It seems silly to me that market has been ignoring IT and PSU stocks: Ramesh Damani

“It is as good a time to buy equity as it was 30 years ago. Remain invested, the bull market is on. Of course, we will be challenged. We were challenged a few months ago. We will be challenged again but the underlying message from the last 30 years is that do not sell India short. We are on to something special here,” says Ramesh Damani, Member, BSE

There was a time you were buying stocks to create your nest egg, then there was a time you started buying stocks for your son Ashok. I am sure now you are investing for your grand children now. If you have to advise your son and if you have to make a portfolio for your grand children, how would you be differentiating there?
I am actually doing it. This is obvious when someone new comes into the family, there’s new thinking. My son has also started influencing my thinking. He is a good practitioner in the markets and he has been very bullish for example on the sporting business in India, particularly the IPL, what a rage it has become and the valuations that the TV deals that could happen next month. The last deals went at about Rs 16,000 crore this time. He feels that it could go upwards of Rs 40,000-45,000 crore. So how can one play that? One can either play that through the media businesses or through the IPL franchises.

There are lots of ways one can play that; some are listed directly, some are not listed in the market and so he has bought that kind of thinking into my thought process. Together we try to design a portfolio for my grand children and his children. They could enjoy the benefits of compounding that I have enjoyed. The earlier you start, the better off you are. We are really taking this advice too hard. The children are barely four and two but I have started investing for them.

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So what I have invested for them is a mixture of companies that have very stable dividend yields and also some long shorts. Unfortunately, we cannot mention names but there are some companies that can either be a 10x or would not do anything at all. We put some of those baskets and some more traditional companies in the financial sector which we feel have a good growth ahead of them; some large property companies which we feel will continue to do well in any environment – it has been an article of faith in me. I keep telling this to other people also that people in my generation are old and close to retiring but it is time to invest for your grand children. If you start now with small amounts, the money does not matter. You put in Rs 10 lakh, Rs 20 lakh, whatever amount you can afford for your grand children but if you do it correctly and if the money compounds over 30 years, by the time they reach college age or their marriage age, they should already have a substantial nest egg.

I really appreciate your question because that is something that has been engaging me also for the last few years.

Who says you are too old? Buffett has made some of his most fantastic investments and his biggest is in Apple after he turned 80. Maybe the best of Ramesh Damani is yet to come?
I hope so. I am very hopeful but as you correctly pointed out the pride and joy is now doing it for the grand children or doing it for the other young kids who come to me. There is some satisfaction in giving back and why not? I hope the best is yet to come.

20 years ago, you called out a services boom in India but in last couple of years, there has been an internet and tech boom. Not every company will survive but the ones they will survive perhaps will hit it out of the park. One can see growth there but one can also see absolute mispricing by the market when it comes to Zomato, Paytm, Nykaa and the like?
In that portfolio the mock portfolio as suggested, I would put a large amount of services business because these are stable bread butter businesses and the world desperately needs India programming talent now. So having said that, should one look at the fintech companies, should one look at the ecommerce companies? I think one should.

I do not really own it but Zomato is a great business.They are expanding the marketplace in India, they do an extraordinary delivery service. It is just the valuation I cannot stomach. I mean the valuation that came out with even the way it popped on IPO, I could not store it but in these businesses like Nykaa, Zomato – one should keep eyes and ears open on the valuation and at some point, the valuations will come to attractive levels.

I think these businesses are here to stay, I would not treat them all with the same brush though some of them make no sense to me and so I would avoid them. I do not know how to guide you more without discussing individual stocks. But would I look at some of them? Yes, I would definitely look at Zomato or Nykaa. But I would wait for my price. They are nowhere near the price where I think they are really attractive.

Also to be fair, I think brick and mortar will continue to do well in India. I have some insight into those businesses and I think it is silly to assume that brick and mortar will be relegated and everything will be overtaken by tech. It is a good place to be in technology but we will have to pick your tech companies a bit more carefully.

How do you see the shape of retail changing in India in the next couple of years?
Because of my positions in many sensitive boards in the retail space, I would respectfully avoid the question. We do not want to get into regulatory trouble but I think broadly as a sector, there is enormous opportunity and it is like a river flowing and if everyone picks two buckets, there is nothing there. Organised retail is in the nascent stages and for retail trade, there is enormous headroom and it will be both in brick and mortar and in e-commerce.

Investing into Infosys and TCS perhaps was easy because those were cash generating machines and they were giving a lot of dividend, they had a real PAT. Currently in some of these new age tech businesses, one does not have a sense when they will turn profitable. So how does one deal with this kind of a conundrum?
You want to see a path to the cash flow. It is very important to believe that there will be just more than market share of a business at a particular point of time. If you look at Raamdeo’s last study on wealth creation, he pointed out how digital businesses are created and how they get market share and how they get profitability. We need to understand these businesses over a period of time.

It is just that the rate of change in India is not as enormous as it is in America where penetration of cell phones or e-commerce go from 0 to 100 million in a matter of 18 to 24 months. I do not think it happens quite that fast in India because the credit market is not there, the courier market is not there, there are lots of impediments to that happening in that place but there is enough body of evidence that suggests that these companies get a good business models and positive contribution margins at this stage will become cash flow positive in next two to five years.

