Dear Readers,

Whom would you follow or at least read about when it comes to generating wealth from stock investments?

I am sure that almost all of you reading this would follow (at least partially) in the foot steps of those who have proved it to the world by generating enormous wealth for themselves and have experienced the volatilities and vagaries of market cycles for many years.

At the recently held 16th wealth creation study organised by Motilal Oswal Financial Services, four market mavens — Ramesh Damani, Rakesh Jhunjhunwala, Madhusudan Kela and Raamdeo Agrawal — got together to discuss the future of investing and the challenges ahead for Indian economy and markets. Though each one of them has different views on market levels and stocks to invest in, all of them believe that we may see a challenging 2012.

Excerpts from the panel discussion:

Ramesh Damani:  Rakesh, can we start with you? Sensex went from 3000 to 20000 in a period of say 20 years on the back of reforms, liberalisation and growth. Going by what has happened recently in Parliament, does it mean for the next 2-3 years reforms are in cold storage?

Jhunjhunwala: In our democracy, there is going to be no smooth and one way rise everything needs to be debated or discussed. If the government policy is a hurdle to India’s growth, it may take some time, but it will correct itself. I, for one, don’t agree that we will not get the right policy. We will get it but with some interval. I am as bullish on the Indian growth story as I ever was.

I don’t rule out that we could have six months to one year of below-par growth or some kind of illusion or disillusion within the government. I still remain confident on the longer term although I must confess that for a person who has always had more than 100% of wealth invested in equities, I have decided that in the next bull run I will make it 98%.

Damani: Over the next 2-3 years, what are the key reforms you would like to see happen?

Jhunjhunwala: I don’t think retail in FDI at 51% is something which is extremely important. If I were to decide, I wouldn’t open 51% in one ago. I would do it in stages. I think GST is one of the important reforms waiting to happen. And how do we develop a bond market so that we can do long-term infrastructural financing? And how do we speed up decision making so capital projects can take off?

For example, I mean we cannot take off Posco, which is a $12-billion dollar investment, primarily because 1,600 hectares of forest land are involved. We need to have a balance somewhere. Instead of having a qualitative analysis of the environment, let’s do a study and decide what can be done and what cannot be done. Also, let’s decide how much of the environment are we ready to sacrifice in order to be able to feed 120 crore people. So, for me, the key is GST, speedy decision making so that capital investments can go through. These are the most important activities right now.

Damani: Madhu, do you think that the political paralysis that inflicts Delhi can be broken? For example the Aadhar scheme that was launched by Sonia Gandhi is now under debate. If we have this kind of decision making, what can we get done in India?

Kela: I think I am more disillusioned than Rakesh from what we have seen over the past 12-18 months. I think the characteristics we are showing to the world, everything happens out of confidence. India got extreme premium valuation not for anything else but because we end up delivering. Can you imagine a country where Parliament is not functioning for the last six months? What is the message we are trying to communicate?

From what I get to hear from one of the ministers, it seems there are 13 education bills pending and they would be taken up only when Parliament gets functional. Given this kind of situation, why should there be a case of 30-40% premium valuation to India compared with any other country? I am also hopeful that it will change sooner or later and that’s why we are doing our jobs.

Damani: Raamdeo, the governments in India have acted in times of crisis. Whenever any crisis happened, the Indian government has moved decisively. Could it be that we haven’t reached the crisis stage or unless the government moves, there wouldn’t be a major problem?

Agrawal: Some more time. Still were getting a 7% growth; we started the year with a 9% growth. Now, they’re talking about less than 8%. They still have an ambition of more than 9% plus for the 12th Plan which is starting next year. Clearly, what has happened is that with the confluence of events in the last 8-10 years, we have been able to get 8-9% growth without the government doing anything after 2004. That got us a lot of tax money, so much money that government did not know what to do with it.

