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Dalal Street is celebrating Diwali in style but are there more legs to this market rally. Veterans Ramesh Damani, Member of BSE, Samir Arora, Founder & Fund Manager of Helios Capital, and Manish Chokhani, Chairman, TPG Growth India, discuss their expectations from Samvat 2071.

According to Damani, the markets are currently in a firm ‘bull grip’ and he is optimistic on the trend to continue for the next few Diwalis.

Unfazed by the highs the market can achieve, Damani feels one should rather focus on how low a bull market can go. “Index can go fairly high. The thing is that it should not have more than 10 percent correction in my view,” he added.

Samir Arora too thinks the rally is big and in for a longer duration. However, he does not want to compartmentalize the expected gains on the index to 20 percent or 30 percent.

According to Manish Chokhani, the current Indian environment is neither like 1991 nor 2003, but it is a seminal moment as the country has “decisively moved to right of centre in terms of economic policymaking”.

Below is the transcript of Ramesh Damani, Samir Arora and Manish Chokhani’s interview with Latha Venkatesh on CNBC-TV18.

Q: What is the sense you are getting? As you pointed out sometime back on one of our shows that we are at the start of a massive bull run, is the bull run one-third over, is the bull run half over, what is it looked like from hereon up to the next or Samavat 2073?

Damani: We are firmly on a bull market grip, bull market, like I have often mentioned the Japanese bull market lasted 25 years. We do not know how this will last but all the portents are good. Let me take you through the key data points. Globally interest rates in India are going to go down, inflation is going to come down, growth is going to accelerate whereas globally interest rates are headed higher, inflation is – they are trying to get it higher and growth is anemic everywhere in the world except India and we are now floating on a global liquidity of oil -- cheap oil price is one of the greatest beneficiaries that India will have. So the portents are extremely good plus we have a new government in Delhi that is enthused with the power of change, power of new ideas. So I would be optimistic not just Diwali but perhaps for the next few Diwalis.

Q: Is it 30 percent from 2071 to 2072 Samvat?

Damani: That is always difficult to say. The trick in the bull market is to see how low it can go, not to worry about the high. The highs can be 50 percent, can be 25 percent. It doesn’t matter. In the context of a bull market we know the index can go up double, triple. So we are looking at that from a base of 17,000-18,000. Index can go fairly high. The thing is that it should not have more than 10 percent correction perhaps in my view.

Q: What is your sense? Is the global environment as clement as Mr Damani is making it out to be? Yes, cheap oil for now but that also could be because there is risk aversion as well. We get these bouts of risk aversion. Will global capital be kind, are we going to continue to see a clement global environment towards Indian equities?

Arora: Global environment for India will be very positive, particularly in the last few weeks where cynics were thinking that Mr. Modi will only do this and no more. We had always bet it on the point that Mr. Modi, if you are betting on him, you have to bet for six months and start getting nervous in the seventh and eight month, but with all the new initiatives he has taken, which according to me were well expected, by reasonably clued in individual into the Indian markets but this reinforcement of the fact that this is beyond just the global environment. Global environment is very conducive but the big picture is that foreigners have still not invested enough in India or taken an active enough bet this year.

This year foreign flows into India are lower than what they were last year. In absolute we are up USD 13-14 billion in terms of FII flows into equity and last year were more like USD 19-20 billion and this is after a big event which was well telegraphed and still people refused to believe. So, the foreign flows into India are nothing but in addition now we believe that we have turned the corner in terms of Indian sentiment also. So, I think the rally is big and is going to be long-term but do not box three of us in as to whether it will be in this Diwali 30 percent or 20 percent. It will be big overall and for long duration of time, beyond a point doesn’t matter whether everything happens in the next three months or in the next six months or even in the next one year.

Q: There is headline hunting in trying to find out what is the next Samavat going to be like but I take your overall message that we are on the cusp of something big but describe to me this something big if you can. Are we in 1991 moment when all the parameters changed for us? In one press conference the license raj was rendered illegal or are we in that 2003 moment when we shook off six years of perhaps downturn and got on to a higher business cycle but not necessarily a political economic cycle?

Chokhani: There are two parts – one the global cycle is fairly scary in some sense because the force of gravity, which is interest rates, and the world are artificial and all this money pumping is akin to the Y2K kind of boom which artificially lifted every asset class in the world but that is extremely supportive for a country like India unless the world completely collapses and gets into deflation. So, oil till USD 80-75 per bbl is great but if oil is USD 50 per bbl that means the world is in a bad shape. Having said all of that we expect the world will muddle along, central banks will keep pumping money back, you will get these corrections globally.

