Motilal Oswal’s Raamdeo Agrawal Sees Market Winners Even In A Flat Economy
Raamdeo Agrawal of Motilal Oswal Financial Services Ltd. (Photographer: Dhiraj Singh/Bloomberg)  

Motilal Oswal’s Raamdeo Agrawal Sees Market Winners Even In A Flat Economy

Amid multiple challenges of weak demand, imperfect policy moves and a pandemic, veteran investor Raamdeo Agrawal said it will still be unwise to bet against India’s growth story.

“Some businesses will win big time and some business will lose big time,” the chairman of Motilal Oswal Financial Services Ltd. told BloombergQuint in an interview. “So our job is to find the businesses and the companies which are going to win and put our small bet, whatever little we have, and wait for that company to perform.”

India still has the ingredients for “magic to happen” with the world’s largest young population, the talent, democracy, an English-speaking population,rampant digital economy, favourable demographics and even forex, he said.

“All the wood is there, everything is there but the fire is not there,” he said. “So, you need that one spark, and I’ve seen enough of this—that when you have complete disappointment and when you think it is not going to happen, only then it happens.”

As for choosing what to invest in, he reiterated his well-known formula of visible growth, the courage to buy and the patience to hold.

When asked about the Covid-19 impact, he said that while the end of the pandemic or its total damage is not known, it’s not the end of the world. The outbreak has simply made the environment “fuzzy” which will lead to more questions than answers. That too, he said, presents an opportunity for investors to know better and select companies that will win big time.

Today, a lot of uncertainties are there, unprecedented uncertainties are there and yet we are to invest in that uncertain environment.
Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services

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We’ve seen that history may not repeat but it rhymes. Do you reckon that the long history of the last 30-35 years, can it get repeated or rhymed over the next 30 to 35 years?

It is very aptly said by somebody that prediction of the future is very dangerous. With that kind of a caveat, I would say that when I started in 1985, after becoming a chartered accountant and started investing, the experience was very little. So the only thing was the challenge to make it, the challenge to be successful, the challenge to make a career, to start a family. Those things were there and when you’re not experienced anything, you’ve not seeing anything in the world, you don’t bother too much about what is going to happen in 10, 15 20-30 years. But when you have travelled through 35 years, I’ve actually travelled and right under me, index funds of 300-400 went up to 35-40,000. That has happened in the last 30-35 years.

If you see the journey, the conditions in 1985 and the conditions today, I think there is no comparison. Any data you pick up, today the conditions are far more conducive for the repeat of the future but the next 5, 10-15 years look far more exciting than what it was maybe in 1985, ’90-‘95 at any point of time in last 35 years.

I guess some part of it stems from one point that you’ve told me a couple of times or a number of times in our conversations, is that India is the ultimate next trillion dollar story and the subsequent trillions after that will come in at a faster pace is at the basis. Is that the basis?

So, that has what has been happening and there is no reason why that machine will stop. Why do we say that today at seven o’clock, the sun will set and tomorrow morning the sun will rise again at seven o’clock? It is because it has been happening since forever. Like that if you see, India started in 1947 with literally 99% of people below poverty line. It was a complete basket case as a country in 1947, when we got independence. We had all kinds of disturbances with the partition and then you had the fight with Pakistan, then you had fight with China in 1962, then the war in 1965, the war in 1972 war. So we had all kinds of problems and yet the economy grew. With all kinds of crises, the economy grew between 1947 and 2007 to become a trillion dollar economy. It took 60 years for the economy of 1,000 million people to become a trillion-dollar economy. That was in 2007. From 2007, to now 2020 we have almost become 3X; almost $3 trillion.

The first came in 60 years; the second came in 7-8 years. Third, would have come in 5-6 years and the fourth will come in within 3-4 years. China now has about $15 trillion GDP. They grow at about 6%-7%, they add a trillion dollar every year. So, incidentally China grew, China became a trillion dollar economy in 1998, and today it has become $14-15 trillion. India is exactly 13-14 years behind and is very interestingly poised to grow very nicely. I think what gives me confidence in that the world is growing at 6% dollar rate, let’s not get into real and inflation, but the world has grown at the dollar rate at about five to 6% in the last 35 years. So there is no reason to believe that the world will not grow at about 5-6%.

