as against Remdesivir and it is known to remove the infectiousness and disease from the phase two clinical trials done by 100% by day five. It is not a drug that is very difficult to manufacture, all we need is scalability. So, if you can identify a person with Covid, early in the stage, then a simple drug therapy or a five-day course of taking two pills per day can cure you of Covid and this, I am hoping that the Government of India approves this drug, and the phase three trials data is encouraging enough just like phase two. Phase two was conducted on ferrets and ferrets have the same lung structure that humans have. So, there is a high hope that this drug will eventually see the light of the day and it will be very effective for non-hospitalised Covid patients. So, if that were to happen just to give you an example, if one person in your family gets infected, all the rest of them can take that particular drug as well, to prevent the infectiousness. One person got contracted, he will be cured in five days but others might not get infected at all. So, this is one more weapon in our armoury to deal with this virus, along with vaccines and many other things. We are also augmenting the healthcare infra and oxygen and ICU beds and pediatric ICU beds. So, I’m saying that the third wave, we will be way better prepared than we were for the second wave and we will have better arms and ammunition to deal with this crisis.
From an investing perspective, last year, the differentiating factor between economies, governments, nations—because everybody was on the same footing when it came to Covid per se I mean how they dealt with lockdowns is separate, but nobody had more vaccines or less vaccines, so to say. Nobody was vaccinated and therefore the amount of stimulus that the central bank or the government or combined could give was probably the differentiating factor. This time around, even the quantum of vaccination done is a bit of a differentiating factor. How are you looking at the macro when it comes to this perspective?
RAVI DHARAMSHI: You’re absolutely right. So, last time around, the amount of damage that could be caused to the economy was an unknown, and governments took some time to realise that but I think they acted fast enough, and provided all the necessary support that the economy needed. Obviously now it is very clear that some of the developed economies have probably overstimulated and we are seeing that in the inflation that is happening across asset classes, materials and everywhere. Essentially, the money is getting devalued against every asset and everything. So, to that extent the response in the second wave going forward is going to be measured. In March, there are very few times in the markets when the odds are so much in your favour that no one should not use the thimble as Warren puts it. You should use a bucket when it is pouring but obviously now 15 months down the line of after a fantastic rally and fantastic returns, the odds are not the same that they were in March 2020. But that is not to say that we are on the verge of an imminent crash. I think the central banks and the governments of the world will still continue to keep their policies loose, they’ll still continue to stimulate the economy, they will keep focusing on the data of job creation, and they will try and ignore the inflation threat as they have already put it—it’s transitionary. Now I have no way of saying that whether this is transitionary or not. My job is to look at what the Fed is doing and what the Fed for that matter or what any other central bank is doing is looking through this inflation. So, I will keep looking out for danger signals from bond markets if there are any. But even after such huge stimulus in round one, where we are all already touching the World War-II kind of proportions, the bond yields world over have barely reached a pre-pandemic level, or in fact, some of them are still in the negative territory. I don’t see panic everywhere, especially in the bond market. I feel if inflation was to manifest itself, it will first get reflected in the bond markets and then equity markets will react to it. At this point of time, I don’t think the bond markets are reacting to it as well. Just to sum it up, 2013 to 2019, was a clean-up phase. We were kind of stuck in this vicious cycle where the economy was just not reviving. One or the other, even the steps taken to reform the economy were turning out to have a negative short-term impact whether it was demonetisation, or GST or RERA or IBC. All these steps were having a negative, short-term impact on the economy. Now, the short-term negative impacts are out. Corporate India is de-leveraged, like, I don’t think it has ever been in the past, at least the last three decades. So, loose monetary policies, deleveraged India Inc., the corporate tax cut, and growing profitability. The corporate profit to GDP which fell to below 1% is now rising since last three quarters, and it is slated to go higher. In that kind of a scenario, one has no choice but to stay bullish from a medium term point of view. But having said that, the odds are not the same as they were in March. You cannot rule out a six-month kind of a correction or a consolidation, and whether it is a rotating one or it happens across the market, that remains to be seen.