The Indian environment does not look like 1991 where you had to reform under pressure, or 2003 where money just gushed in mindlessly and lifted lot of bad quality stocks. It is a seminal moment for India because this country has decisively in my view moved to right of centre in terms of economic policymaking.

And from being a sarkar of -- where sarkar is maibaap -- to  where I will decide and I will hand out to the citizen is trying to make the government smaller, speedier so that the citizen comes at the centre of decision-making and the government becomes progressively smaller and all the right moves in terms of trying to get volume growth in the economy by way of oil sector reforms, mining reforms, manufacturing, defence, they are all the right moves to build volumes to enhance productivity. All these administrative reforms, the dirty parts which no-one wanted to touch administration, labour, goods and services tax (GST), all these are all on the anvil and I would imagine the period between now and the next budget to be full of drama and given the mature administration, which is playing it like a chess game rather than a big bang announcement, which pleases maybe markets and media, there is a real politic and there is a way to play this in a mature way, which I am very optimistic and hopeful about the way things are going.

Q: Is the market wrong in expecting big bang reforms? At the press conference while announcing the coal e-auctions, it was very clear that the ministers were repeatedly telling us Coal India’s interest will not be harmed, not even something like commercial mining, not even something like nationalisation of coal is going to be abrogated, it looks like they are not thinking reform at all then where is so much bonhomie coming from?

Damani: If you have read an interview with Arvind Mayaram who recently became the Tourism Secretary from the Finance Ministry, he said if you are expecting from divestment to privatisation, if you are expecting removal of capital control, that is not going to happen. The government has already set its priorities out, which are smart cities, the Delhi-Bombay corridor, GST, labour reforms at the state level, etc. I think the market will be disappointed if they are looking for this big overarching intellectual reforms. There will be more incremental reforms and they will be more focused on governance but it is enough to take the market through to a very prosperous Samavat 2071.

I think we just looked through those verticals, there are ample opportunities of growth and the environment as Manish points out is so benign to India. Our moment is not to compare us to 1991 or 2003 but to compare us to Japan of 1964. A third world country in the next 25 years became a first world country member of the G5 nation, it survived the crash of the Dow and still went on and made new highs, the index went up from 1,000 to 40,000. So we are on a similar trajectory, I am not suggesting 40X move in the index for sure but I am suggesting a similar trajectory. If luck holds us in good state and we continue to get good economic policies, we will see a long multi-year old market which will significantly change the face of this country. It is not about making money on Dalal Street, it is about changing this country. I think there is a real tangible possibility that 25 years from now India will be a far different country than it is today.

Q: Don’t look for policies, policies are there but get them implemented is perhaps what Mr Modi is talking about and clearly, the fact that he began by speaking about cleanliness that clearly indicates that he has got his heart in the right place.

Damani: How could you not support that.

Q: Will you be looking for anything by way of reforms from this government? What will you be looking for? What have you seen of it now that gives you the optimism that you expressed when you began speaking?

Arora: This year and since September last year we have been very bullish and enjoyed it a lot but the main thing always has been that India does not need reforms, it just needs even better implementation of the worst possible policies even if they were there.

Let us say that MNREGA, which many people consider negative, was just done efficiently so that there is no diversion of subsidy and it went to right people and that maybe you built something more meaningful than digging drenches which would then be filled up again. Let us say any of these was done even properly, I think that itself would be a big deal.

So our first bet always was that Mr Modi because of his track record in Gujarat -- by the way since 1947 Mr Modi is the first Prime Minister to have had a job before he became Prime Minister which was somewhat leading to having a P&L. I don’t mean in that way -- that way Mr Rajiv Gandhi was a pilot but broadly somebody who ran his own P&L for 9-10 years and therefore knew governance and administration and how to deal with bureaucracy and other groups and things like that and not be an economist or a freedom fighter or a politician or a stuff like that. So that is the first thing, but even the government has benefitted from policies that were started by the previous government.

I think the most bullish thing in future, even if you just implement it properly but don’t do new reforms, is UID because the amount of subsidies that have been diverted whether it is scholarships to people, whether it is midday meal, all of them can be controlled if you use your fingerprints to see whether that is the right person and whether the kid is going to school before you give midday meal, subsidy for him and things like that. So many of the even previous government’s policies because they will come fruition in this government.

