While foreign brokerage firms believe the worst is still not over, Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services, tells Priya Kansara Pandya that Indian markets are very close to the bottom. Edited excerpts:
Some market participants are expecting the Sensex to drop to as low as 12,000. Are you also that bearish?
I don’t think market will go to such low levels. I feel there is no major downside from the current level. However, it may not rise very quickly and you may not make big money. Overall, 5,000 (on Nifty) is the level at which markets will struggle, between 300 points plus and minus in the medium term.
Will 2012 be better than 2011?
I would like to say things will not be as bad as 2011, at least. From last Diwali to this year’s Diwali, the markets tanked 20 per cent. I do not see the same happening in the next one year. Next Diwali would be better than this year’s Diwali.
But inflation and interest rates continue to be high.
Worldwide, commodity prices have softened, though it did not benefit us (India) due to rupee depreciation. Inflation is now clearly showing signs of softening. Even if the rupee-dollar (ratio) stabilises at this level, I don’t see a spike in inflation. Thus, I believe the problem of inflation is behind us and the seven per cent targeted by RBI (the Reserve Bank) is achievable. Also, the base effect will start kicking in.
Once RBI gets convinced about the downtrend in inflation, it will start cutting rates to kick off growth. However, I do not see a reversal before March. But in the next one year, interest rates will surely be lower.
What is your advice to investors?
This is the time to keep buying slowly, as we find valuations of 12-13 times one-year forward earnings reasonable. Investors should start building a portfolio of good quality companies, not necessarily large caps.
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However, in the current environment, midcap companies will see more challenges, as most of them are generally not leaders in their respective space. Hence, till the slowdown persists, mid-caps will not do well. But any recovery will start from such companies, as they are trading at dirt-cheap valuations.
What sectors do you think have bottomed out?
Everything has broadly bottomed out. From here, the recovery should start. It could be very slow because you don’t know how fast inflation is going to come down, how fast the government is going to start kicking off growth. Capital-intensive companies which got badly bruised will the first ones to bounce back.
Though it may be too early to ask, how optimistic should one be for the coming Budget?
There is no optimism from the government. The fiscal position is not that good. The corporate sector is unlikely to get any sops. There is no room for hikes either. I expect the government will take action to cut expenditure, probably on social sector schemes.
Throw some light on your wealth creation study.
Wealth creation is change in market capitalisation. We analysed the top 100 wealth creating companies during 2006-2011. We have identified the biggest (Reliance Industries), fastest (Sanwaria Agro) and most consistent (Kotak Mahindra Bank) wealth creators. By consistent, we mean featuring in 10 consecutive studies.
Sector-wise, financials have emerged as the fastest and largest wealth creating sector. I think that will continue, led by existing and new private banks.
You have also talked about blue-chip investing. Which are the blue-chips, according to your study?
Blue-chips are highly priced stocks which typically tend to enjoy premium valuations due to their high quality. Dividends are the ultimate source of income for an investor, and blue-chips also have consistently high dividend payout ratios. They might be large caps, mid-caps or small caps.
Based on a six-screen filter, we have identified 48 blue-chip companies. The top five are Sesa Goa, Motherson Sumi, Havells India, Titan Industries and LIC Housing Finance. There are another 20 recognised and 28 potential blue-chips.
In India, over the past 20 years, blue-chips have significantly outperformed benchmark indices, with much lower risk.