I’m no economist to say that but I’m just extrapolating the current trend into the future. The potential is very high. So, if the world grew at 6%, the world will become a very prosperous place. That you must believe that in the next 15 years, the world from $85 trillion, it will be more like $160-170 trillion. The kind of next $85 trillion, India will have a much bigger share than what it has today because India has all the all the things that are required. It has the youngest population, it has the talent, it has the political setup, it has the democracy, it has English as a speaking language, digital economy is in full rampage, and demographics are in your side, even forex. I think it’s one of the things that a poor cannot do is Forex. For development, you need X amount of Forex in a globally interdependent economy. In 1992, we had less than a billion dollar of Forex literally less than a week’s import coverage. Today, we are sitting on over half a trillion dollar of forex reserve and climbing faster than any other country. That is the third largest after China and Japan. So, incidentally, this is the month when we have a proper trade surplus first time in the history of I think, 20, 30-40 years.

What I’m saying is that this is a time when you have enough Forex and if you have demographics, you have the politics at your side; you have the world wanting more of India. There is nothing much to challenge you. So now it is on us whether we can achieve that. I don’t have any reason to believe that we will not be able to do it.

What’s the difference Mr. Agrawal between 10-12 years ago to now. A lot of these promises about India having good demographics, young English speaking population demographic and things on your side existed 10-12 years ago but we have to admit that compared to say China or some of the other nations. We haven’t done justice to our growth potential. So, we will grow for sure but will we to your mind be able to do justice and if so, why do you believe that now versus what are your thoughts would have been 10-12 years ago? What’s the difference?

So, this growth is something which even as an entrepreneur I know that -- forget about a country I have never run a country but I have run a small business -- growth doesn’t happen every year. When you think that I’m tired and now I cannot see what is happening I put my best, then the growth happens and growth happens beyond your limit. I remember in 1990, I started in 1987 and for the first four years, the way we worked, me and Moti, we used to come diligently at 10 o’clock go back at eight o’clock, nine o’clock but we were barely on Rs 15 lakh rupees in four years. Then, between ‘90 and ‘92, a bull run came the external environment was so favourable, there was a bull run not done by me or anything, but it happened and from that we earned Rs 30 crore in 18 months. That’s how serious the foundation of Motilal Oswal was laid and I can tell you three to four more instances, how the tailwind in the global economies or your own economies, for some reason happens that the economy is pushed to a different level altogether.

Also every economy and with large economies of course your hard work is required, sincerity is required and policies are required but you need that enabling global environment for it to happen at a rapid pace. So, I would say the Indian economic growth between 2003 and 2007 was unprecedented. The external trade was growing at 25-30% and the economy grew at 8- 9% compounded for five -six years. So, that was a very different period of time but between 2008 and 2014, again we grew maybe 5, 6-7% for the last five years. In the last five years, a lot of reforms came in and has been more muted than what one would desire.

I think your stock picking technique starts with asking whether the magic is happening in a company or no. Do you reckon if India was a company, then the magic is happening. Am I correct?

All the ingredients are there but for the magic to happen something is amiss. Like all the wood is there, everything is there but the fire is not there. So, you need that one spark, and I’ve seen enough of this that when you have complete disappointment and when you think it is not going to happen, only then it happens. Why it happens and why it will happen, I am not the master of that but what I’ve seen in the past that it will happen. I don’t have any doubts that it will happen.

You’re not trying to second guess that it could be this whole China versus India thing which could be leading to that spark or the fact that we are in a favourable position on a number of other accounts. Something will happen you can’t just place a finger on it right now?