I think Mr Modi is a real leader to bring up things in a national independence day speech that na mein khaunga na khane dunga where everybody in those kind of speeches say how great we are as a nation, how we have been born with greatness to bring up such hard hitting problems that we are a dirty nation knowing that this problem cannot be solved in five years and therefore people will say, oh, he just says it, he cannot deliver it but to even bring up such things which people don’t bring up because they are embarrassed and also because they know that this is a long-term solution that will be there, it cannot be done in two years. That is why I think that if you bet on some things, you have to bet on everything.

That is what I say to the Indian investor, if you believe that nothing has changed, stay out but I don’t think that they can say that this is the same country as it was a year ago but if they still want to be cynical, it is okay, foreigners will pick up the slack.


Q: All of you extremely bullish on Indian economy and markets in over the next four-five years, but since you have your fingers in several pies, you are advising Axis, you have interest in several companies which are very closely linked to the consumer, even if you were not the numbers are not showing that the economy is turning, the index of industrial production (IIP) number -- no matter how badly it is calculated -- was exactly the same number in August 2013, in August 2012 and in August 2011, it is a stagnation that is stubbornly refusing to go, when will the economy turn?

Chokhani: The IIP represents a lot of manufacturing -- manufacturing as you know will take its time to turnaround and you had this period where you had the monsoon scare then you had the whole coal sector getting back into a mess so it is difficult for people to announce new projects.

What I am heartened by is that the backlog of projects and the implementation are moving at a very rapid pace now. Hopefully we will be solving the coal and power sector issues as well, which are big segments of the economy. The whole defence establishment getting indigenised is a very big long-term manufacturing move because the way the world is, manufacturing is not like the 1980s where China could become the manufacturing entity for the world. There is excess capacity in manufacturing in the world. So therefore, it will have to be a bit of import substitution led manufacturing which will take its time to build up, export markets for us to find in a slowing world is a fight for market share, so it will take its time.

As far as consumer sentiment goes, I would think, it was also wait and watch mode for most people. From what I know of the retail markets and nothing to do with the boards where I am a member of is that the Diwali sales have been good, leading up to Diwali they won’t be particularly good but the last two weekends, things have started moving. There was also this whole hungama about Flipkart and Amazon and so on which led to some confusion in the market place.

Auto sales were down in September presumably waiting for Dhanteras where a lot of deliveries are to go on and so on. We have number of investments on the anvil as well in this space. I think it is the rate of change one is looking for. Like we said, we don’t expect big bang reform and I would bet that the January to March quarter, this country will probably end with 7 percent GDP number because things are all moving in the right direction. If you realise oil price down USD 20 billion and of that half goes back to the consumer, it is a USD 10 billion stimulus to India and that comes into urban pockets largely and that will allow people to go out and spend. USD 10 billion incidentally is a number, which the previous administration gave as a stimulus in 2008, so it is large number going back into consumer pockets.

Q: Are you also smelling the turnaround as quickly as that on the P&Ls?

Damani: What he says, diesel price were not taking the full impact of what that means and were not taking the impact of what Mr Modi is suggesting in terms of smart cities, in terms of Delhi-Mumbai industrial corridor, that will spur up the investment and capex cycle out there. Rather than a top-down approach, take a bottom-up approach, I look at companies after companies and there will be periods when companies will be slow but there is no reason to pack your cards and go away to another company. These are great businesses that are built over periods of time. So I never look at a market in one quarter or two quarters period. I am happy to take a couple of years view. I have had those consumer stocks in my portfolio for 10-15 years. I see no reason to change them. I think good times are ahead, whether it comes this quarter, next quarter, let us see but no reason to sell them.

Q: I completely take your point about that slightly larger turn in the economy, which will be positive but are you just smelling that turnaround because while we have all these positives and we in the media have been spouting them for the last six months if not even longer, the actual numbers are still even the second quarter earnings numbers are still not speaking of a turnaround.

Chokhani: Can I take a step back? I see the US markets as well and if you were in the US markets, you would have kept saying the economy is going nowhere and 2 percent growth and it is dead. In that economy, there was Apple, Google, eBay and so many 10-40 baggers in that market and in each of these stocks, they were on single day corrections were 25 percent in each of these great companies of the world which you want to own. So the markets are not meant for people who want nice, steady interest income coming every month, you have to take the volatility, you have to believe where this company can be in three-four-five years and the wealth, which magnifies by holding a long-term winner is something which a trader can never fathom.

