This interview was first published by www.rediff.com on May 03, 2014
To set up any business in India may be little time consuming, but it is not so difficult as it is conceived to be. Raamdeo Agrawal, joint managing director of Motilal Oswal Securities also not had it easy when he co-founded the firm in 1987. Agrawal follows some simple but very important fundamentals that have helped him steer his business through thick and thin.
Along with handling prime responsibilities at Motilal Oswal, Agrawal is an Associate of Institute of Chartered Accountants of India and also a member of the National Committee on Capital Markets of the Confederation of Indian Industry. He is the recipient of several accolades for his contribution to the capital markets.
In a free wheeling conversation with Nupur Pavan Bang of the Insurance Information Bureau of India and Vikram Kuriyan of the Indian School of Business, Agrawal talks about his journey, investment process that he adopts and his faith in the Indian economy.
You have built Motilal Oswal from the scratch. It is not easy to build a financial advisory firm in India as people do not want to pay for such services. Tell us about your journey, about the challenges.
In1987, Motilal Oswal and I started a sub-broking firm. The initial few years were a struggle. But we always insisted on research. The Harshad Mehta scam happened in 1992. The scam resulted in the Sensex touching 4,500 but it was a fantastic business opportunity. Volumes exploded and we made a lot of money and re-invested them into the market which further appreciated multiple times. Then the market crashed around 50 per cent. By 1993-94 we made a few crore.
We kept on building our research team and ventured into Institutional broking. Morgan Stanley became our first client. By 2002 we were the best Indian local brokerage house and since then we have maintained the number one or may be second position in research.
In 2003, Motilal Oswal had a topline of Rs 10 crore (Rs 100 million) and a bottomline of Rs 2 crore. The bull phase from 2003 to 2008 saw the firm growing 90 times to Rs 900 crore (Rs 90 billion) and pre-tax profit of Rs 300 crore (Rs 3 billion) respectively. We paid Rs 100 crore ( Rs one billion) in taxes in 2008.
When we got listed on NSE and BSE in 2007, our market capitalization on the day of listing was close to Rs 2000 crore (Rs 20 billion). In three months it crossed Rest 6000 crore (Rs 60 billion) indicating the confidence of the investors in the company. Complete client satisfaction and research are the basis of our business.
Focus on research must have been difficult way back in late eighties, as the World Wide Web and internet were not available then. How did you manage to research?
The absence of or limited access to resources had both advantages and demerits. I went to the US and walked into a Barnes and Noble book store and found many good books. But I could not buy them as I did not have the money. Up until 1994, there was a scarcity of resources. So what we did was that we physically went and collected almost 200 to 300 balance sheets each year. The biggest disadvantage then was that we did not have historic data.
We examined ratios like the EBITDA margin, cost margin, etc. Very few other competitors had the kind of edge (competitive advantage) that we built in understanding corporate India. I had a good feel for numbers. I would remember everything for every company because my brain was empty. Today everyone’s mind is full of all irrelevant things due information flowing in from all corners. The biggest challenge is to focus your mind on getting what is important.
Where does one begin to look, in order to invest in the stock markets?
Before one starts investing, always look at the business of the company. Invest in a business you understand. 99 per cent of the job is in understanding the business. If someone tells me about VSNL, I leave. It’s a complex business and I don’t understand it. You cannot evaluate a company unless you understand it. For most people, a company is just a number. Most people don’t know what Reliance actually does.
Once you understand the business, see if the business is good or bad. Is the long term economics of the company favorable? Is management trustworthy and able? Figure out if the company actually makes money or not. Making an investment comes later.
You must also look at what the company does with the money that they make. Do they distribute [dividends], re-invest or destroy? Lots of companies do not allocate capital. Even Infosys is sitting with crore of cash. We saw a leading telecom company mis-allocating funds and buying businesses that did not add value. The stock has not done well for a few years.
When QGL : Quality, Growth and Longevity, all three come together, the company will make money. Invest in such companies and let compounding do its job.
How does one acquire the skills to evaluate the business? Stock markets are risky and people can lose money.
Start investing in the market with small amounts. When you lose, you will realise your mistakes. Value derived from small mistakes is huge. Those lessons will not be forgotten. So it is necessary to start investing in small amounts.
Invest time in reading. If you don’t have the reading habit then you are out. That habit cannot be cultivated. The urge to learn more should be there. It’s about understanding and not information. Investing skill is a global skill, same in any market, same across time series. You have to learn and acquire those frameworks. A beginning has to be made by actually entering the markets.
You are a proponent of equities. But in India, people prefer to invest in fixed deposits or gold. Retail investors mostly lose money inequities.
Warren Buffet defines Investing as foregoing current purchasing power now for a greater purchasing power in future. The first big anomaly is inflation. In the last 34 years, India has recorded consumer price inflation of about 8.4 per cent. You have to earn at least post tax 8-8.5 per cent to stay where you are and fixed income [deposits] delivers that. So basically you are running very fast to stay where you are standing.