Yes,it’s like saying that I have a rank in chartered accountancy I will get a job.Now you say you don’t have any offer but I know I’ll get it. You say the economy is very bad, there are no jobs, there are so many layoffs and all but I know for sure that I will get a job, a decent job I’ll get.

How do you correlate investing in that scenario with this? Because I’ve seen you traverse and you used to look at profitable companies for the next three-four years and make investment decisions as well in the past, and you probably look at companies with a 10-15 year as well and make investment decisions. What are you doing right now?

The investing style is the same. We are a voracious stock buyer. In this economy, you guys ask and we talk about it but actually we should not be allowed to talk because this as a subject is a specialized subject and only economists or the guys are trained in that should talk and have an opinion. Coming back to investing, investing is far simpler and a much smaller game than the game of economics and even in a flat economy, there will be winners and losers. Some businesses will win big time and some business will lose big time.

So our job is to find the companies, businesses and the companies which are going to win and put our small bet whatever little we have and wait for that company to perform. So that’s what we do patiently. Basically in investing, three things are required. One, you’ve got to have the vision to see that these businesses or companies are going to do well. Secondly, you should have the courage to buy and the patience to hold because when it doesn’t work or things take time for it to work then you should not become impatient. So over a period of time, in the last 35 years, I think this is what exactly we have mastered or we have got over our behavioural setback and we are working on that. So, the investing style remains the same, the process doesn’t change. Even in a flat or 1-2%, 4-5% GDP growth rate, I don’t know what is the most pessimistic forecasts for the GDP growth rate but even if it’s 4-5%, we will see a lot of winners and losers in the marketplace. Of course, it cannot match with the general boom in the market. When you have 7-8% or 9% growth, the government tax buoyancy is massive, the government is giving orders left, right and centre, there is infra spend, there is a shortage of every damn thing; the capacity is running out, people are adding up capacity overnight, what is your capex becomes my revenue. So suddenly there is a huge demand and a very strong demand.

Today, if you ask me in the Covid period, when is a boom going to come? I’d say, we don’t know when Covid is going to end. What shape is it going to leave us, what is the kind of damage, then damage assessment will happen and then what are the counter cyclical policy the government itself takes and which businesses are in good shape or bad shape. Those things have to be seen. Today, a lot of uncertainties are there, unprecedented uncertainties are there and yet we are to invest in that uncertain environment.

Whole presentation that you made and the whole belief about ‘Don’t bet against India’ it’s surely not just pre-empted on a few stocks that are do well right? You presumed that the economy as a whole would do well. So, do you like this recent spate of reforms Mr. Agrawal? Ashok Gulati likened the Agri reforms; the ones that were done by the Manmohan Singh government in 1991 and land, labour reforms waiting to be cleared as well. They have been brushed under the carpet because of Covid, but do you like what is happening here?

Yes, if it is executed well then clearly these are far reaching reforms, particularly the agricultural thing; APMC kind of thing where now the buyers can buy directly from the farmers. The farmers could probably sell to anybody but buyers couldn’t buy bypassing the APMC. So, now I think the large retailers which are coming up like what we are seeing the organized retail retailers, they can buy the farm to fork; that concept could become real. It takes time, it is not a 12-month kind of action but you will start seeing in two to three years’ time, farmers growing for the retailers and their business model will change and become better. I think it has a potential to bring the kind of revolutionary impact in rural India because rural India is well supported, tax laws are very lax and it is in the private sector. I mean, a good thing is that farming is not with the government so the farmers can organize themselves and get in agreement with the retailers. So I think it is a work in progress, but I’m hopeful that it can become big in four-five years’ time.

That can add meaningfully to maybe even the investable community right because there is may not be a direct place but it would impact a lot of revenue streams for a lot of companies I reckon?