So, they never had a problem about doing work and yet they got revenues. Now, that revenue tap is getting closed. The tax collection has come down to 8-9% now and my sense is that, if it goes on like this fourth quarter, we may see a negative growth in tax collections. Then, you have a fiscal problem. Though government may not admit, we have a problem on hand – look at subsidies, be it related to petroleum, fertiliser or free food, you have a whole lot of it. Power sector is witnessing huge losses annually. Look at Air India & BSNL… much is the government going to pay up for? All this was possible when the revenue was very strong. Nobody bothered and everyone was happy. Now growth is gone, global environment is very challenging. When outside environment is challenging, you have to take care of your house properly. You have to deleverage, you have to manage your currency exchange rate and take proper decision. So, worse to worse, if we go to 6% growth and once revenues start drying up, we will see them start working.

Damani: Rakesh, coming to you. One part of the crisis is the rupee dollar rate which has gone berserk in the last few months. Does it surprise you? Does it change your investment hypothesis?

Jhunjhunwala: It does surprise me. I was a rupee bull myself. But seeing the price movements lately, I personally feel there is a 75% chance the rupee will lose more against the dollar and I don’t see the dollar going below 48-49 against the rupee easily. I think in the export industry, people were covered or hedged for the next 6-9 months. And everybody was caught by surprise with the rise in the value of the dollar. If this continues for the next 6-9 months, export industry will benefit like anything. Software, especially Infosys, and all textile and export, pharma companies should benefit.

Damani: Madhu, your take

Kela: Six months down the line, you will see the real impact on earnings in companies like pharmaceuticals where 30-40% of the company’s revenues are export driven, but import is not that high. The other side of the coin is that a lot of companies have taken huge debt in dollar terms and some of the companies have taken billions of dollars.

Jhunjhunwala: I don’t agree. Maybe, the first year will be difficult. Today I have a debt. Nobody has a debt unless and until you are not in the export industry. For all of the export industry, the annual sale in dollar terms is surely more than the debt.

Kela: There are a lot of domestic companies which do not have any export exposure and have taken dollar loans. So, what I am saying is as an investor you need to avoid these companies. Also, many of the companies have yet not provided for the kind of losses they may bear if the rupee doesn’t gain back.

Damani: But Raamdeo, if the rupee depreciates as sharply as it has, come say January 2012, will foreign fund managers put money back into Indian equities, given the fact they are getting Indian equities relatively cheap due to a favourable exchange rate?

Agrawal: I don’t think it works. In fact, the guys who are there are going through their own pain after losing 35-40% of year opening balance. So, first that pain has to be handled. Once growth starts, you see the problem is that of growth, if you don’t grow at 8%, now the entire infrastructure and expectations are built around 8% growth. This 8% leads to very different levels of growth in corporate earnings due to buoyancy in consumer spends. But as the growth goes down, a lot of things will change and if you go to sub 7%, it will be a different India.

Kela: If I can add, FDI investors might find it very attractive, essentially if you’re buying something for a million dollars and if you get it 30% cheaper, and if you really want to invest in India for long term, this is an opportunity for you.

Damani: Raamdeo, let me ask you this question. NREGA. It is a boon giving a lot of employment and creating a lot of prosperity. But it is also contributing to inflation and pushing people out of productive labour forces. Give us your view on that. How is it helping shape economic decisions for you? What are your views on NREGA?

Agrawal: The kind of poverty you have in rural India is not humane. You have to take care of these guys. Giving a hundred rupees to someone in rural India is not a lot of money.

Damani: Isn’t every employer complaining to you that we can’t find people now?

Agrawal: But this is a good thing, in the sense that people at the lower end of the economic hierarchy are beginning to gain in purchasing power. Economic growth is meant to progress in a way that a trickle-down effect will reach them. It is time to celebrate that. That will drive industries all the way. I mean, it is not only our birthright to consume. They should also consume in their own lifetime. And if there is a little help… Management of these schemes is another thing whether you are actually able to get some work done. People send their children to IITs or IIMs, they are getting huge subsidy in one form or the other. Why not that guy who has been deprived of good education and good infrastructure? If he gets two dollars a day, I don’t think it is bad.

Damani: But is it contributing to inflation?