In the first Alpha Moguls that you did with us, you had mentioned that at times you’re so focussed on stock-picking and moneymaking that you lose sight of the macro, and it’s when the macro comes and slaps us hard we realise that this should have been paid heed to. You don’t foresee such an issue as things stand right now?
RAVI DHARAMSHI: I absolutely agree to that point, yes. While we still have one eye on the macros, as well as the valuations, but I don’t think it is panic quarters yet and one should still be focussed on stock-picking. So, I think markets were behind the curve in anticipating the kind of profit growth that was on the horizon. For the last eight years we were constantly getting disappointed with the earnings estimates as they were hardly being met. For the last three quarters the surprise on the earnings estimate is so huge that it has never been such a big surprise in the estimate. So, clearly the market was behind the curve in estimating the profits and those profits are now coming through. The fundamentals still remain strong, probably markets might have moved now a step ahead of the fundamentals but there is nothing to say that fundamentals are going to turn for the worse or that markets are so far ahead that there is kind of a capital destruction risk on the horizon. The biggest factor and again pointing out that India Inc. is deleveraged. The utilisation levels are yet to reach a level from where they start announcing huge capex. The economic cycle once put into motion it is difficult to pull it back, I mean, if this profit cycle continues for another two three quarters, you will see a spate of announcements from across sectors on capital expansion. That will be the sign. You need and the corporates need that six eight quarters of profitability under their belt before they start announcing expansion. We can see that in a couple of quarters but it will happen across many more sectors. Just to add to that, this government’s policy of PLI, the production linked incentive scheme, I think is just providing one of the best environments that there has been for corporates. Not only are we restricting input but we’re also providing support domestically to achieve scale. As Neelkanth Mishra has already pointed out, this has never been the case. We have always and always incentivised remaining subscale. The first time that companies are being incentivised to achieve scale to become globally competitive. So, this will have its impact. Today two-three sectors are off the track but in due course about 12 to 15 sectors will be in the same race and there will be champions emerging out of each of those sectors over the next five years.
If you’re not worried about a macro scare or you don’t believe that valuations have turned so out of the whack that it should worry you, how are you playing your portfolio currently? Is the portfolio currently tilted towards the tried and tested, beautiful names with maybe rich valuations or are you going for value because traditionally you are a value investor? Within that, too, are you going for the unlock trade now that we’ve been in about a month, month-and-a-half in a lockdown and we might very soon be out of that? That is where, actually there are bombed out valuations, if you will. So, what’s the current portfolio or stock-picking strategy?
RAVI DHARAMSHI: Just to put a little bit nuance to the outright bullishness that seems to be coming out of the conversation, there are risks at this point of time and the risks are more of you overestimating or extrapolating the current trends into the future or you taking a bet on a company. It is not everybody’s cup of tea to scale up, so there will be a few winners. Not everybody is going to remain a permanently good investment. So, you need to be very careful about the stocks that you pick going forward. Having said that because the profit cycle is improving, corporate profit to GDP, which went below 1% in March 2020 is now probably between 2 and 3% and is likely to rise to 5 to 6% and probably exceed the previous high of 7% in that was made in 2008 and it may exceed in the next four or five years. When the profit cycle is rising it so happens that the pie expands, as well as the number of sectors that are participating in it, expand. The opportunity from that point of view is expanding. Three years back, there were 10, 12-15 stocks that were doing well and only those companies were being touted as quality and those are the stocks to focus on. Now you can see if the number of companies that are reporting fantastic results has probably run into hundreds. It was almost like 200-300 companies would have given fantastic results and the absolute valuation was very cheap. The opportunities are there but the risks also are there in the terms that you have to be really correct in your stock-picking. It is not that you go and blindly place a bet on the last company that is yet to perform in the sector and suddenly that will start doing well. There is a risk of you probably giving too much importance to the near-term profits, there is a risk of a little bit of valuations, if it is a cyclical and not a structural theme. So, you need to be very sure of the sustainability of earnings, the quality of earnings as well.