It all depends on execution; what kind of promotion is there and who is blocking it. So, it’s all in the execution of a lot of things. Say for example, the steel licenses but not a single plan came in Orissa by the boom of 2003-2008. Fundamentally, we should have got at least 5 to 10 new steel plants in Orissa but nothing came. The broad policy was right but finally at the execution level, it didn’t happen. It needs flawless execution for this to become a movement and scale up in millions and billions to turn all over the country, that takes time and slowly you have to give it time. You have to set an example, say, in the next two-three years, Punjab, Uttar Pradesh, Haryana they have a very advance practice in agriculture. So, they will show the example and that trend will pass over to Gujarat, Maharashtra in other places. I think with the internet I think it can happen much faster.

Are you are you making any investment hypotheses, if not essential large investment decisions on something like this, sticking to agri right now?

I’m a village boy so I understand how this so called rural economy works and how to make money with rural consumption. Basically, the stock market is more about discretionaries. Where will the discretionary spend on rural India go? Say, liquor or motorcycles, it will go to cheap entry level cars, it will go to agro inputs, some pesticides, fertilizers, you see the tractors are booming. It is only segment of the economy which is all time high in terms of production and sales. So, clearly that rural push is visible. It is not something to do with the reform but clearly, rural economy has been very resilient and I would say it has remained more or less undamaged by Covid-19. The monsoon has been very good; farm prices have been very good. That is the portion of the economy, two thirds of the population is there but only one third of the income comes. Let’s not forget that right now, rural economy is much smaller than the policing of the game. So, the benefits will be in very small pockets and we have to figure out the companies which have a monopolistic tendency and yet it has been loved by rural India. So, we had to go one by one whether it is a tractor company, whether it is a motorcycle company or with a pesticide company, or a logistic company or something like that.

What’s the nature of businesses that could actually propel the next leg of growth? I’m not trying to get in sectors what I’m trying to understand from you is when you’re looking at companies currently, are you looking at risk takers? Entrepreneurs who don’t mind betting their balance sheet right now on growth, even if it looks ugly for a few quarters-years, etc. but there is growth potential? Or are you banking upon companies which are displaying both-- the balance sheet growth and the ability to take risk but minimal so that doesn’t damage the balance sheet. How are you approaching this?

Today, what is most important is, who is going to come out stronger from this storm. The Covid storm is going to break a lot of businesses and probably the weaker businesses which were not run well before Covid would be more susceptible because the government help will also be very limited and business in any case will be shut for most of them. So, you have a double blow and third is they are leveraged, that the business is bad, the government support is not there and they are leveraged. So, I think this triple blow is going to cripple a lot of companies. We have to see that we are not in that category. We have to find the companies which are a clear survivor; not a chance but clearly a survivor. That is the first thing.

Second, what is the potential of the business in the future. In the sense that, is there a potential for penetration of their products or no. How’s the competitive situation, how the competitive forces will shape up in the future. One other thing that Covid is doing is that competitive forces for larger businesses have suddenly come down because the new entrance which were coming or the ones which were at a loss; those were challenging the existing incumbents, they have taken a backseat because either the seed money is not there or the market itself has collapsed.

So clearly when the Covid storm is over and we come out of Covid in next one or two years, I think the existing successful companies will have a clear runway for two-three years without any challenge. So I think we are looking at the companies which are going to come out prosperously out of the storm. Actually, few very few businesses are doing better. This is the quarter in which the good and bad, ugly, will all be clear. You must have seen an 80% decline in the profit; somebody will have 5% decline profit, somebody actually go by 30-40%. You have to find the 5-10 companies which are going to grow like that.

This is not the end of the world; let me tell you. But this is going to give you a very fuzzy kind of environment. People will get so confused how much is the pent up demand, how much is the actual decline, how strong is a franchise. There will be a lot of question marks and the market will not know how to price it. So, here is an opportunity for you to know the company better which will make you say, Covid or no-Covid, this company is going to win big time and hence, they will misprice and say, let me buy into that.

A small follow up because I see a lot of disparity in opinion from people and again, I know you yourself will tell me that my opinion is an opinion right now it may not be right or wrong. But everybody is confused about what the companies are; not the businesses or the business models which will succeed or fail post-Covid, right? Opportunities are written for cinema halls, and at the same time people are coming in saying that multiplexes are still here to stay. Again, obituaries are written for malls saying that this will not succeed but there are a number more people who believe that a human being is a social animal therefore, these businesses will be here, even if they face some problem in the next couple of quarters. Have you been able to say to yourself with certainty that what are these businesses that last and what are the ones that may not last?

