Date & Time: 17 September 2021, 05:30 PM – 06:30 PM IST
Speaker: Navin Agarwal, CEO, Motilal Oswal AMC
Moderator: Sankalpo Pal-Biz. Development, PMS AIF WORLD

This decade offers stupendous wealth creation opportunities in equities, BUT…

We, at PMS AIF WORLD, firmly believe that the current decade presents a life-time opportunity for wealth creation, but those investors who understand the right approach to equity investing will stand to reap the maximum benefits from the markets.

We have been very vocal about our belief since the last 2 years and have maintained the same during the 2020 pandemic. Investors who have spent time talking to us have benefited by investing with the right approach. While currently markets are sky rocketing to levels never imagined in such a short period, we thought of testing our belief by performing a dialogue with Motilal Oswal AMC and through the same, many insightful facts were brought out.

Motilal Oswal AMC’s CEO, Mr. Navin Agarwal, who comes with 21 years of experience at Motilal Oswal, is a businessman having the eyes of an analyst. He shares the same belief and infact provided lots of logical arguments that are worth learning and so we are writing this article for the benefit of investors. The markets have gathered steam and investors are worried about massive corrections in the next 4-6 months. It led to a poll that asked whether corrections over 30% are possible within the same time frame or not. 42% of respondents felt that it was quite inevitable, while 57% believe that such massive corrections will not take place. It set the context straight where mirror images of the ’04-’07 bull run were evident. March 2001 – March 2003 had seen the annual compounded growth rate of GDP hovering around 4% and it set the base for the bull run in the next 4 years. With FY21’s GDP growth slated to be an all-time low of -8%, there are concerns about the future trajectory of indices.  Structural reforms like GST, the Real Estate Act (RERA), the IBC reform along with the land reforms in the last decade has helped the Indian economy whether the massive storm in the last 1.5 years.

Moreover, Mr. Navin Agarwal highlighted the similarity in the savings and investment rate during late 2002 and those currently in the market. The current rates are at decadal low which was also evident in 2002. It was covertly put forward by Mark Twain that ‘History does not repeat itself but it sure does rhyme.’ The learning leaves us with a point that savings and investment rates will improve just like it happened earlier. Another similarity between the two periods could be noted in the corporate profits as a % of GDP where the number languished around 2%. The belief has been set straight that the number is poised to increase to 5-6% in the next decade. A stable Rupee and a healthy forex reserve was last of the similarities that could be noted from FY04 and FY22. Motilal Oswal believes that the forex reserve will touch a trillion dollar making it the best forex reserve for any country. It is imperative for commodity prices to remain stable with prices in the energy sector remaining around $70. Corporate profits growing at around 20% p.a. with a stable Rupee rate against the USD is an ideal scenario that will be in India’s favour.

We know that India took 50 years to touch the 1st trillion dollar GDP mark. Today, as we stand at a 3 trillion dollar economy, every trillion dollar added has been very fast. Over the same period, per capita income has more than doubled and expectations are ripe about the economy touching the 6 trillion dollar mark within the next 9-10 years. The basic spend has seen a marginal rise but the saving and discretionary spends have risen exponentially. The discretionary spends on autos, consumer durables, entertainment, travel, and premium wear have significantly increased.

Motilal Oswal has a strong belief that a linear GDP growth for India is poised to return exponential opportunities for wealth creation. The Next Trillion Dollar Opportunity Portfolio has been a long term compounder as it had a CAGR of 21% for the last 12 years. The annual compounded returns stand at 16% as compared to 11% on the benchmark returns. It has generated twice as much return, leaving investors a lot wealthier. The fund had a plethora of multi-baggers over a period of time with the likes of Eicher Motors Ltd, GlaxoSmithkline Consumer Healthcare Ltd. and Bajaj Finance that have made the cut. Furthermore, it has sufficient holdings in the IT sector, Pharma, Insurance and Consumer Staples.

The fund has returned in excess of 15% since inception more than 75% of the times, whereas the benchmark generated the same return just 30% of the time. The average rolling return for the fund stands at 21.5% as compared to 11.5% of the benchmark. The QGLP framework has worked wonders for the fund as it includes a mix of small/mid-caps and large caps. The quality lies on the company making a return on equity of 20% while the growth is earmarked for earnings growth which currently is in a sweet spot of 24% CAGR over FY21 – 24E. The longevity of earning growth is high and the portfolio trades at 1.2x multiple of PEG. Moreover, the fund has outperformed its benchmark after every economic downturn.

