Raamdeo Agrawal, Chairman & Co-Founder, Motilal Oswal Group, says in the case of PSUs, it is a rerating from the bottom. If you see our wealth creation study, in 2004, 2005, PSUs used to have commanding heights in wealth creation, 45, 50%. It came to zero in 2022. So from there, it is rising. There is a reversion to mean. There is one portion which is a reversion to mean and other portion is whatever growth is there. But these numbers do not come separately. Once the rerating is done, a company which is at five PE, has come to say 15 PE, that itself will give you 3X. Once that is done, then you have to see the merits of the company in terms of how earnings are going to shape up.

Everyone is confused about IT. We have seen these curves in the past in 2000, 2008, Enterprise and the IT companies have come out as winners. But now the Street is divided. The numbers do not look very inspiring but IT companies are saying that we are standing, we will come back. What is your view?

Raamdeo Agrawal: They have a global competitive advantage. There is no competition with Indian IT at the aggregate level. Now this AI thing has come and the US is hopefully on the cusp of rate reversal. What is most exciting is that corporate activity will normalize and they will again get onto the building for the future and new technologies will be deployed and larger contracts will come out for Indian companies because ultimately, even AI implementation will be done by Indians.

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So the opportunity for IT implementation going forward obviously has to grow but right now, they are not growing. The issue is what do we do? The people dumped the stocks and they use IT almost like a hedge against buying other stocks. Then the results were not as bad as what they thought and hence they had to cover it back. That is why you see the flurry of activities in that particular counter.

I do not think the operations per se have much of a blowout quarter or some excitement, which we do not know. I do not think so because they are very transparent companies and all sorts of companies are there. None of them are saying that people are queuing up or anything like that.

The winners post Covid essentially have been PSUs.
Raamdeo Agrawal: Yes, yes, big time.

PSUs were known as ugly ducklings. Now they have become the centrestage, from railways to defence. Are PSUs leaders in this bull market and will continue to go higher?
Raamdeo Agrawal: If the government does not divest, there might be some more steam because of the capex. Last year, the government did about Rs 10 lakh crore of capex and that is still not done. The orders have just been given. It is not implemented fully. On top of it, you will get another Rs 12-13 lakh crore in 2024-25 budgets. So, there is a problem of plenty in terms of these companies’ order books. How much they will execute, only time will tell.

But the fundamental thing was these companies were hated and they were all low single digit, not even single digit, they were low single digit, three, four, five, six PE multiples. And so when the whole market has gone to 23, 24 PE multiple, they are at four, five, you are not so bad. You might be a little inferior but there are enough bad companies in the private sector also. I think there was a complete disregard for the value underlying in these companies. They are monopolistic, very large. They cannot be wished away. And I think, from there only it is coming.So, in the case of PSUs, it is a rerating from the bottom. If you see our wealth creation study, in 2004, 2005, they used to have commanding heights in wealth creation, 45, 50%. It came to zero in 2022. So from there, it is rising. I think there is a reversion to mean. So there is one portion which is a reversion to mean and other portion is whatever growth is there. But these numbers do not come separately.

Once the rerating is done, reversion to mean has happened, say a company which is at five PE, that has come to say 15 PE, that itself will give you 3X. So once that is done, then you have to see the merits of the company in terms of how earnings are going to shape up.

Where is reversion to mean on upside becoming normalized? Where do you think the other way will happen? Reversion to mean can happen both ways. So where in the market where valuations have really gone high, have they come back to mean levels, which means either time-wise correction or price-wise correction?
Raamdeo Agrawal: I think time-wise correction is on. A lot of these high-priced shares are not dialing up the market. Look at Asian Paints and Titan. Titan has done well because they have growth also. But there a lot of these 80, 100, 120 PE multiple companies, if they do not have aspirational growth rates, they are suffering in terms of, their returns are sub-index levels.

If I look at some of your latest portfolios, you have added very different names; manufacturing, energy, you are not just sticking to the five, six historical names. Is that a conscious strategy?
Raamdeo Agrawal: Yes, of course. There is a change of guards. My leadership was more of a buy and hold and sit through the good companies. It gives you a bumper outperformance and gives you a bumper underperformance. So it is good for a private portfolio, not good for the public portfolio.

So then we said, instead of maximum performance, either way, we will go for consistent performance. So there we have brought a very effective risk management process where downside is arrested. But when you arrest the downside, your upside is also somewhat compromised. But what we are trying to make sure is that 3-5% kind of outperformance across rather than 17%, 18% outperformance.

I will take the liberty of asking you a direct question. Your son is in the business now. He is effectively managing the business.
Raamdeo Agrawal: Yes, not managing the business. He is managing a portfolio.

He is managing a portfolio. I mean, managing public money. I am sure every manager has different thoughts. So what does Papa Raamdeo have to tell his son when they do not agree on a stock idea or investment thesis?
Raamdeo Agrawal: No, I don’t discuss anything. In fact, I would like to discuss but he does not discuss anything with me. So there is no communication about the portfolio. I do not know what he owns, what he buys, when he buys, how much he buys, or what is his style. I do not interact on his portfolio with him

Okay, there is complete independent thought.
Raamdeo Agrawal: He does not take ideas from me, I do not take ideas from him. In any case, I do not invest and so I do not have to take ideas from him. But he does not take any ideas from me. And so we do not discuss. He discusses with the CIO, Pratik Agrawal, maybe with Naveen, and then colleagues, Niket and all. So it is complete hands off.