So one is that, you start with a portfolio. We had our fully invested portfolio on the very day of Covid and then the Covid show started. In the Covid show, whatever was the weaker company in your portfolio from any segment, say financials or banks? Now, you have all kinds of banks, you have the best of the banks and you have a not-so-great of a bank. At the early stage, what Buffett did, he sold all the airline stock. He realised that this particular business model is broken for not now but probably broken for a pretty long time to come. He decided to get out of the whole thing in a hurry, at a loss also. So, clearly the message is that at this point of time if you realize that Covid has broken the business model or it has exposed the weakness of the model, I think you are better off getting rid of that particular company and get into something which has a better chance of survival and prosperity. So you improve the quality of the portfolio at this point of time. So, when I come out I come out with only good and prospering companies.

So you yourself also believe that it might be better to kind of take that call right now, you might have taken the call in your portfolio as well. Why stay with risky businesses, even if the price has fallen; best to rearrange or realign the portfolio.

See, pre-Covid, the best of your reasoning capability you selected a portfolio pre-Covid. You’re not God; I mean nobody knew Covid is coming and what all aspects of Covid are there and the lockdown is there and resilience of businesses. It’s not that the businesses which we have, have not suffered. They also suffered but I think it is a reassessment of who is going to come out with the least possible damage. The damage is there to almost everybody but who is going to come out with the least possible damage.

The other point and I’m just borrowing a slide from one of the presentations that I saw Mr. Agrawal made which is about the growth that India may have and you call it a 7-8% GDP growth for the next 35 years as a Lollapalooza. Now, my question being that if indeed that’s the ideal thing to happen, you are saying that it’s difficult to predict that but let’s make that as a hypothesis. What do you bet on that? Do you bet on inward looking businesses because India will grow that fast or do you bet on companies or businesses that are going out and conquering the world? Or is it an ideal mix of both?

The issue is that I don’t do it like this. Once I’m bullish, once my mind-set is there that, yes, the world is going to be fine in six months or one year or in the next 10 years the world is going to be fine and I have to invest I have to be in equities, stocks and all. Then we go about finding the businesses right from bottoms up; who’s putting up new business model or whose business model is successful, or the ones which are successful, do they have any new challenges or have their opportunities even become bigger? Because the winning companies, they also keep finding new ways of making more and more money and become bigger and bigger. So, you have to just keep chasing the successful entrepreneur and the successful model and rest all is taken care by whatever happens externally. The guys who have a prepared mind, those who are in the readiness, they only become lucky at some point of time. So, out of your portfolio of say 25 stocks, there will be every two or three stocks which will become lucky too. Maybe you’re not bought it for them but suddenly, there is a spurt in the demand, something which happens which will take the world to different levels and hence you get disproportionally rewarded. But finding only those two companies and putting money is impossible.

For example, let me take technology. Everybody thought that Indian technology will not do well. Somehow Covid-19 is brought out some degree of optimism out there and at the same time now Indians have the option; the product which you have, a Nasdaq ETF product or even going out and investing directly, to invest in global technology leaders too or to invest in Reliance Industries which has got these Jio-platforms. What do you think? The global dominating businesses will win or will Indian IT also have its place under the sun?

Indian IT is a world-beater. In fact, a lot of these world beating companies, a lot of their software and modules are built in Hyderabad and Gurgaon and Bangalore. So, clearly Indian IT Services has its own unparalleled support to the global digital move or whatever is happening in the world of technology. Indian tech professionals are complete backbone to global IT revolution. So, I would not disassociate though Indians don’t have so much on innovation, they make it more on the hard work they’re doing at the hour but clearly, India’s digital capability is marked as one of the biggest differentiator. In fact, in the presentation I have said that it is a very unique thing that for a country of $2,000 per capita, you don’t find that level of sophistication in digital capability. Today, the digital capability of India is staggering and we’ll get to see more of it, as we go along. Since we have developed these systems for others worldwide and they are supporting them day in and day out, there is enough talent to do what the world is doing and maybe in some cases, better than the world. So, we can take the lead also. Clearly, India’s digital capability is far higher than the capita income India has.