Enormous wealth creation lies ahead of us and I don’t think we should get swept away by the minutiae of what is this quarter, next quarter in terms of earnings. Directionally this country is a super tanker, which has changed course, it is on course for 10-15 years with the demographics the way we have, with the entrepreneurship with the way we have and now the government in place in the way we have, it is an irreversible journey. I think if we don’t get that message across to all our viewers, we are doing them a service. If the aggregate Indian shareholding, ex-promoter and FII is 10 percent of the market, what are we discussing. The deposits in the bank are more than trillion dollars. The holding of equity aggregate by Indians is probably USD 100 billion. If we would just put our interest income into equity every year, we would be far wealthier at the end of the cycle than we will be.

So I can only urge viewers, let us not discuss the world and other things, get our asset allocation right. It is a young country, we are 26 years old, and according to me we should be the reciprocal of 26 is 74 percent we should be in equities. Twenty six should be fixed income. Unfortunately we don’t even put money in fixed income, we are buying real estate and gold, we are not coming where there is wealth creation. It is a time to be building businesses in India. I see in my private equity avatar, youngsters 30-35 years old guys who will build billion dollar businesses, you have seen Snapchat, Snapdeal, Flipkart, they are 10 years old stories, they are billions of dollars of wealth creation guys. These are young ou may not agree with their valuations, you may not think they have a P&L today but where are these businesses going? The world is changing and it is like this Diwali guys wake up, start your business, invest in equities, that is the only lesson I want to give.

Q: Does that disturb you at all – the problems are fairly seriously entangled as far as power and coal is concerned, as far as the entire gamut of infrastructure is concerned as well consumption and capex have still not picked up; neither investment nor consumption, the two legs of growth. How long would you give this economy, would you give it two quarters-three quarters?

Arora: Before that I want to talk to you about quarter to quarter. In 2008, the market fell 65 percent or 60 percent depending on rupee or dollar but the earnings did not decline 60 percent and similarly next year that is in 2009 when the market went up 100 percent, earnings actually went down that year because they were adjusting for the fact that the year is different from the market. So you cannot do it contemporaneous that whether it’s like this. So look at it differently. In the last two years from December 2012 to today the market is up 14 percent in dollar terms over two years and this is because of currency plus market but overall the market is up less than 7 percent per annum. So do you think that is fair or not, when you US last year went up 37 percent and this year is up 3 or 4 percent or zero. The point is it is not so literal.

I actually did this for one of my newsletter that for the last 10 year if you put down the earnings growth of that year and the market movement in that year, there was no connection but if you did it for the whole ten year period, it was more or less inline of about 16 percent per annum for both earnings and the market – that’s one.

Second, I would think that if all elements are in place and you feel those are moving in the right direction as we can say that there is a bottoming out of economy.The oil prices are low, on the margin there are reforms, on the margin Indian investors do not have equity, on the margin foreigners are not running away and these things will happen. All of these things will happen now. It doesn’t mater whether it happen this quarter or next quarter but obviously if they do not happen at all its bad but there is no reason because everything is made up of five or six or ten elements and those 10 elements are in place.

Talking about infrastructure sector, I was quite negative on the coal outcome but everything in India is told to you before it happens. The people were surprised with the second Supreme Court ruling but actually it was announced in the first Supreme Court ruling that they find everything illegal. When some scam is found, it was known one month before that these guys were in some cahoots with some politician. Everything is known. So, again you will know if these things are not working but because of yesterday’s event or today’s event saying that they will do an auction. I still think it is difficult to do who will be bidding, who will not be bidding but broadly it will get sorted if they start. The previous government had meetings and did not start some of these things for 2-10 year – that is why today the bet is not that this thing has happened but it is reasonable to expect that these things will happen.


Q: I take your first point that at least look at equities. You cannot be a country 3 percent invested in equities when your average age is 26 as you put it. You have 71 percent to catch up in terms of equity investments, I take that point. But If the cycle is turning and there will be people who will be looking for three year gains, two year gains. Is the place to be financials, the place to public sector banks as well which has been the most beleaguered lot?