Agrawal: Yes it is. I mean at some stage, at the absolute low-end, the demand for wheat, rice definitely goes up. But that also allows the farmers to produce a lot more and get remunerative prices. On the whole, I think if it is managed well, the NREGA scheme is good for the poor.

Damani: Are we in a long-term commodity spike? Do you feel commodity prices will hold higher in the next 10 years?

Jhunjhunwala: One thing is assumed in higher commodity prices that the demand will remain the same at all level of prices. I think that may not be correct. It’s not as if the demand is going to remain if copper goes up substantially. If you look at the return on capital which companies are getting at present commodity prices; why will supply not come? I am not a commodity bull to say that commodities will go up day by day, year by year.

Damani: Bears are fairly vocal right now; they’ve been pleading the case. A lot of them tell me that 5200 in the Nifty is the high watermark for the market for a long time. What is your view on that?

Jhunjhunwala: Dekh Ramesh, zindagi mein kya hota hai ke har aadmi ka din aata hai. So be it yaar. I only want to know at the end of five years, their balance sheet and my balance sheet. I’ll ask the bears. I think the proof of the pudding is there, not in the shouting…I think the markets are in a difficult stage. We could be in a range for a long period of time. It could be for six months or one year. As an investor I don’t feel that I should sell my equity and put my money elsewhere or that the companies will fail and India will not grow. I am confident.

May be 5200 could be a difficult point to penetrate. I think 4600-4700 is also going to be a difficult point to break.

Damani: What’s your trading range for the market?

Jhunjhunwala: I would think 4600-4700 level should hold.

Damani: Madhu, Rakesh suggests 4700-5200 as a range for the Nifty, what is your view?

Kela: To my mind the index is not 5200, it is much, much lower, because it is only 15-25 companies which are making this index. I think even in this painful phase, even if it lasts 6-12 months, one is very clear that in the larger midcap space is where you will get investing opportunities. That index is around the equivalent of 3000-3500 on the Nifty. So, that is where one is investing time and resources to identify companies. This is the time to invest in those companies, and give it time and patience and you will get disproportionate rewards. This is the time to look at good quality businesses and high quality management. And some of these stocks are already beginning to be on that radar. Not every midcap which has fallen is a fraud or a cheat.

Damani: Look ahead to 2012, which are the sectors you think are attractive to start investing in?

Agrawal: I am aligning more to buy more blue-chips or emerging blue-chips. May be even younger companies which do not have a track record of paying dividends for five years. I look at individual companies rather than sectors and look at their performance. What they can do, their dividend track record, what kind of competence and honesty they bring to the table. I don’t buy 10-15 companies in a year. If I can add one or two companies in a year, that’s good enough.

Damani: Do you think the index will be higher than today, year on year?

Agrawal: I would think so. Diwali to Diwali would be a better time. Damani: Madhu, you said start looking at midcaps, smallcaps, any particular sector you find attractive?

Kela: I think across sectors you will find attractive companies even perhaps in real estate or infrastructure, which is completely written off. If you look at the technology boom, there were 200 listed companies. Ten of them have survived but it could be said that they have seen glory since then even when compared to 2001-02. In every sector you will have leaders. This is the time to choose, rather than a sector, individual companies from different sectors and make your portfolio.

Jhunjhunwala: Ramesh, if you ask me where to invest the money, I’m looking for money, because I am already fully invested. We are entering a year of uncertainty. I think it is best not to predict. It’s best to watch and react. With inflation, the European government factors, I think it is going to be an unpredictable year. If I were to invest I would invest in the beaten-down sectors.

And also the concept of value-investing, I think value-investing is not only buying the blue-chips. Value investing is also buying a stock, keeping it for 12-18 months and selling it at a handsome rate. Every stock in life doesn’t have to be bought for 40 years. All of us cannot be Mr Warren Buffett in life, let me tell you. Just because he thinks that every stock should be bought for life, does not mean that we should also buy every stock for life. Value investing is buying value where it may not be lasting value. That value could be encashed over two or three years.

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