Investors are not wrong to be cautious about the market, but those are not good enough reasons to sit out, said Raamdeo Agrawal, chairman, . In an interview ahead of the firm’s global investor conference, Agrawal spoke on his investment philosophy and new-age businesses among other matters. Edited excerpts:

Many seasoned investors have turned cautious on the market. Do you share that sentiment?

I do not understand why there is so much caution. While people have remained cautious, the Sensex is reaching 60,000. I am not saying being cautious is bad but let me tell you that timing the market is impossible. There could be a 10% correction. So what? Let’s not forget that there has been a 20% rise also. Just to give you a personal example. I might need some money soon to make a payment. But even then, I am ensuring that I will not time the market to make this payment. In that process, I have gained almost 12% from that investment. It could have been 12% down also but the market is such that out of four times, you will get it right two times.

So, how should investors manage risks to their personal portfolios?

You have to be very clear about equity allocation and then just sit tight. I am not saying do not shuffle your portfolio but do that only to exit an expensive stock and buy a cheaper one. For instance, we have been selling Bajaj Finance since it was Rs 3,400. Now it is Rs 7,400. This is what happens when you time the market. Retail participation is changing the market dynamics. The change in the market’s character is getting difficult to analyse but it is a great transition time where retail money is entering big time. Our number of shareholders (Motilal Oswal Financial) has exploded through the roof. From 30,000 about 15 months ago, it is 80,000 now. What is happening is when a large institution sells, it’s a bunch of retail investors who are buying the shares.

But, aren’t peak retail participation and rise in valuations usually signs of markets peaking?

Yes. High valuations and this kind of retail investor influx are certainly signs that the market is heated. If you are an investor, you should be ready for a 10-20% correction. But who knows when it will happen? What if the market rises another 20% after the correction?

There are individual stocks that are looking expensive. You could sell them but you can’t just dump everything. It is important you stay invested. Else, you will lose out on the best part. We are in uncharted territory and the economy is recovering. At one level, all the analysis about valuations is not accurate.

One is the corporate earnings and the second is the discounting (valuations). The earnings side is looking very good because the government and central bank are supporting growth. On the valuations part, since the interest rates are so low and earnings are recovering, nobody knows whether valuations should be 25 times , 45 times or even 50 times. There are multiple positives and while investors are not wrong to be cautious about some points, those are not good enough reasons to stay out of the market.

What is the sense you are getting from overseas fund managers about India?

Overseas investors are timing the market much more than even retail investors. As of now, they are not very bullish on India. They are not too happy with the kind of activity in the IPO market and the retail appetite too. When Indians are selling, they want to buy. But the retail money has been so big that they have overwhelmed FPI flows this time. This is evident from the fact that the market is going up despite FPIs selling. FPIs are concerned about the third wave (Covid). So, once the picture is clearer, you might see huge FPI buying.

How will markets react if there is a third wave?

Now, we are spending a lot of time forecasting the third wave. A lot of people are saying it will peak in October. How can we do that when the third wave has not even started? But what people are not realising is that if there is a third wave the central banks could extend their easy monetary policies.

Where are you betting your money these days?

We are spending a lot of time on digital businesses like Zomato and many others which are looking to list. For me, it is counter-intuitive because these are companies that are not profitable. It is important to understand how to value them based on overseas experiences.

Orthodox investors are struggling to value these companies.

In these companies, growth capex is happening through the P&L (profit & loss) and not the balance sheet.

For instance, if a cement company earns Rs 2,000 crore and is putting up an additional Rs 4,000 crore of capital equipment, it will be capitalised in the balance sheet. So, the profit looks like Rs 2,000 crore and when they commission the Rs 4,000 crore worth of plant next year, they would make another Rs 1,000 crore and that is how the Rs 2,000 crore of profit goes to Rs 3,000 crore.

In digital companies, if they are spending Rs 2,000 crore to acquire new customers, that money is debited straight away in the P&L. So, they show Rs 1,000 crore profit and Rs 2,000 crore loss. So, the net loss is Rs 1,000 crore. So, one has to understand how much of the operating expenses is pertaining to the growth capex happening in the P&L. Does the company have good gross margins? Is it inherently profitable? Does it have scale? Does it have a large opportunity? Does it have a good network and consumer connect? These are the questions we try to find answers to while looking at these companies.

But aren’t the valuations of these businesses elevated?

Yes, valuations are elevated. But you should buy only that company which you understand. The challenge is that every company is unique. Understanding consumer digital companies require a different mindset. When digital companies fail, they fail horribly. They scale up and scale down very rapidly. So, an understanding of the business, management and valuations are equally important.


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