Chokhani: I will take a step back for that let’s say we want to get asset allocation right and coming directly into equities is not for everyone because most people by nature are not designed to handle volatility. So for investors like that to get the allocation right instead of taking a tip and buying, what all of us collectively on this panel say just buy funds, buy them every month so that you know in 2014 I have 2 percent of my assets in equities and I want to put 1 percent in every month for the next 24 months and I will end up at my desired allocation. You will eliminate the volatility; you will at least be in the market, in a ship which is sailing towards a very nice destination. So that would be step one.

Step two is getting your portfolio construct right and I have always said this and I hope Ramesh and Samir will agree as well that you cannot be jumping sector by sector when you do not have a proper portfolio. So, you have to have an element of consumers, you have to have healthcare and IT which are our big export businesses. You must have a lot of financials, you may choose to from time to time, have energy or commodities depending on your view there and then some amount of manufacturing especially those which are globally competitive.

That is a well constructed diverse portfolio. You would have an element of midcaps versus largecaps, don’t go crazy in that especially one is an average investor. Even we guys, I don’t know about Ramesh but I would keep a watch on what is happening on my sectoral allocation and what is happening to my largecap, midcap mix in my portfolio because that itself gives me messages of what is the cue of the market and where is this market heading. So if one gets that framework correct, it is very hard not to make money in our country.

Q: I don’t want to sound like a wet blanket but there are a large part of risk averse investors as well. Is fixed income going to give you decent amount of money in next one year?

Chokhani: I would think if you play duration, long-term gilts for example will lift up because rates in my view inevitable are headed down in India. So you have to have a duration in your portfolio today and being an equity person, I always think if I have to take duration, I would rather hold the equity. So people who have deposits in banks, just go out and buy the stock of the bank in which you have a deposit. You will do better than your FD.

Q: What is your sense? We have audiences also who will invest for the year, maybe more of the trading variety but is cyclicals the place to be for the moment for maximum gains, would it be public sector banks at all simply because they are the most beaten?

Damani: I have a different approach than Manish. First of all, if you are young in India, cannot pick stocks, buy an index fund that tracks it rather than SIP. You want to get as close as into the beginning of the bull run rather than systematically over two-year period because you will make more gains out there. I would still encourage people to go and buy own stocks, it is not easy but making money is not easy rather. You have to devote some effort and time. Where would I look? I would look at the sectors where the PM as Samir said is telegraphing that is where investment is coming, that is where activity is coming. You can see the e-commerce sector, you can see the construction sector, you can see the smart cities sector, you can see all those places where the government has already announced is going to make a push and you will find good valuations. The trick in my opinion -- unfortunately I don’t know what Manish does as to buy across sectors, across largecap, smallcap -- the trick in my opinion is to buy great businesses at cheap prices. That is what we try to do all the time and we try to go overweight rather than underweight. The trick to making a fortune in the stock market is when you find a great bargain is to back up the truck and buy. So the philosophy I follow perhaps is different that we want to find the few great businesses and watch that basket very carefully.

Q: But if you can give us little more in terms of how you will select businesses at this point in time. Would you prefer internet stocks, would you prefer consumer stocks? What exactly are you looking at and ultimately the Sensex is also about 30 percent or 50 percent public sector undertaking (PSU) stocks. So, willy-nilly people will want to know your view on oil stocks, PSU banks?

Damani: I think Hindustan Petroleum Corporation (HPCL) which I happen to own, so it’s a disclosure - offers some exciting possibility. It is close to Rs 550 level which is a technical breakout level of a lifetime high which is very bullish technically speaking; it’s about 2.5 lakh crore turnover. The company starts earning 2 percent margins with decent deregulation that makes Rs 5,000 crore. This is great for a company that marketcap today is Rs 15,000 crore. These are numbers that you can dream about, so that is a good place.

PSU banks probably avoid. Mr. Modi is very aggressive about smart cities project. There is a huge capex cycle unfolding in that cycle. So, look at some sort of verticals there and you will find a lot of opportunities; cement, construction and ancillary machinery – that would provide the opportunity in the next couple of years because the government is now committed to moving ahead and rolling ahead on that.

Q: I am not going to ask you about PSU stocks.

Arora: I will not even buy oil and gas.

Q: Oh not even oil and gas, I thought you would be somewhat thrilled with the gas decision. No buys in oil and gas space?

