2014-09-13

Nikunj Dalmia: Currently there is a feeling of carnival in markets. There is hope, hype and excitement. When there is too much of optimism, don't you think that normally is bad news?

Ramesh Damani: It is. It tends to be at the extreme but there is an old saying that "jab jaago jab savera." People have not woken up to this extraordinary event that is going on. We are already one year into this bull market and typically bull markets have a lot of time to go in terms of years or points to go.

People are getting vertigo just seeing the index from 16000 to 26000. The best time to invest in the Indian bull market was last year during the lows in 2013 when the index was 16000 but the second best time to invest is now, wake up. The coffee is strong, there is lots of optimism ahead and there are lot of people bullish early in the bull market. The trick always is to stay bullish as the bull market eases on.

I have seen many a bull market in India and overseas. At the top, there will always be signs flashing yellow and red. You have to take into account those signs at that time. There will be leverage, there will be lot of back slumping. IPOs will list, lots of signs come out there but we are nowhere near that. We have hardly raised that money in the IPO market, there is very little outstanding position, volumes are still fairly decent. So, there is reason for optimism and the market is rewarding that correctly.

Nikunj Dalmia: A year ago, you said it was a good time to invest into stock markets, valuations were on your side and your famous quote was that good news and good prices, they rarely come together. Right now, news is good but are prices also good?

Ramesh Damani: Joseph Granville, an American market historian, classified the bull and the bear markets into three phases. The first phase is characterised by complete depression, which we had last year. This year, by my reckoning, we are in the second phase of the bull market, wherein stocks double and treble. Though we may not be able to get an appreciation of that scale, but typically one should look at cyclicals, technical chart patterns and good ideas. Therefore, while prices will continue to remain high, they will not be high enough to discourage investors from buying into stocks. Though earnings, economy and fundamentals will take their own time to catch up with these companies, but if someone is waiting for a correction to come in, then he/she may never get that chance. So, in my sense, it's never too late to look for high-quality companies and buy them.

Nikunj Dalmia: The optimistic lot on street is of the view that this will be a bull market similar to the one in 2003 to 2007. Would you concur?

Ramesh Damani: Every bull market is different, with a different leadership. It is still too early to comment.

Nikunj Dalmia: But, what about in terms of magnitude or appreciation?

Ramesh Damani: I think this year will probably be bigger, since each bull market is bigger than the one preceding it and each bull market creates more wealth and more opportunities. I am more excited, because this may well be the last bull market of my life, given I am an aging bull myself! I am sure this year will give an extraordinary opportunity to create wealth and money.

By nature, bull markets are like an eclipse - they are miraculous things. If you get it right, it changes the course of your life and may indeed change the course of a country or an industry. Take, for example, the IT industry and compare it with its position prior to 2000 and after the bull market that it witnessed. Similarly, look at some of the cement companies before the Harshad Mehta bull market happened and after it. So, bull markets are not to be dismissed because that is not a matter of the index going up by 100 or 200 points - it is a life-altering event.

In my humble opinion, it is still not too late for investors to participate in this bull market just because the Sensex has gone up from 17,000 to 26,000. The technicals, the underlying strength of the market, the breadth, the leadership are intact and everything suggests that we only will head higher. Though we will have corrections, but periodic corrections are in the very nature of the market. Some of them can be brutal, but from all the indicators, it is evident that the markets are poised for far higher levels from now.

Nikunj Dalmia: If I look at the market behaviour, the tilt of the market action is once again concentrated in and around pharma, IT and select consumer names. Even though the basic bedrock of this bull market is that Indian economy is on a mend, interest rates will come down, investment cycle will start but as of now, the market positioning is very different.

Ramesh Damani: One should always try to understand what causes the bull market. The thing which started this configuration of a bull market is that there is severe under ownership of Indian equity. The trouble is that Indian public went wild with gold or real estate and just ignored equities. Equity ownership is at historical lows.

This issue is now being addressed. Equities are attractive because a) stocks are cheap and b) the dividends are tax free. So, people finally have got to understand the logic of that business.

Now look at the names that are participating, tech, pharma, FMCG. They are globally protected against rupee. Inflation is protecting your assets out there. These companies do not dilute their equity. If you want to come and buy now, from under ownership, you want to go over ownership, only the PE will expand and that is what is playing out, there. Companies that are diluting the equity, for example, recently Jaiprakash raised issue, sold issue in the market.

Markets are hammering them back to shape but people who are building a great business are respecting the equity, looking at growth will for premium. Premium will not only stay at this point, it will expand over the next few years because company like Lever has just done a big buyback. They got less than what they wanted at Rs 600 and probably the market took it down to 550. How is that rationale? You could have sold and tendered any amount you want at 600, everything will be accepted and yet, a month later the market thought it was worth only 540. It is not a rational behaviour. Investors sense that the good Indian businesses and companies will not dilute equity for the foreseeable future and get a premium PE from the markets.