There are enough businesses there and the main problem is the valuations. You talked about Infosys and how we have made money in Infosys. I never get tired of reminding that Infosys came with an IPO in 1992 at a 30 crore market cap which even at that rate of 30 to the dollar was about $10 million US and it was already earning Rs 3 to 4 crore when it went for the IPO.

Now fast forward 30 years, these companies are coming at almost stratospheric valuations. So at least for people like me or value investors, the better bets are elsewhere. But I like these businesses and as you are well aware, an investment is great if bought at the right price. We will wait for the right price.

ou have always maintained that the romance of India is consumer and the advantage of America is technology. How do you see the frontline consumer companies moving?
I don't know; a lot of people have been negative on consumer discretionary. Maybe demand has taken a knockout but I remain bullish. I have held the stocks for 20-30 years in a portfolio practically unchanged. I have held Lever, Dabur for 30 years and I intend to hold them. I have no really great desire to sell those businesses at this point.

The one aspect that I would worry about is to just add some more context. In the FMCG business, increasingly private labels are also taking share away from the branded companies. So margins of these FMCG companies could be affected over a period of time. This transition has just started. We will see how this plays out, but increasingly coffee, tea, hand wash – a lot of items in retails are creating private label brands and they could be taking market share away, keeping a pressure on prices for the FMCG companies. But I would still suggest a good exposure to consumer discretionary in my view.

ITC is up. State Bank of India is outperforming HDFC Bank. Kotak is underperforming Canara Bank. Are markets rotating?
I think so because when interest rates are zero, you want to invest in the most exorbitant growth story in the hope of a big jackpot five years down the road because the money does not cost you anything. But when money costs you something, when you pay something you measure it more stringently and that is the rotation that we are seeing right now.

Globally, tech has had a rally for the last few weeks and they have come back a little bit. How can one ignore dividends, cash flows? It just seems silly to me that the market for the last two-three years has been ignoring that and that is partly the case I am building for the public sector stocks because they have such clear order books, there is so much visibility, the government is committed to a capex cycle for defence, for railways. There is an extraordinary collection of businesses which are fairly dominant in the sectors they operate in, available in the market at PEs of 6 or 7 and yields of maybe 5% or 6%, 5% or 6%.

On fixed deposits, one is getting 4% interest and in dividend stock, one is getting 5-6% yield for a basket of stocks. It seems ridiculous to me that the market would keep ignoring these stocks. Having said that, am I disappointed with the disinvestment policy? I am a little bit disappointed. With the PMO’s weight and prestige behind it, I thought it would go a bit faster but other than Air India, nothing really has been done.

We keep hearing that it will happen but I think the delay is getting a bit too much for my taste. But I am buying these businesses not because they will be privatised. If that happens, it will be great but I am buying these businesses because they are essentially good businesses. The corporate governance in these businesses are increasing and they are literally throwing away the valuation in these businesses. So this is my contrarian bet if that makes any sense.

If the India story is so appealing and if we have got everything going for us whether it is on the macro front, earnings front, governance front or even on the administration front, then why do we keep on getting rewards from brokerages which say India is expensive, we are trading above its mean valuation. If the starting point is today, the returns will be compromised.
The starting point, of course, is important in any investment. I mean you could have bought Infosys 10 years at the peak and did not make any money but I will give you the converse case. Let us say I was on the floor on the Bombay Stock Exchange and I bought ACC at a gigantic price of Rs 10,000 in 1992, starting from a base of Rs 300. So you figure that no way will you make money because then the bear market started and the stock collapsed.

But even if you bought it on that day in April 1992 at Rs 10,000, you made 5X your money. I think the stock has gone up 5X from that price even though it was the highest price. So as long as you remain invested in great businesses, somehow they tend to find a way to make money. Inflation helps because that increases the value of all these assets over time. The rupee keeps depreciating and that also helps the value of these assets.

It is brokerages business to encourage you to churn your portfolio, get in, get out, buy, hold, whatever. I do not know but that has been the wrong trade in India. The trade in India is to be to remain invested in high quality businesses and the evidence backs me up. Whether they are right or wrong, I am not sure, maybe they will be right a few times and wrong a few times but if you kept the Asian Paints and kept the Dr Reddy’s or kept Castrols, you have done well.

So rather than try and time the market, try and find great businesses that you want to remain invested. There is no dispute about that, the index is up 100x, now you can keep saying that this is undervalued? The evidence points that if you stay, you compound 15-16% per year in the index. I am suggesting if you pick stocks and pick good businesses and maybe you can move it up to 20-21% and that is a great pay day for everyone.

The bull market is not over?
Absolutely, very unequivocally. I feel that it is as good a time to buy equity as it was 30 years ago. Remain invested, the bull market is on. Of course, we will be challenged. We were challenged a few months ago. We will be challenged again but the underlying message from the last 30 years is that do not sell India short. We are on something special here.