Arora: When you improve finances of the government there are many other companies and many other sectors like the financial sector which benefit. Directly betting on the specific beneficial is not obvious because these companies have not been used to dealing with an open economy in terms of their own sector – that means now whether you get the correct Fx cover, whether you imported oil on one day or the other day and then Reliance and Essar coming in and also these companies are not suppose to have more than 10 PE, so the fact that they are up 100 percent in the last one year is not because people thought that this is a bull run. They thought that something will happen to these companies and it has happened.

Q: You don’t want to talk about public sector units for obvious reasons, would you say NBFCs are a place to be at all, does that space attract you partly because looks like there money is going to get cheap and partly because they have the freedom to grow which PSU banks don’t have?

Arora: Yes, we own a lot of them. I think along with financials, our second or third highest sector -- after banks, consumer and then NBFCs because many of them are mortgaged finance companies and we own nearly all of them and some of them are consumer finance and we own one-two of them, basically we like that sector. Now there have been some issues that RBI will come up with policies to remove this arbitrage between banks and NBFCs but on the other hand, they also know that to do financial inclusion, you cannot make it too tough because they do a somewhat different job than what the banks can do. We are very positive about NBFCs.


Q: Let me come to the one theme that fired us all – the Alibaba offering and which made us suddenly realise about interne and related themes, not many listed stocks in India. How would you play that theme?

Chokhani: There are two – Just Dial and Info Edge which are the direct listed ones. There are lots of ways to play it through courier companies and logistics companies and so on.

Q: Are you doing that or would you advise doing that?

Chokhani: Because I also work in private equity I have the privilege of seeing all these companies when they are young and one can make investments over there directly. I also see what we do in the US and China.

China is the most virgin internet market in the world which Indians cannot play but there are ways for Indians also to buy some of these global internet stocks. There are funds now which offer you the opportunity to participate in some of these companies overseas as well and I would suggest people really serious should take a look at some of these funds. There is one of my friend, I don’t normally recommend but Parag Parikh runs a nice small scheme 500 crore odd, they do some money overseas and some in India and interesting array of stocks, high quality here as well as overseas, but having said that its an idea whose time has come in India because of our infrastructural bottlenecks over here and more and more of these companies will come to market. I suspect lot of them will just straightaway go and list overseas rather than doing it in India and what are the rub-off benefits of these companies maybe on the supply chain people here as well as the logistics players over here. So, from a listed market perspective those are the places to look.

Q: A blank cheque question – what would you be buying on. I am sure consumer companies form a big part of your portfolio as well?

Damani: IT, pharma, technology, these are all stocks that are dominant in my portfolio but typically in Diwali people look for “new ideas” but let’s give it a crack and see if that becomes better. The e-commerce space will do well and as Manish said you do not play the frontline because they are very expensive but the ancillary, data, packaging, media, logistics all offer value, they all had great run in the last year. Look at also the analog or the real world where you see all these construction companies doing well. So I suggest one idea for your viewers, a company called Ingersoll Rand (India), they benefit from two things themes that will play out over the next few years. One is the Make in India theme; they have started a contract manufacturing business which they can scale up rapidly. It’s about 40 crore-50 crore base right now and second, they are linked to the construction, textile, pharma industry. This company has done nothing for the last 15-20 years but I recently visited them and I think they have new energy, their capex is done. It’s around Rs 700, Rs 2,000 crore marketcap, almost Rs 500 crore in cash.

This company can give a compounded return, not necessarily one or two quarters and probably not in one or two quarters but over the next two-three years this is the high quality businesses that you want to be in, good corporate governance, good verticals that they are addressing. It seems to me to be good place to start looking at.

Q: What would be your favourites in terms of stock picking hereon?

Arora: I am going to answer your pervious question that how to play the internet for Indian retail investors. Do not play it. It doesn’t have to be because there are only two listed companies and we are short one of them, but separately it’s true that you can easily buy US companies and own all of them.

I own Google, Apple; Apple is not internet and those Indians can also buy but in India it is for private equity and second, because of advent of private equity the public market guys will not make any money even when they go public. Just look at alibaba.com - I owned Yahoo in the olden days so I made some money but broadly speaking it went public at USD 67-68 and you would not have got it unless you were a private banking client of Goldman Sachs or somebody and if it was in India, it would have been oversubscribed 200 times so you would have still loss money. From the day it got listed, I think it is down. Day of listing means after the listing and when it started trading. So some of these things because of aggressive private equity in India or in the world these days the money is made via private equity funds and by the time it goes public anyway we have time, when they go public we can evaluate but today to desperately try and get into private equity type domain by buying somebody who owns a little bit of this and that, is not a theme, stay away, in fact stay away from companies which may negatively be affected by this.