You know, I have tracked your wealth creation studies and I always urge our viewers to please read them. They are available on Motilal Oswal website and they are for free, free and available. There are two things which Indians always want and wealth creation studies are there. They are free and they are available. So I am going to quote one of my most fondest recollections of a wealth creation study. You should have vision to seek, courage to buy, and patience to hold. Apply that theorem for us in the market right now.
Raamdeo Agrawal: Yes, patience is being tested because we have not seen such rich valuation for a very long time, but we have also not seen economic resurgence of India and liquidity participation. The retail participation of them both are coming together.

When the Harshad Mehta bull run happened in 1990, it was only liquidity without fundamentals, this time there are strong fundamentals; your forex reserve is $600 billion plus you are the fastest growing economy in the world, inflation is under control, your corporate earnings are growing at 15-20%. So everything is right on the fundamental side and then on top of it, you get the added advantage of massive liquidity influx: four million customers a month is almost at least Rs 1,000 crore per day and predictable.

See it is not that off and on. So the combination is lethal – fundamental and technical – both. It is uncharted. None of the chartists will be right, believe me, on a good stock and on the market predictions because the force behind a market and force behind a stock is of a different order all together 5x 10x

So is the situation like what happened in let us say Japan like in the 1980s followed by what happened in the 1990s?
Raamdeo Agrawal: I have seen only some stories. I have not lived because we were not there in the market that time but I have lived in the craziest bull market in India from 1990-1992, the Harshad Mehta bull run. So from 700, the stock market went to 4200 in 19 months. Unfortunately, we did not have SEBI. They could not control and in fact the arrival of SEBI was because of this scam.

So clearly now we have SEBI. We have RBI. We have digital traction. The force multiplier this time is much bigger but since we have surveillance and proactive risk management by SEBI and demat kind of a situation, no physical shares, that time physical shares you could do BR this that so that is not there. So everything dematerialized. So it is a very smooth system. The margin system is very effective. My sense is the actual impact is much bigger, the liquidity as well as fundamental change is massive.

So I think we will have a wonderful four, five years, 10 years. In any case we are getting a new mandate for political continuity. So at least five years out it looks to be pretty good so long as we do not become parabolic. If my index performance is 15% 17%, 0% or even minus 10 to plus 20-25% we are fine. The moment it goes to 45-50% then you have a problem.

Rakesh Jhunjhwala always used to say that the mother of the bull market lies ahead of us? Would I be right in saying that?
Raamdeo Agrawal: Yes, I think this is what is going on. We do not know how big this is going to be and after that can it be bigger. India is a growth economy and growth stock market and the participation culture of a stock market is deep. I mean 120-130 years 140 years so I mean losing and gaining is accepted without any problem. Options have been taken as an acceptable way of participating in the market. I think the rise of the country from $4 trillion to $8 trillion and $8 trillion to $16 trillion will be in two phases. Let us talk about the $4 trillion to $8 trillion phase. That is going to happen by 2031-32. And then let me talk about expansion of the capital market. My market cap to GDP is about 1.25 so we are at $4-4.5 trillion market cap. My GDP is still at around $3.7 trillion. My GDP is expanding at best at 9 to 10% even in dollar terms but my market cap is expanding at the rate of 25%. In three years flat I will be as big as China.

So the growth from $4 trillion to $8 trillion in the real economy, could happen in 2030 or 2031?
Raamdeo Agrawal: Eight, 9 years you must take.

If I use that same force of multiplier, which is that 1.2 x 8 that means we are looking at the capital market directly indirectly becoming at least $10 billion in 7 to 8 years?
Raamdeo Agrawal: No, no, you are confusing me. See GDP will double by 2032. From 4 to 8 that is about 8 years, but my market capital will double in 3 years flat.

Yes, because it is at 1.25
Raamdeo Agrawal: Yes at 1.25 GDP is going at 9-10% in dollar terms 9.5% that is their projection and that is what we have done in last 25 years but by market cap see index grows by 12-13%, 15% but the new listings expand the base and so the total market is growing at the rate of 25%. That is the real wealth growth.

But Buffett has always said he is used this traditional GDP market capital, that’s a Buffet, but by that yardstick we are already expensive?
Raamdeo Agrawal: Do not say expensive. We are higher than historical standards but the world is higher than historical standards. Today the US is steadying at two times. I mean I read a book where they say that potentially you could be as high as the world can be as high as five times GDP. It can support that if the right level of securitization happens and that is why all the unlisted large companies should think about getting listed.

Everybody looks up to you for advice. One very basic question is what should one do with small and midcap? Is it time to book just 15-20% profit and move back into largecaps? Is that a very basic standard and good advice?
Raamdeo Agrawal: See small and mid is not 100-200 companies. There are thousands of companies. So the stocks where you have gone berserk, I mean 50 PE- 60 PE, it does not make sense. The historical PE multiple is say at 20, median PE average is about say 21-22 and it is trading at 45-50, you must book profit. And if you are a big lover of a small cap, you must go to the reasonably priced new discoveries.


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