Q&A: Raamdeo Agrawal, Motilal Oswal Group

Several scams that came to light recently have led to a correction in the equity market and left many clueless about the future direction. That apart, there are several concerns like inflation and rising interest rates that still persist. Jitendra Kumar Gupta  spoke to Raamdeo Agrawal , Joint Managing Director, Motilal Oswal Group on the occasion of unveiling of the group’s 15 th  Annual Wealth Creation Study on these issues, the market’s valuation as well as future prospects and the opportunities to gain from. Excerpts:

Your view on the markets in light of the recent scams?
Most of the impact of the scams and other concerns are already factored in the Indian markets. However, now it all depends on the behaviour of foreign investors, who are generally seasoned. Next 1-2 months, people will watch if things are resolved amicably, and pass judgment. If you do not punish those responsible for the recent scams, we should be really getting ready for bigger scams in the years to come.

Your views on market’s current valuations, and the road ahead?
It is not cheap at 19 times PE, and factors in the earnings for 2010-11. At these valuations the market may not move anywhere for some time before all the issues are resolved. But, there is a possibility that it can go down from 19 times to 16 times (PE). I think, at any point of time the 12-15 per cent correction is very likely.
One will have to look at the Budget and what is going to happen in the year 2011-12. Let this year be over. Our projection is that the Sensex EPS will rise from Rs 1,050 in the current fiscal to Rs 1,250 in 2011-12. And, if markets believe that this is within reach, then it will move to the next level. So, if we do achieve an EPS of Rs 1,250, there is potential for the index to go up to 25,000. That could happen, may be, in October or December next year or much earlier.

What are the risks for earnings considering the impact of inflation and interest rates?
The inflation is moderating and probably interest rates will remain here or somewhat lower (though not much). As of now it is not so much of risk, but if crude oil price were to go to $100-110 per barrel then a lot of things could change. I am quite sure that the world is going to see lot of changes in the next 5-6 months.
We do not know what could come. This time it was the scams, maybe next time it could be government policies like mining tax or some other unusual tax in the Budget.

With regards the annual wealth creation study, what is the theme this time?
One of the things is that there are ways of investing into the future of unknown and unknowable or things which are not visible, but there are good chances to make lot of money. But, in this case it requires a lot of skills to understand such kind of situations (uncertainties). Also, there could be a situation where out of four picks two or three may go wrong. But, that is where one can make massive returns, may be 10-30 times.

How do we identify such unknowns?
You have to look at the three buckets namely business situation, management and valuations. To identify the next Infosys, Titan or Bharti Airtel, one will have to continuously think about the opportunities which the market is not able to visualise. So, the investing strategy of unknown and unknowable is to put money where nobody is putting, but not mindlessly.

What are the potential opportunities?
Sectors like retailing, banking and metals could emerge as wealth creators. We find commodity companies are becoming very strong, and consistently creating wealth. Looking at what the world is going to be over the next ten years, where China and India are going to dominate, commodities are going to do well. This is the most opportune time, the probability is very high.

Telecom, which used to be in limelight of your earlier wealth creation studies, has seen significant setback. What is your view now?
It is almost a contrarian call and a typical UU situation, where nobody knows what is going to happen. If the competition comes down, which we believe will come down because of the present operating economics, the valuations is not going to continue (at these low levels). My sense is that the opportunity is very large and as over the next 2-3 years the competition will weaken and hence, the profitability of the companies should go up and so should the valuations.  

You mentioned that services sector could surprise in the years to come. Please elaborate.
As commodities are becoming more expensive, all the user industries are not able to maintain their margins. Like tyre companies, they are selling a lot, but they are not able to make money (good margins) due to their inability to fully absorb the high rubber prices. But services like IT, banking, internet, hotels, etc, they are not that much impacted by the rise in the commodities. Which is why we think the services sectors should do well in the years to come.