Home Market Compounding works only in good companies, not in bad companies: Raamdeo Agrawal

Compounding works only in good companies, not in bad companies: Raamdeo Agrawal


In an interview with Nikunj Dalmia of ETNow, Raamdeo Agrawal , MD & Co-Founder, Motilal Oswal says 85-90% of the companies are bad companies, they are not compounding enterprises. Otherwise the world will become so rich!

Edited excerpts:

Nikunj Dalmia: Where do you find scope for earnings and PE expansion? It is a lethal combination. If you get a company or a business where PE is sasta (cheap) and growth is high, earnings as well as PE will grow and you will end up hitting a multibagger. Is there scope for your portfolio to have PE expansion also?
Raamdeo Agrawal: Aapko jyada maalum hoga (You will know better) because you talk to all the maharathis (masters), you get to hear at least one or two ideas. See you cannot get too many ideas like that overnight. I do not have anything like that which is worth mentioning. But one space where you will find stocks where earnings ina very predictable fashion will grow at a rapid pace for a very long time — at least 10 years — and valuations are not that demanding is the private banking space.

Nikunj Dalmia: Private banks still?
Raamdeo Agrawal: Yes, you see nothing of the private banks.

Nikunj Dalmia: Corporate or retail within private banks?
Raamdeo Agrawal: Privately owned, like say Kotak Bank or HDFC Bank or RBL or Axis. These banks have everything. Predominantly, corporate banks are a little more cyclical. Because of entrepreneurship and the opportunity size and the company landscape, market share will shift from PSU banks to private sector banks in the next 10 years and there will be a giant shift.

Right now, it is most likely 50-50. Banking requirement is growing and it is too much AI driven, too much digital driven. A kind of frontier technology seems to be part of the banking process or service offering and that can be done by only entrepreneurs. This is one business where you have to figure out which bank to put a buy on or how much to buy. This is one space where I would remain very firmly put to get high growth, high possibility of return.

I like the entire BFSI space, thanks to the evolution of financial space and even insurance — general as well as life.

Nikunj Dalmia: How will you compare insurance company with banks? We know that you look at price to book…
Raamdeo Agrawal: Wo tension wala kaam hai…(That creates a lot of tension)

Nikunj Dalmia: So, stick to a large pedigree player?
Raamdeo Agrawal: Yes, because in insurance, particularly life insurance, there is no matching principle in terms of recognition of P&L and the expenses like there is everywhere else in financial services. So, current years cost is accounted for in the current year but in insurance, the next 10 years or 20 years of cost is booked now if you do new business and that distorts what is the P&L which is visible.

Nikunj Dalmia: So typically when a sector gets created, like the AMC business, insurance business, private banks were created 20 years ago — you just buy a company with a good lineage and then sit on it?
Raamdeo Agrawal: One thing that you should be prepared for is in investing, the first important thing is whether you understand something or not. I cannot understand all of them. I am not the techie type.

Nikunj Dalmia: Yet you have bought Infosys?
Raamdeo Agrawal: That is okay. It is not classical tech tech. It is basically an arbitrage of the labour cost between Boston and Bangalore — at least to start with. Now it is a scale, skill and a lot of project implementation capability, project management.

When we started in 1997-1998, it was more of a labour arbitrage. So you have to understand something at some point of time and that is where you put the bet.

Nikunj Dalmia: You have not shied away from buying PSU stocks in the past. You have bought HPCL and SBI in the past. How do they tally?
Raamdeo Agrawal: The experience is not very good. We have made money and we lost money in the second round, but the government has its own prerogatives for managing PSUs. We can predict when commercial sense will prevail. But governments do not do what is good for the company, they will do what is good for society.

Nikunj Dalmia: That is why they are called PSUs — public undertakings…
Raamdeo Agrawal: So that market will keep discounting and it will never get the full price of the potential of the company. If it is in the private sector, it will get x valuation, but detour for the public sector will get half or something like that.

Nikunj Dalmia: A sector where you have a very deep understanding is autos. You understand the dynamics. Do you think the downturn is cyclical?
Raamdeo Agrawal: It is clearly cyclical and it has come with a little bit of surprise. In September-October, we were asking the companies how are you going to shape up, if they have capacity for next year. They were running out of capacity. Today we are asking what will you do with the capacity?

But these things happen. The entire NBFC crisis starting in September-October led not to credit squeeze but there was some kind of aversion from the lender side that let us be a little more tight, a little bit more careful. But in that process, the products which are sold only on credit suffered.

Also, in general, liquidity was slightly tight. RBI is very proactively releasing liquidity and there is even credit aversion to lend more. That also goes away once your experience is good.

Nikunj Dalmia: One of the biggest mistakes of my television careers has been that even though I started in my 20s and understood the power of compounding theorem in my 30s, you understood the theorem of power of compounding very early and you have applied that also. When you look back and say that this is something which I would like to change about my investing career, and if I have to write a letter to my son, what would I write in that letter?
Raamdeo Agrawal: Start early because power of compounding is not as much about the rate but more about the longevity of the rate. I mean 25% is a very high rate by any standard. But 25% in five years is three times and in 10 years it is 10 times; in 20 years it is 100 times, 30 years it is 1,000 times and 40 years it is 10,000 times and 50 years is 100,000 times.

So even if you start with a lakh, a kid who is starting at the age of 20 and goes on till 70, has the chance to make it one lakh crore!

Nikunj Dalmia: If you have to write a letter to your son, how do you think the letter will start and how do you think the letter will end purely on investment wisdom?
Raamdeo Agrawal: I would still think that you must understand where you are investing. That understanding has to come to anybody who is trying because it is a risk capiRead More – Source