Q: You have 30-40 percent of your exposure in midcaps. Give us some ideas – what are or how are you picking those stocks?

Arora: Broadly we do not pick stocks any more. We just have them but we own United Spirits and my logic at which we bought – (a) it is one of the few companies which is down for this year. Doesn’t matter technically because last year there was an open offer or whatever but very rare to find a stock down 10 percent (b) we considered it the Modi equivalent that means Mr. Modi when he became Prime Minister, whatever happens we would say it is because of previous government. So, the same thing happens with United Spirits. Whatever is bad, we say it is because of previous thing. So even when they had Rs 4,000 crore write-off or whatever they say its because of previous management and on the first day that they have a change that the margin goes up 10 bps or revenue goes up 1 percent, we will say a turnaround has happened but for the next one year or so I thought and it seems to be working out that you cannot have a downside, it may not have an upside because nothing changes but for one year you will keep giving them benefit of doubt because they will also say that we are cleaning up, we are bringing it to global standards, our reporting is now global. So, every time they will have a story for three-four quarters or two quarters and by that time something will change plus we know that Indians have a fascination for multinational companies and in any case even companies go 10-15 percent they give them 30-40 multiples which we do not do for our own tech sector. Look at our own tech sector.

Q: You own that. You want people to own that?

Arora: Of course I own the entire tech but for somebody to sell a stock down 10-14 percent that means he think it must fall 30 percent because if he was willing from a day before price to sell it down effectively 15 percent down in two days. What analysis that fund manager must have done. We like United Spirits and we own it, so it’s okay.

Q: This DMIC - you were speaking about these smart cities, how do you play that theme because now it is an NDA government or a BJP government wherever the DMIC is rolling out, can the theme be played other than these mortgage companies and the fact that there will be young people with the money to consume?

Damani: You can. You play through the infrastructure companies. I think we are on the verge of a huge construction boom in this country.

Q: Cement...

Damani: Just basic construction, cement too but also construction companies, there are only so few with good capacities, good balance sheets and I think -- what happened last year to NBCC, you look at the book to build ratio what happened there. I think they are very modest now at two-three times with a good 8-10 times and at that time that have pricing power in the business. So you look at that overall sector, look at cement companies, look at sanitary wear, there are lots of ways you can skin this cat but that is a theme that investors will be focused on for the rest of the year.

Q: Then a theme perhaps divestment, you think anything at all will be picked over there. They are supposed to do about Rs 50,000 crore this year itself but should investors look for gems in that space -I am not asking Samir that question?

Chokhani: I have a different take on this and I wish the government would not sell in dribs and drabs and sell things away at a fraction of book value. The world has 1-2 percent interest rates, they need these annuity type businesses, which a lot of the PSUs are, the time is to sell them all these lock, stock and barrel, take that money and build new assets and that would be make in India. That would be building out of new infrastructure. I don’t see any logic why does the government has to sit on Steel Authority of India Ltd (SAIL) and ITC and God knows so many hundreds of companies.

The Indian railways can attract a lot of money, life insurance can attract a lot of money and lot of government land can be sold. So the government balance sheet is USD 800 billion of debt. We pay USD 75 billion of interest every year. The entire public sector produces a grand return of 2-3 percent. We cannot be holding on to these assets and after holding them, we are selling them at fraction of book value. So I am hopeful towards the end of Mr Modi’s term, which may be 5-10 years who knows when a lot of this state which has been built up will be dismantled.

Q: You wanted to add to anything on the divestment theme at all? Should investors look there because that is probably going to be the story for the next five months, I know that is not the time you all are concentrating on but will you pick these businesses?

Damani: I agree with Manish’ dribs and drabs and are we going to move to so right of the centre that we are going to dismantle the PSU sector, I don’t see that happening right now. There is no political consensus in the country that will happen but just for fun because they all added US stocks, I am going to give you two stocks in the US that I am following. One is Coke, I think it is breaking out of a 20-year zone and United Parcel Service (UPS), which is the logistic champ in America and they are showing some pricing power which is what I find interesting about this, logistic businesses because e-commerce is now 11 percent, will go to 15 percent, so they are seeing some pricing power. So just for fun, we will check back next year how these stocks are doing.

Source: http://indiaer.blogspot.in/

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