The longer term priority of the Modi government would be housing, sanitation, defence, infrastructure, said, Ramesh Damani, Member, BSE, in an interview with ETNOW.
Do you think that right now we should not get carried away and euphoric and we should worry about earnings, valuations and global cues?
I have been asked this question so many times in the last few years. Is 8,000 a good level to invest? Is 10,000 still a good level to invest and the answer is always the same. As long as you think the bull market is intact, as long as you find quality businesses at great prices, you need to invest. There is no evidence yet that the bull market that began in 2013 has topped out. Does it suggest that the market is at the higher end of the range right now? It is a personal belief that we are probably at the higher end of the range but would I be investing right now, yes I absolutely would be!
Eearnings in the NDA-1 regime have disappointed us. What are the chances that in the NDA-2 regime earnings could surprise us?
Well let us look at it this way. I am not sure there is a direct answer to your question but Narendra Modi right now is 5 and 0, he has won three state elections with a thumping majority in Gujarat, two national elections of thumping majority on the national scene. This man is in touch with the mood of the electorate. We can say whatever we want, but he has become a transcendental figure in Indian politics, much like after World War II, Charles de Gaulle was in France, Winston Churchill in the UK. Someone who knows the mood and the direction of this country.
When I talked last weekend to a lot of analysts who are very pro BJP, they were suggesting to me that on the ground level, a lot of work has been done by the BJP. By that, they mean direct benefits transfer, cooking fuel for people, more sanitation and that has led to the support.
Rather than focus extremely narrowly on what Dalal Streets concerns are, the market should focus on the broader concern. My sense is that the prime minister in the second term, will look forward to building a legacy of his premiership. The focus is on housing for all, clean water, basic infrastructure spends and the market should be well advised to look at those areas, rather than worry about a particular consumption slowdown or not.
PE multiples have also gotten rerated now. Do you feel that going forward, we might start to look at more inward focussed sectors?
I can only tell you what I am doing. The market breadth has been atrocious as most of you have reported this almost every day that the stocks that comprise the rise, every day are fewer and fewer and they are just the glamour stocks of the market. Where does one do a contrary bet? Does one make it in the midcap space? Does one make it in the balance of the Nifty stocks? What I have done is there will be a massive infrastructure push. The government might take money from the RBI, they might release the fiscal deficit a bit more and they will push it massively to infrastructure spending which will be expressed through a lot of the PSUs that are currently listed on the market.
Over the last year-and-a-half, half a dozen public sector companies mainly in defence and the railways have been listed. If you look through those companies and their balance sheets, you find extraordinary visibility in terms of bill to book almost 5-6:1. The order books are outstanding, earnings growth has been 20%, single digit PEs, 5% yields. If you take a contrary bet, I would suggest that analysts could look at that sector of the market. I know the PSU are out of favour but sometimes, the greatest values are found when a particular sector is out of the favour. It is hard for me to go out and buy the glamour stocks in the market right now but I can certainly afford to buy these stocks and get a 5% yield and wait for the market to comeback and rerate these stocks.
When we looked at the outcome of the 2014 elections, we saw the broader end of the market see a massive rally. There was a lot of enthusiasm within clusters in the broader end of the market. Do you see a similar trend playing out if not immediately after a gap within the broader end of the market which has so far been a bit lacklustre?
I hope so. I really hope so because this kind of market with the index making a new high today, there should be smiles all around but most portfolios are now underperforming the index because the broader market has not kept pace. For the bull market to strengthen and remain good, the market would have to broaden out and that will come only with an earnings rerating.
Because the earnings have been lacklustre, those stocks have fallen out of favour. So yes, we would hope it would happen but perhaps it would not happen in the next six months.
Given how quickly the markets cooled off, do you feel that perhaps a lot of the up move or lot of the sentiment has already been priced in? Do you see a stagnating over the next few months?
That reminds us what an efficient discounting mechanism the market has. In three days, it discounts complete thumping electoral victory that Mr Modi enjoys and now we are going to look at who is going to be the finance minister, how are the monsoons, what is the RBI going to do! So market will now move on to the other factors and more importantly, the first thing that all market participants feel how the finance minister is going to solve is the NBFC crisis that is engulfing us right now.
Markets are fairly efficient discounting machine and now it has discounted the election results and it is going to move on with more mundane matters, not less unimportant but still more mundane relative to the election.
The big move for this calendar year is behind us, we have seen what could be called as front ended returns?
I would not be shocked if that were true. I mean to be honest the returns are in two parts. If you were broad midcap portfolio owner, you had negative returns. If you are in the glamour stocks, yes you have done well up to this morning. My sense is the market is probably at least for the next quarter at the higher end of its range.
NDA-1 in a sense ensured that there was a lot of financial inclusion. Do you think that this mandate is for financial inclusion and that is something which is the secret message which we should realise?
I think so. We underestimate the prime ministers skills in touching out to the broader voter base. By financial inclusion, if we mean what he has done with direct transfer, I think that has worked as a charm in terms of the electoral vote bank politics and has worked very well for him.
What he has done with DeMo, though I disagree with that, it seemed to have formalised the move to the savings sector. The financial sector has been formalised. GST, of course, is a much needed reform that took place which means we have moved from unorganised to organised.
So the prime minister has his touch. He has won five state elections in a row and at this time, we are ready to follow his lead rather than trying to preach him what needs to be done.
We did see the last time around there was a lot of rhetoric centred around Make in India, digital India, smart cities and all those kind of initiatives. It seems the focal point this time would perhaps shift to agrarian crisis. What is the rhetoric that you expect on this front?
Someone pointed out that we cannot have an economy with 20% of GDP from agriculture and about 70% employment. It is very inefficient. So we need to create jobs as you said through Make in India. But from what I understand about reading about the prime minister and talking to people who are close to the corridors of power, they seem to think that Mr Modi fancies what Lee Kuan Yu did with Singapore in terms of development. If you read through those templates, one of the first things he wanted to do is housing.
So, the massive push for low-cost housing because that is a great employment multiplier, GDP multiplier, prosperity multiplier. I think more on sanitation, clean tap water, lavatories, all these kind of basic hygiene factors that the economy has needed.
Dalal Street may want something else but the prime minister will probably move in the areas of say housing, infrastructure, defence spending. Those are the broad areas that he will concentrate on and some of them may be expressed through some of the listed PSUs. The PSUs are not going to privatised no matter what Dalal Street wants.
So, orders or capital expenditure through the public sector companies, is where the opportunity lies for Dalal Street investors. If that happens, which are the public sectors stocks you want to pick out because they are undervalued right now and so underappreciated that there could be a reversal of the pendulum towards those stocks.
You have always picked up on these trends before they went mainstream — from e-commerce to railways. For example, how is NDA 2 going to be different? What are some of the themes we can expect or watch out for when it comes to NDA 2?
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