EXPERTS
TAKE ON UNION BUDGET
Let
me first tell you an anecdote: Chetan
Parikh: Good evening Ladies and
Gentlemen, On
behalf of Capitalideasonline.com, I would like to thank all of you for
taking time out to be with us this evening for the Annual CIO Investor and
Fund Managers’ Roundtable. “In
the 1930s, out of power and financially strapped, Churchill taught a
lecture course at The
class gasped. Churchill,
obviously relishing the moment, pointed at a young woman in the tenth row.
“What’s the answer?” he demanded. The
woman flushed and replied, “Well, obviously it’s the male sexual
organ.” Wrong!”
said Churchill. “Who knows
the correct answer?” Another
woman raised her hand. “The
right answer is that it’s the pupil of the human eye, which expands to
twelve times its normal size when exposed to darkness.” “Of
course!” exclaimed Churchill, and he turned back to the unfortunate
first woman. “Young
lady,” he said, “I have three things to say to you.
First, you didn’t do the homework.
Second, you have a dirty mind, and third, you are doomed to a life
of excessive expectations.” The
reason why I recounted that story is that the key to successful investing
is expectations and you can make money and much more than 12 times when
your expectations differ materially from those embedded in market prices
and you are right. And
you increase your chances of being right when you have an edge. Bill
Miller, the market beating portfolio manager of Legg Mason, wrote that
there are three sources of competitive advantages that an investor can
develop: informational, analytical or behavioral. Informational
is when you know something material that others don’t. It is extremely
difficult to get that edge in large, well researched stocks unless you act
unethically on inside information. But small and midcap stocks, which are
outside the radar of most brokerage houses, offer possibilities of
developing that edge. Take
the second sort of edge: Analytical advantages come from taking publicly
available information and processing and assessing it differently from
others. And finally, there is the behavioral edge and there are ways to
systematically exploit human behavior in the financial markets. I don’t
want to go into prospect theory, support theory, cognitive psychology and
neuroscience but behavioral finance and investor psychology are as
important as understanding financial statements and valuation metrics. Capital
Ideas Online has promoted Capital Ideas Club. You may be seeing the
banners and pamphlets of Capital Ideas Club and may well wonder why you
need a CIC when you have CCI in Capital
Ideas Club is an exclusive investment community where the best value
investment ideas are presented and reviewed by other expert investors. I
urge you to apply for membership because this will be a great way to
become a better investor and analyst as your ideas will be shared in an
online forum with other expert value investors. Membership
is free, but will be limited to only a few sophisticated investors who
will join based on the quality of their investment idea. Just 200 members
will qualify for the Club. The
admission will be granted only after a careful screening of candidates. Each
person applying must submit an application at www.capitalideasclub.com
that includes a current investment recommendation. The
quality of the applicant's investment analysis and research will be the
main criteria for admission. Entrants submitting the best ideas will be
accepted as members of the Capital Ideas Club and will be eligible for a
quarterly cash prize. Let me emphasize that I suspect that for members the
main motivation will be the thrill of playing the game and not the spoils. There
will be a 45 day delayed Access to ideas posted by members for non-members
and only members will be eligible to post ideas. With
the investment community and your blessings and support, I would like to
today formally launch the Capital Ideas Club. We
had released the book “ Capitalideasonline.com
would like to thank the Bombay Stock Exchange for allowing the use of this
Convention Hall and the help and support they gave us for today’s
evening. In particular, I would like to thank Mr. Kalyan Bose, Mr. Jeevan
Sakpal, Ms. Saheli Chatterjee and Mr. Balasubramanian.
Capitalideasonline.com would like to thank Reliance Mutual Fund for
sponsoring the event and Emkay Shares and Stock Brokers Limited for being
the associate sponsor and Business Standard for being the media partner. I
would also like to thank Mr. Rakesh Jhunjhunwala for his support. Capitalideasonline.com
would like to thank the members of the today’s panel Mr. Ramdeo Agrawal,
Mr. Anoop Bhaskar, Mr. Sanjoy Bhattacharya, Mr. Prashant Jain, Mr. Rakesh
Jhunjhunwala, Mr. Madhusudan Kela, and the moderator Mr. Ramesh Damani for
taking time out to be with us today. I
would like thank Mr. Chetan Ahya of JM Morgan Stanley, who looks after I
would like to thank all the members behind Capital Ideas Online – Mr.