The question that has been ringing in the minds of investors is that ‘Should you be worried about the rise in markets?’ The question is answered by taking a leaf from the history of Nifty 50 when it was trading at 1000 pts around January 2002 and it touched 6000 pts within a space of 6 years yielding a compounded return of 33%. The same period was replete with instances where the markets corrected in double digits on more than 7 instances. It will be deemed illogical if one heavily relies on the taper tantrums in the US to be the only reason for the market to correct itself. There are several reasons that might affect the market but relying solely on one will be detrimental.

Temperament is 99% and IQ is 1% in investing, says Mr. Navin Agarwal

Temperament is to be greedy when others are fearful and patience is to sit through the innumerable market corrections that might follow. The last 20 years has seen market correction on 18 years and double digit corrections on for 9 years. Hence, wealth has only been created for those who have sat through all the downturns. It should be highlighted that the market cap to GDP ratio is at an all time high of 1.4x and it is difficult to gauge valuations at this point of time. Valuation is indeed a tricky part of investing as the current P/E ratio stands inflated to a certain extent. The QGLP framework helps in guiding investors to create wealth and understand valuations in an absolute manner. Sankalpo Pal brings up an interesting point that the bull run of 2004-2007 had a lot of capacity expansions taking place in the economy but there are concerns about the same in today’s bull run. The companies that make up the core sector of the Indian economy have announced projects that are poised to double their capex in the next 3 years as compared to the previous three years. The PLI scheme continues to remain one of the most interesting programs by the government that will boost the manufacturing sector which in turn will drive up exports and drive down imports. The RERA Act and the ease of access to REITS on real estate have opened up massive opportunity for the sector. The government capex in FY 21 was up 315 despite the pandemic. The capital expenditure in the budget estimates for FY22 is up by 26%. The signs are strong for good capex cycle ahead of us as also mentioned by Mr. Navin Agarwal.

The abundance of capital, globally, and a dearth of good projects available to invest, leaves India Inc with a decent shot to meet the capex. Sale of green bonds in overseas market has started the trend and set the base for the next cycle. The inclusion of Indian bonds in one of the indices will ring up $200 billion of funding available as stated in a report. Technology has started to play an important role in forming businesses and the FinTech space has also started an amazing journey with 27 unicorns already present in the market. The likes of Zomato, Swiggy, Nykaa and Flipkart have potential to drive digital businesses and turn themselves into multi-baggers.

Accounting for companies vary across verticals as one might look as a loss making firm but the product is for the future generations. Competitive advantage with respect to ease of entry and high sustainable gross margin allows for a safe investment. The future cash flows discounted to today should have significant value along with a fall in customer acquisition cost. However, just like a journey from Mumbai to Pune is filled with cautions, the investors need to be cautious about the next trillion dollars that will be amassed by the Indian economy. Yet again, timing the market would be futile as exiting a business just on the basis of high valuation would be a caution. Professional investors water the roses and cut their weeds, which is ideal for a long term plan. The mortality of small and mid caps is much higher and is hence not everyone’s cup of tea. It is pretty evident from a seasoned driver that he/she does drive by only looking at the rear view mirror which is equivalent to state that past performance is not a guarantee for future returns. Sankalpo Pal sums it up by saying that staying cautious is to not leave the party early. On the other hand, booking a loss does not increase the loss but an early exit from an investment can compound any mistake.

Last couple of years have seen a slight underperformance for Motilal Oswal just like the dilapidated state of Indian cricket from 1999-2003, post which it was rescued by Sourav Ganguly and his captaincy. It was a 1000cr AUM 7-8 years ago and currently has an AUM of 45,000 cr as the belief of buy right sit tight continues to dominate the investment framework. Furthermore, concentrated portfolios have worked wonders for the firm. An accurate study by Mr. Raamdeo Agarwal has shown that the portfolio PEG ratio should not cross 2x and hence a lot of winners in the portfolio were trimmed and several laggards cut down. Paying the right price for incremental purchases is crucial to generate future returns. Earnings growth should lead portfolio performance which effectively acts as a safeguard against all other distractions. The difference between great companies and great stocks is the price paid to purchase it which was swiftly put forward by Mr. Navin Agarwal.

A fundamental framework could be difficult to identify market corrections that could take place in the near future but behavioural finance has some answers to it. It is only when investors stop to worry about corrections that one nasty drive will wipe away returns. Mr. Navin Agarwal has remained invested in the market which has helped him remain in good stead and the power of compounding was realised. ‘Buy right and sit tight’ should be an ideal philosophy for wealth creation in the next 20 years. The processes keep improving as the future looks exciting and generating superior returns for investors should be the motto for any asset management company.

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