I’m sorry if I misunderstood the answer, but a lot of people write obituaries not arbitrarily but the investing possibility in Indian IT or because they are doing rudimentary back-end work and not quite innovating. You don’t agree with that?

I’ll tell you the simplest businesses can make more money than very complex businesses. Airline business is so complex I mean the logistically, it’s a nightmare to give you a smooth ticket and lift you up from the ground safely and take you take you to fly at 35,000 feet. Then land you back in, in some city. So, for those one-two hour flights, you get pay less than $100 maybe more like $60 dollars. So, there’s a lot of complication in there and you are not going to make money. On the other hand, a good street food, say, Vada Pav is on a street where there is no competition, he can make more assured money than an airline company. It’s not about sophistication. It is about how you add value and how the little competition is when you are doing it. That is important. It is not about what looks to be very advanced or complicated or cutting edge technology. Money making is very different from so called more sophisticated things.

Telecom is doing something completely simple as well right, connecting you and me, connecting you to others me to others and without competition as well. Do you reckon it has found its place under the sun?

As I said, the difference between Aamby Valley and Mumbai is the quality of the internet. So, the importance of the Internet has become so high and is increasing by the day. The whole economy is running right now on the backbone of internet given by these telecom companies. So the technology is playing a lot more role in running the economy or day to day life of the people. So telecom companies with now, about two or three players left it is a very interesting place. It’s not only telecom, it is internet also. So, I think it’s an interesting time; they’re not made money for last 10-12 years. I think, they need to make money and the government must see to it that they make money so that they can spend more on the capital expenditure. But it remains inevidently and the potential of making 30-40% return on equity is not possible. Today it is a negative, so from there to a 15% kind of a thing. When you go from ‘very bad’ to ‘reasonably good’, it’s a huge delta. It is never going to be Unilever and Nestle, there’s not going to be 100% ROE, it is a utility. So, it will be very capex dependent but then you can make a lot of money. An absolute amount of money to be made would be very high though the return on capital will be much lower.

You’ve looked at businesses, balance sheets business models now for the last so many years. In the last three months, anything that you’ve tracked, which has surprised you positively, a business model, a business decision, an annual report or a balance sheet that you would have seen and you would have thought that there’ll be a lot of stress but there wasn’t because the company managed it well. Anything that has surprised you in the last months positively?

What has surprised me is the resilience of technology and the role of technology in learning day to day life of the people at large, all over the world. As far as the data flow is concerned, right now the post-Covid impact is yet to be seen. In the sense that, the first quarter numbers are coming now so I’m very eagerly seeing each and every number as many as I can see and analyse. Where is the true franchise, in the sense that whether they can survive and where they can prosper. So we have seen a few technology companies, one retail company. So we are seeing the impacts are on their business models so it’s a work in progress. Except for this lash about this telecom and technology, in fact I’m mostly stunned by the stock market resilience in this period when markets took off from 7,500-7,600 Nifty to the current levels. I think that has been the biggest positive surprise for me but otherwise, I’m just trying to grapple with what is breaking down and what is intact.

Mr. Agarwal told us it’s also important to stay invested during trying times because the bottom number doesn’t belong to the person who ties but belongs to the person who stayed invested.

It actually worked. I was so bearish personally but I didn’t reflect it in my portfolio activity. In the sense that, for the conversation, we can always have the bullish talk and bearish talk but portfolio goes 100% invested. So, it drives my changes within the portfolio and never go in cash. So broadly, never go in cash and stay invested. So I got the 100% throwback from the bottom till the top.

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