Navin Agrawal, Mr. R N Bhaskar, Mr. Manish Chokhani, Mr. Ramesh Damani,
Mr. Jamshed Desai, Mr. Bharat Shah, Mr. Utpal Sheth and Mr. Avinash Wadhwa.
Above all I would like to acknowledge the contribution made by Mr.
Chandrakantbhai Sampat and his guiding values. For
making Capital Ideas Club possible I would like to thank Mr. Bhavya Jain
for his untiring effort and guidance. I would like to also thank Mr.
Mayank Sharma. I
would like to thank Mr. Ramesh Wadhwa and Mr. Ravi Wadhwa for going well
beyond the call of duty to make this evening a success. I would like to
thank my wife, Sheila for all the work she put in behind the scenes. I
would also like to thank Praveen Parola for the effort he has put in. Value
investors often refer to short-term price movements as noise. May I
request you not to add to the noise by switching off your mobile phones. It
is a pleasant duty for me to hand over the remaining part of the evening
to the wizard behind the wizards of Rameshji
has been a member of the Bombay Stock Exchange for over a decade and a
half. He is probably the most listened to financial commentator. He is one
of the Ramesh
Damani: To start the
discussion we turn to the king of the panel first – so I’ll start with
you, Rakesh, as always. Well, what do you think of the market? Rakesh
Jhunjhunwala: The
bullish market is not
the index, it is the bullishness of the Indian economy. And as long
as Although
you could have the economy growing but you could have very high interest
rates which is a big factor in the valuation of the market. That could
temporarily disturb the market. As
long as Ramesh
Damani: Sometime
they say stock prices are slave to corporate profits over the long term.
What is your outlook for corporate profits or the Sensex in 2007?
Rakesh
Jhunjhunwala: Well,
to be very frank, I don’t do too much mathematical research. I don’t
say that Ramesh
Damani: I
now have a question for you. We have had four years of solid gains in the
Sensex. Do you make it five years in a row for 2007? Rakesh
Jhunjhunwala: Well,
seeing the apprehensions that people have, I don’t see any reason why it
shouldn’t be. Because if you have 15 to 18 per cent earnings growth,
unless P/Es dip or those earnings dip, I don’t see any reason why there
should not be a positive year. Ramesh
Damani: Sanjoy, in the 2006
roundtable, you had said that Sanjoy
Bhattacharya: I got it wrong the previous year.
Clearly, I missed the way the economy would respond to a number of
different stimuli – whether it was policy driven or liquidity driven –
and many of those remain in place. To not have learned from that would be
a tremendous sin. This
market bears a burden of very high expectations. And the way people are
pricing future earnings suggests that, the penalty for getting that wrong
will actually be quite serious. I
don’t doubt that if you have an economy growing at 14-15 per cent in
nominal terms and you have certain advantages which are there to stay and
which are long term in nature, things are improving. That is a clear
indication that things are getting better. That can only help
productivity. Ramesh
Damani: And margins then? Sanjoy
Bhattacharya: Margins are a function of where
you are. I mean clearly in manufacturing margins are driven by factors
which are not solely in the control of our economy. Today
we are much more open as an economy. There is much less tariff protection;
much more global impact of commodity prices. So you are not able to
insulate yourself from them and as we speak today, a lot of these things
suggest that margins will be under pressure. Ramesh
Damani: If you were to say outlook for 2007 in
terms of the Sensex, would you say it would be a negative year? Sanjoy
Bhattacharya: I do think though that 2007 will
not have the kind of returns we have seen in the last four years. We will
not see 30-40 per cent plus type returns spread. The last four years
actually have seen the index multiplying 4 1/2 times. Ramesh
Damani: Raamdeo, you started this great Now
you’re seeing the tightening–prime rates are going up, housing rates
are going up. Can that then stop all or even finish this bull market
because interest rates are now swinging from low to extremely high? Raamdeo
Agarwal: This
is the first globalised bull run in every asset class all over the world.
