The central government has full powers with a clear mandate, but the central directives have to be implemented well at the state level. So many things are still not in Modi’s hands, says Dr. Ramdeo AgarwalIn an interview with Motilal Oswal Financial Services, Joint Managing Director Narendra Nathan And Signal reflector.
Have we been looking at the bull race for many years?
I think the full potential of the market economy has not yet been priced. For the first time, a true nationalist has come to power with a clear majority. New energy has been transmitted across the country. My guess is that the market still does not understand the difference between the NDA’s more than 300 seats and the BJP’s more than 272 seats. Look at how the cabinet posts have been allocated – the BJP alliance has got limited posts and their negotiating power has diminished. Full power is in the hands of the government. The political context is now completely different. The economy is on the brink of a historically positive change.
It’s the same car, but the driver has changed. It is now being operated by a Formula One driver. Thus, the acceleration will be dramatic. It will become visible very quickly. Today we are growing at a rate of 4.5 percent. Growth could accelerate in the next few years. A lot will happen in five years. It will be interesting to see the level of the index at that time. In the process, investors will make a lot of money, because the market will discount that growth two years in advance. It will not wait for the fifth year. When all the domestic and global factors are aligned, the markets will go through the roof.
Is there a challenge to the fragile economic recovery?
The reason for the current optimism is that a major variable – the symbolic political setup – has been revised. There is no doubt that the new government came to power in this election; A highly qualified person has been given the responsibility. At the moment, everyone is bullish. But one must have a bad temper. Finally, the Centre’s directives need to be implemented at the state level. Otherwise it will be a waste. There are many issues that are not yet in Modi’s hands.
Many other factors will also play a role. Good rains, favorable global environment, peaceful borders etc can change the whole scenario. Only time will tell how many they will line up. So, a lot will depend on external factors. I also look closely at how the new government is dealing with inflation, which is a symptom of a deeper problem elsewhere. The government needs to address supply-side constraints. A weak currency cannot make a strong country. That is why inflation must come down. It will start developing, investing, and so on.
The rally, so far, has been driven by hope. When will the originality take over?
News headlines, and monetization are two completely different things. We should not be carried away by the title. The focus should be on who will actually make money. In most cases, it will be a company that is making money right now. Rarely will a company that has collapsed today make money tomorrow unless there is a complete change in the dynamics of the business. Today, we have nothing to go on. Thus, wherever there are inequalities in the economy, they will return to normal. At the moment, it’s just about the promise of a better future. Some of these promises have to take shape in the budget.
What should be the first priority of the new government?
India needs to be more business friendly. Finally, the country needs to create employment for its growing young population. Who will create this job? Business employment will be created more than the government. Business employment can be created only if the business is environment friendly. They too will not be able to sustain growth without creating employment. So the government has to be business friendly. All obstacles must be overcome. We need businesses to take more risks because that will result in more jobs.
Will mid-cap stocks continue to outperform large-cap stocks for now?
It really depends on the company. Mid-caps were long overdue; The smaller the cap the more. Eventually it has to be integrated. Large-caps now look extremely expensive. At this level the appetite of investors is limited. Most of the work is in the low-quality, low-cost category. Smaller investors are obviously buying lower quality goods, thinking that prices are lower. But, even if it moves to higher valuation areas, lower quality will remain so. This is where the whole game ends. Of course, high quality stocks are expensive now. But that doesn’t mean you should have junk in your portfolio. If you find quality at a reasonable price, buy with decent expectations. Such names are very rare and far away. But, even if you get 3-4 such ideas in a year, you can make money. The challenge is to invest patiently. Filling up with garbage will be a disaster, but if it works you will get a multi-bagger. High quality investors may perform less in a rallying market, but they will emerge better throughout the cycle.
Can we expect an income upgrade anytime soon?
A 12-15 percent earnings upgrade is certainly possible this year. As the economy recovers, sectors such as cement, steel and automobiles will accelerate. Oil and gas can also contribute to income growth. At the moment, corporate profits are contributing about 4 percent to GDP, which is below the band. At the top of a cycle, it can go up to 7-8 percent. With a nominal growth of 13-14 per cent in GDP, it would double to Rs 220 trillion in the next six years. The question now is whether the current profit of Rs 4 trillion will be Rs 8 trillion or Rs 16 trillion. If the current ratio is maintained, it will stand at 7 trillion rupees. If it reaches the top end of the band, it will be worth Rs 16 trillion. If this happens and the PE multiple remains the same, the market will quadruple. The economy will zoom in at the moment of growth from 5-6 percent to 8-9 percent. Due to this the market is likely to move to the stratospheric level from here.