Nikunj Dalmia: According to you, in consumer, pharma or IT stocks, there is no froth, even when they are trading at lofty PE multiples?

Ramesh Damani: We will have to come to terms with the fact that the stocks in consumer, pharma and IT are not going to come down in a hurry. There are 500 stocks that trade in BSE and they never get tired of trumpeting. But, to see it the other way, these are basically 500 companies that you can really look at.

So, the few good quality companies, that do not need to dilute their equity and do not take a substantial amount of debts, must be held on to for life. I was asked in an interview if I was going to tender my Lever stocks, and I said no. It is a comfortable investment and just to make Rs 50 on this stock was not good enough reason. It is hard to believe that Lever's better days are over, as there are millions of people who have recently entered the consumer class and also, with the whole new boom coming in India, Lever's and their products will continue to do just as well. I am not saying Lever's is a monopoly on the good times. There will be lots of consumer companies that are likely to do well. So, be it lofty or nose-bleed valuation, you will have to learn to take in a stride. In my particular case, for people who have invested early, there is a huge margin of safety. We are happy to stick to it.

Nikunj Dalmia: How should one participate in this bull market?

Ramesh Damani: First of all, get invested. If you do not have the time to pick stocks, consider Buffet's advice and buy an ETF that tracks the Sensex and the Nifty because it comes at the lowest cost. Now, if the Sensex goes to 40000, as some people suggest, then the ETF will mirror it and you will make 50% of your money from this stage on, with absolutely very zero cost.

If you are young and can devote time, which I think you should, then it is very easy to see that there is a boom coming in ecommerce. With 20 crore people about to own smart phones, the ecommerce business is only going to revolutionise and there is a huge opportunity. You could buy the front line companies, which are not cheap, like JustDial, Info Edge, Snapdeal and Flipkart.

But for someone, who is not necessarily digging for gold, the mining boom looks attractive. Even the media, which will play a part in the ecommerce boom by getting them business from advertising, packaging and data. There are some great selections across the board and this is just a starting point. You could be bullish on construction, as I am, because currently we are at the tip of one of the greatest construction booms in the history of India, which will unfold in the next one to three years.

So, there are a lot of ways to skin this cat. You can buy the classic defences - the Glaxo's, the Lever's of the world - but if you are young and probably want to shoot for a higher rate of returns, then look at something in ecommerce or in the construction business. I have been very bullish on media and some of the companies have broken out of the pack, the earnings have come through and their advertising is growing. So, there are lots of opportunities.

I have no monopoly on ideas and a lot of people have different views, but it is a good idea to start looking and scratching your head - put pen and pencil together. If you are young in India, then put some money into equities. You will realise the miraculous part of the bull market when it transforms you from a saver to an investor, and a wealthier one for that!

Nikunj Dalmia: You bought Gati when there was virtual panic on the street. Do you think a business like Gati has a long way to go because as of now it is trading on hope?

Ramesh Damani: I believe in Gati. If you break it down, they have done a couple of things correctly - they got in a Japanese majority to take care of their basic business KWEM. The ecommerce business is growing at 10% per month and that business will scale up over time. So it is up 6x since a year ago. Though, obviously, it is not cheap.

However, the 20 crore smart phone users in India might order five packages a day, which means 100 crore packages. I think there is a lot of opportunity there. It is a place you want to start investing in.

Nikunj Dalmia: The challenge for some of the logistics companies could be that in order to grow, they may end up diluting. Is that a risk?

Ramesh Damani: It is a risk, since these companies require large amounts of capital. In Blue Dart's case, the parent DHL has given that to them, and their balance sheets are not yet strong enough. Gati has raised some money through QIPs in the past or through fund instruction from KWE, but they will require large amounts of capital to go.

Nikunj Dalmia: How should one participate in this data opportunity because for the moment, everyone has the data and no one knows how to analyse it? 10 years ago, you were trying to understand the internet, now the internet is trying to understand you.

Ramesh Damani: Good point. Data is actually a secular opportunity. The opportunity is digitisation. As we move from an analogue world to digital world whether it is in photography, telecom or stock market, everything is ultimately stored in data. We are playing out the digitisation theme in consumer electronics, in the media, in actual storage and cameras.

It is a huge mega trend that has been driving markets for the last 10-20 years and we are catching it in different snippets out there but there are two parts to the data equation. The first is what we stored last year in data 2014. I figured out couple of years ago to buy the American data storage companies Western Digital and Seagate. These are the only two guys making hard drives and the stocks have done fabulously well and they continue to do well.