The world economy is struggling to figure out all this noise about
inflation, and only time will tell because there is no dearth of money. Ramesh
Damani: Raamdeo,
what are your (Motilal Oswal’s) forecasts for 2007 Sensex earnings? Raamdeo
Agrawal: By
the last count when this quarterly results got completed, our team had an
EPS of Rs 710 for FY07 and more like Rs 840-845 for FY08 for the Sensex
stocks. Ramesh
Damani: Madhu,
Jim Rogers says that there is a 20-year bull market for commodities. But
yet commodities sold off quite sharply recently. If you see, oils, zinc,
copper have all sold off. What is your view on the commodities price going
ahead? Madhu
Kela:
See, I am not a commodity expert. But however you see there are pockets of
commodities which will do well. Soft commodities in the world would do
well. Ramesh
Damani: Madhu,
you have been one of the most successful stock pickers. Any particular
themes that you think will work in 2007? In 2006, Madhu had come here and
had said the thing to attract is real estate. What do you think of real
estate now? Madhu
Kela: I
am certainly not as gung-ho as I was last year. And in my wildest of
imaginations, I also didn’t expect that stocks will go 100 times in a
matter of a year. So, having said that, I don’t think you can completely
ignore this sector because this is where 30-40 crore Indians are
interested. Land and property would always be an interest to Ramesh
Damani: Tell
us how the Sensex will end this year, plus or minus? Madhu
Kela: I
am positive in a longer run. Making money is going to be tough if I take a
12-18 or even 24 months period. There are not companies which are
available at 5 or 10 P/E multiples. However, we have had 50 years of
under-valuation in Ramesh
Damani: Prashant,
how seriously should investors view the threat of inflation and what do
you tell your investors and how do you protect your portfolio in this
case? Prashant
Jain: Real
inflation is actually much more than probably what the numbers are
suggesting. The largest component in any household expenditure is a house
and houses are clearly unaffordable by whichever measure you see. If you
look at the inflationary impact on the total consumption expenditure of
the household, inflation is way in excess of what these numbers suggest. Economic
growth will still accelerate, but profit growth will slow down. Profit
growth will be lower in 2008 than the profit growth in 2007, and 2009 will
be even lower. Ramesh
Damani: Does
Raamdeo’s Sensex earnings target of Rs 840-845 seem too optimistic to
you? Prashant
Jain: Yes.
I don’t look at the Sensex as one composite. In
fact, Sensex has two parts to it–the secular growth companies which
would be companies like telecom, IT, consumer goods and the cyclicals. If
you split the Sensex into these two parts, you will get a more realistic
picture of the valuations. And it is not very good. If you look at the
secular growth companies they are all trading at close to 20 times FY09
earnings – two years forward, which is not cheap. And
there are risks – telecom will certainly slow down by then. You cannot
have 100 crore mobiles in Cyclical
growth companies are trading significantly above replacement cost and we
are somewhere close to a peak cycle. So how the sectors will pan out, how
zinc, lead, aluminium and steel prices behave, how the margins behave is
very hard to forecast. One thing is clear that these are economically
unsustainable prices and these profits are not likely to sustain for long
time. Ramesh
Damani: Anoop,
what is your outlook for the market? Are you more cautious or optimistic? Anoop
Bhaskar: Last
year has been quite camouflaged. If you look at the large-caps, there are
only six or seven stocks which have contributed to the entire movement of
the markets. People
with only small-caps and mid-caps in their portfolios would have only
gained about 8-12 per cent in the last eight months, which is not a bull
market. I think we’re taking a breather.
But I do believe that you have the biggest market and the biggest
opportunity for all companies is the economy. Look at any sector,
everything is at such an early stage of growth. 
Much of what has transpired in the past 12 months is indicative as Rakesh
said of a turning point for this nation’s economy. 
The government is worried about the response to inflation and is saying
the rate will fall in April. But the issue is that it is responding by
closing down exports. So what happens is when sugar export was possible,
you banned it. You got the inflation under control but what happened? It
has shattered the entire sugar community. 
Things like food grains which have not seen any price – real rise in the
world – will do well. But, I am truly scared when I look at let’s say
something like zinc. You know on a five-year perspective is there a
possibility that zinc prices can be stable at $3000-3500 a tonne while
your cost of production is $500-600 for an efficient player? So these
commodity prices which have really hit a significant high from their lows
may not sustain. But that does not mean you will have bearishness across
the board in commodities.
Banks are offering 10-11 per cent on deposits, and as we go into March
they may start offering 12 per cent. So over long periods of time, there
is certainly a strong case to be made that exposure to equities in Indian
households which is very low should increase significantly but I don’t
know at what pace it will happen – given the fact that fixed maturity
plans from mutual funds offer virtually safe 10 per cent return, which
used to be 5-6 per cent two-three years back. 
In terms of small-caps, we have been in a bear market for the last 15-18
months. So, it is only six stocks which have made this whole audience come
out here and say that we are still in a bull market. The bull market has
stopped around 12-15 months back, frankly.