Till 2005, gold was as good or bad as fixed income. But in recent times it has done better. In India, it also has to do with the culture rather than the notion of investing.
Equities are one asset class where you can beat inflation and by a large margin if you make the right decisions. There are two emotions in the market: greed and fear.
People come only out of greed. Greed is highest when market is at the peak of the bull phase. That is the time when 80-90 per cent of the investors enter the market, when actually no one should come close to it. They sell when fear is the dominating emotion, that’s when the market is at the bottom. So they buy at the top and sell at the bottom. It will keep happening. You have to master these emotions. Buy when everyone is selling and sell when everyone is buying. If you do that, you will not lose money.
How do you see the next 25 years unfolding for India?
When we became independent in 1947, our population was 330 million and our GDP was $10 billion. It took 60 years (2007) for the country to become a trillion dollar economy. When a country becomes a trillion dollar economy, it starts getting noticed. In 2013 or 2014, it will be a 2 trillion dollar economy, despite the rupee depreciation. The time taken to achieve the 3rd trillion mark will be even shorter.
Magic is in the $1000 per capita figure. $900 is non-discretionary. It is needed for food, shelter, etc. Anything beyond that is discretionary. As of now, we have only about $100 as discretionary. The journey has just started. In 1987 this journey was blank. The market capitalisation of Cipla was Rs 5 crore ( Rs 50 million). Today it is a Rs 30,000-40,00 crore (Rs 300-400 billion) company. Reliance would be a few 100 crores at that time. Scale has changed in the last 25 years and will be bigger in the next 25 years.
Doubling of GDP means exponential opportunity for various businesses. One must prepare for it and participate in it. Foreign Investors are already investing in India. We are looking at the present but they are seeing the future. Why does Walmart want to come? Because India will be one of the largest market in the next 25 to 40 years for brands or logistics.
Why Etihad? Why P&G? In the future, entry barriers will be much higher than it is now. Lots of businesses will become almost monopolistic and that’s where the opportunity for investing lies.
In 1991, we had a billion dollar reserve. The country did not have a credit rating. We are in different times now. We have $280 billion of foreign currency reserves. The next 25 years will be very exciting.
You mentioned about the $280 billion of foreign exchange reserves that we have. Since the Federal Reserve in the US is tapering off quantitative easing, we have a widening current account deficit, dwindling foreign portfolio investments and a currency that has depreciated more than 25 per cent in a year, would you say it would be prudent for the Reserve Bank of India (RBI) to fire fight and sell dollars in the open market to bring the exchange rate to 2011 levels?
We now have Raghuram Rajan at the helm of affairs at RBI. He is a much acclaimed person and he will do his job. He understands what is required locally and also how to meet the global challenges.
The fear for the worse has resulted in the Rupee depreciating to Rs 65 against the dollar. Before opening up the capital accounts, he is using the challenge to get ample liquidity.
Lots of weapons are available. There is no crisis. There was bad currency pricing. For 10 years, we had inflation differential of 5-6 percent but the currency did not depreciate. So what happened is that existing companies kept on losing their competitiveness and it became difficult for manufacturing companies to conquer the Chinese threat. It is good that the currency has depreciated now and people have understood the implications.
Which other factors will have an impact on the Indian markets and its performance?
Governance is a key factor. A period of five years of good governance will change everything. Today, investment in India forms just less than 1percent of global equity portfolio. That figure can double if governance is good. The amount of money which the world can send to India is humongous. The question is, do we deserve it or not? We area capital scarce nation. So we must play the game and attract capital.
Moves by the Chinese is something that we should be aware of. Till 1998china was like India, after which it emerged. From 1997-98 it is a trillion dollar economy. Since 2009 it is growing by trillion dollars every year with little appreciation of currency. The world economy including India, will be far more impacted by what China does in comparison to the US.
India is far behind in development than China. GDP has slowed down to sub 5percent levels. Why would capital flow to India? Is there any source for optimism?
Well, we can talk about the negatives in the economy. But let there be balance. It should not be that we overlook all good that has happened. There have been major improvements in road networks, telecom networks, infrastructure, in the last 10-15 years. Public-private partnerships have evolved. iPhones are launched in India at the same time as in the US. We may not be happy with the pace of it. But there has been development.
The strengths of this country are very different. I am not undermining the difficulties but let’s not be bogged down by them. I have seen the Mumbai riots, the balance of payments crisis, and the sanctions that followed the nuclear tests in Pokharan. This generation takes the internet as a given. I did not have electricity when I went to school.
We are impatient. We want all our cities to be like Shanghai. What we should realise is that we don’t have capital. If we see it as a challenge, we will overcome the problem. The challenges have kept changing over time, but as a country, we have always emerged triumphant.