The central government has complete authority with clear authority, but the directives of the center should be well implemented at the state level. So, there are many things that are still not in Modi’s hands, he says Ramdev Aggarwalin an interview with Joint Managing Director Motilal Oswal Financial Services Narendra Nathan and Sanket Dhanurkar.
Are we looking for a multi-year bull run?
I think the market has not yet priced in the full potential of the economy. For the first time a true nationalist came to power with a clear majority. There is newfound energy all over the country. My feeling is that the market still doesn’t know the difference between 300 plus seats for NDA and 272 plus seats for BJP alone. Look at how the cabinet posts have been selected – BJP’s allies have got limited posts and their negotiating power has been reduced. Full power rests with the government. The political scene is very different now. The economy is heading for a historic positive change.
It’s the same car, but the driver has changed. It is now driven by Formula One drivers. So, the speed will be dramatic. It will be revealed soon. Today we are growing at 4.5 percent. Growth is likely to accelerate rapidly over the next few years. A lot will happen in five years. It will be interesting to see the index level at that time. In the process, investors will make a lot of money, because the market will discount this growth two years ago. It will not wait for the fifth year. If all domestic and global factors align, markets will go through the roof.
Are there challenges to a weak economic recovery?
The current optimism is that one major variable—the symbolic political structure—has been corrected. There is no doubt that the new government has gained full power in this election. Power has been given to a very competent person. Right now, everyone is smart. But one should expect heat. Finally, the guidelines of the Center should be well implemented at the state level. Otherwise it will be wasted. There are many things that are still not in Modi’s hands.
Many other factors will also play a role. Good rains, favorable global environment, peaceful borders, etc. can change the whole scenario. But, only time will tell how many stars will align. So, a lot will depend on external factors. I am also very interested to see how the new government tackles inflation, which is only a symptom of a deeper problem elsewhere. The government should address supply-side constraints. A weak currency cannot make a strong country. Therefore, inflation should be reduced. This will be the beginning of development, investment and so on.
The rally, so far, has been driven by hope. When will the basics take over?
Headlines, and making money are two completely different things. We don’t have to go through the headlines. The focus should be on who is actually making money. In most cases, this will be a company that is currently making money. Rarely will a company that is broke today make money tomorrow, unless there is a complete change in business dynamics. Today we have nowhere to go. So, wherever there is disturbance in the economy, it will come back to the normal level. Right now, it’s just about promising a better tomorrow. Some of these commitments should be reflected in the budget.
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What should be the priority of the new government?
India should become more business friendly. Finally, the country needs to create jobs for its growing youth population. Who will create these jobs? More than the government, it’s the businesses that create the jobs. Businesses can create jobs only if the business environment is friendly. They cannot continue to grow without creating jobs. So, the government should become business friendly. All obstacles must be removed. We need businesses to take more risks because it will create more jobs.
Will the middle cap Stocks Continue to Outperform Large Caps For Now?
It really depends on the company. Mendcaps were lagging behind for a while; Small caps even more. Eventually they must join. Large caps seem to be priced higher now. Investor appetite is limited at these levels. Most of the action is in the low-quality, low-price segment. Small investors obviously buy low-quality goods, thinking that the price is low. But, even if it goes to the higher value area, the lower quality will remain the same. This is where the whole game ends. Of course, high-quality stocks are expensive now. But that doesn’t mean you should have junk in your portfolio. If you find quality at a reasonable price, buy with moderate expectations. Such names are few and far between. But, even if you get 3-4 such views in a year, you can earn money. The challenge is to be patient and invest. Filling the garbage can will be a disaster, but if it works, you get a multi-bagger. High-quality investors may underperform the market, but will outperform throughout the cycle.
Can we expect an increase in revenue soon?
A 12-15 percent revenue hike is certainly possible this year. As the economy improves, sectors such as cement, steel and automobiles will grow faster. Oil and gas can also contribute to revenue growth. Right now corporate profits account for about 4 percent of GDP, which is near the bottom of the band. At the peak of the cycle, it can go up to 7-8 percent. Assuming a nominal growth of 13-14 percent in GDP, it will double to Rs 220 trillion over the next six years. Now the question is whether the current profit of 4 trillion rupees will go to 8 trillion rupees or 16 trillion rupees? If it maintains the current ratio, it will go to 8 trillion rupees. If it reaches the upper end of the band, it will go to Rs 16 trillion. If this happens and the PE majority stays the same, the market will go up four times. Profits will increase when the economy moves from 5-6 percent to 8-9 percent growth. Hence there is potential for the market to go into stratospheric levels from here.