But, in India people want to digitise the paper work or their photographs. Here, cloud will be a big business. The two companies that participate in it is Tata Communication which I happen to own and the company called Ricoh India. It is a Japanese major which also has a cloud and data business. We own both these companies as proxies for the big boom in data that we see.

Nikunj Dalmia: For the longest time, you have been making a point that this is a consumption led bull market and before the revival of investment sentiment, the business sentiment or consumer sentiment has revived. How should one read into the consumer behaviour?

Ramesh Damani: They believe what in 'acche din' promised by Prime Minister. It is nice to have a consumer led society in India. We do not want to go back to the Fabian socialist days of the 1950s where we shrunk in even shorter and shorter pie. We want the pie to grow and the people expect it to grow.

As interest rates start coming down and FDI comes in, you will see the investment cycle spur which will again spur the consumption cycle. So, it is the magical bull market at work and people need to appreciate that.

Nikunj Dalmia: So, the cycle has changed and I guess the sooner we realise it, the better it is.

Ramesh Damani: That is capitalism. The bull markets will always happen. Even this bull market will end. All bull markets end. Bull markets always end badly. We know all of that but that does not mean we do not live. Sometimes you just need to have faith.

Nikunj Dalmia: You have been very bullish on NBCC. Are you still bullish on NBCC?

Ramesh Damani: Yes, I am. The company is called National Building Construction Company and it offered a good play on the huge construction boom just lurking on the edges. I owned quite a good amount of equities, but here I am bullish for NBCC. They have order book, the last balance sheet stood at Rs 18,000-20,000 crore. By March, just by adding up the projects that are on the stages of closure, the order book could be from Rs 18,000 crore to Rs 50,000 crore in the next six months to one year. This is for a company whose last year turnover was Rs 4,500 crore. So, it is like doing business worth Rs 1 crore, but getting a Rs 100 crore of the order book behind you. This is all cost plus business. So there is no risk inherent in it. If they do Rs 50,000 crore, they probably make 10% of that. So, Rs 5,000 crore come to them. They have visibility for the next five years and this will only grow if Mr Modi decides to speed up the smart cities. A lot of the business comes to NBCC because it is a government company and they are well situated. They are run ably by a very good managing director, who is ambitious and we feel that though the stock has had a run, its best days are still ahead.

Nikunj Dalmia: They just got the Navratna Status as well.

Ramesh Damani: They did, which also helps because now they are able to look more freely for projects. Since the country woefully lacks infrastructure, the Prime Minister's solution to this is to take inspiration from the China model -- better infrastructure facilitates better business. Almost anything he does, impacts the company and this stock.

Nikunj Dalmia: So if you are bullish on construction, are you also bullish on cement?

Ramesh Damani: Cement is something that I have never traditionally been bullish on but the more I think about it, the more we are on the verge of a construction boom.

Nikunj Dalmia: For the longest time, you have been an IT bull. Why are you bullish on IT because it is more like a mature business. These companies cannot grow at historical run rates.

Ramesh Damani: Even they protect you against declining rupee. These are global businesses. The world goes to Saudi Arabia for oil, they come to tech for India. The disappointing part is the midcap technology companies. They have badly underperformed the market. The likes of TCS have run away and have done very well but the mid-tier has been underperforming.

But, I am still not giving up on them. The fundamentals are still good. They will get traction in the next six months or one year.

Nikunj Dalmia: So you are happy to own Geometric?

Ramesh Damani: I still own Geometric. Also, I own Polaris, Mphasis, almost across the basket of those stocks. They have been underperforming but I cannot sell them at these valuations. They still seem attractive to me.

Nikunj Dalmia: What has gone wrong with United Spirits? Do you think there is an issue with the balance sheet or Diageo has not been able to understand the business or the fact that what complication they have acquired?

Ramesh Damani: Problem is that it is an overcrowded trade. It has become the most fancy trade in the market and the common phrase that it doubles in three years. So everyone moved into that for position because the market was still low and that seemed like a sure-sure thing. It never happens in stock market.

Diageo also needs to come to grips with dealing in India. They are having problems in the sales system, they have not been able to incentivise the dealers properly.

Though I still own a large chunk of it but my sense is that it is going to be a stock that will underperform for me.

Nikunj Dalmia: If you have to make a basket of two or three stocks which could be the core holding of the Damani family, what would you like to buy in that basket?

Ramesh Damani: I have lot of exposure to Godrej Property which has again been underperforming but will do well. Godrej Industries, Godrej Consumer etc is the basket I am very bullish generally on, they have done very well for me. I am bullish on media stocks. Generally, I have a very diversified basket of stocks. 

Ref: http://articles.economictimes.indiatimes.com/2014-09-13/news/53877126_1_bull-market-ramesh-damani-ipo-market