India will see a “very strong capex cycle” in the next two to three years that would push forward the domestic bull market, according to veteran investor Ramesh Damani.
“The government revenues are way ahead of target,” Damani told BloombergQuint’s Niraj Shah in an interview. The government will be a big capital expenditure provider for roads, railways, education, water as revenues have received a boost from a recovering economy, he said.
Most of the capex expenditure will be in steel and cement, which are seeing a 75-80% capacity utilisation and will look to set up new greenfield projects, he said. Damani also sees potential in data centres. “So a lot of people who benefit from that would probably be the stocks to look out for.”
“But if we’re wrong about the capex cycle, then of course, the case for the bull market diminishes considerably,” Damani said. “My feeling is that those are the pillars that will push this bull market ahead.”
The veteran investor is hopeful about public sector companies which have attractive valuations.
“A lot of the companies in the defence (space), in the railways, they’re facing extraordinary healthy order books and capex cycle,” he said. “In my humble opinion, (they) are extraordinarily cheap.”
Read the full transcript here:
Despite the externalities, it’s been a rather good year if we discount the last couple of volatile months. What have the last 12-18 months taught you about money-making?
Ramesh Damani: It’s been a bumper year and I'm one of the latter converts to the bull market. Now, I'm full-blown in the bullish camp despite some skepticism because of this current fall of 10%, that maybe the market has peaked or the bull market is over.
Here's the case I make. If India is to survive and prosper in this era, it will have to beat its own drum. There's some evidence to suggest that the U.S. bull market is running for almost 13 years non-stop, is tiring, getting old, or maybe even over.
The breadth is increasingly narrow. The S&P is dominated by five stocks, which are powering all the gains. A lot of the tech stocks are at 20-30%. There's an old saying that 'you can't find the Fed'. So, the Fed is now tightening after easing for so many years. That itself is bad for equity markets because the valuations of the companies come down.
Retail investors who typically get in at the end of the great cycle have been getting in, in droves. There are record amounts of outselling margin debt, record amounts of outstanding apps are floated in the U.S. stock market. So, my feeling is that the U.S. market is ageing.
We have to beat to our own drum because there's a chance, this is a very virtuous cycle we are seeing of India. Like Japan in the '60s or some other emerging markets, India can now beat to its own drum because India is a large domestic economy.
And the most important thing is that in the last year, we proved that even when foreigners come and sell in India, as they sold almost every month, the Indian market can still remain buoyant. It's a work in progress, but it gives me hope that even when the Dow Jones enters a serious correction, India can at some point break free and march to its own drum.
The common adage is that India will be tied to the hip to the oil markets. 2022 will see the U.S. growth mean reverting, and if some economies were to do well economically, it'd be the one with the higher savings rate and stronger balance sheets. What gives you hope that India, with a relatively leaner balance sheet, will be able to march to its own tune?
Ramesh Damani: There are a number of reasons. If you look at what Indian earnings are said to be, and what the capital expenditures are said to be, a lot of the world is now coming to rely on two parts (aspects) of India.
One, of course, is the tech prowess — the basic ability to write code and help the world digitise, which is of paramount importance. India's software exports are now bigger than Saudi Arabian oil. So, that's a huge statistic in our favour.
But along with that, there are a lot of hirings in the software industry, and a lot of raises, (almost) 20-30% raises for software professionals, and a huge amount of hiring, which has a multiplier effect on the economy and will help consumption in many ways.
Look at the capex cycle—the government revenues are way ahead of target.
So, my feeling is that the government will be a big capital expenditure providers for roads, railways, education, water, and the like. Private sector steel and cement are now hitting 75-80% capacity utilisation. So, they will be looking to set up new greenfield projects.
For the last five or six years, the government speaks with one voice. There seems to be an urgency now to set in the reforms that had been delayed for the last five years or so during Modi’s term one. So, there will be a more urgent focus on reforms.
For the first time in India, we're not looking at trying to divide the pie. The whole Indian socialist ethos used to be 'let's divide the pie more equitably'. We are now looking at growing the pie and then dividing the pie. So, that augurs well for economic growth.
I'm hopeful that the Indian bull market that began sometime around the lows of the pandemic of June 2020 will continue, maybe go through a correction of a few months. That won't surprise me at all. That should be good. Markets have had a huge run-up. So, there is nothing wrong with expecting consolidation for six months. But from where I see and invest, it seems to be that we are in a long-term bull market, and we have barely gone through the first few overs of that.
In the event we had done sometime back, you had told me that God had chosen you for special punishment as all the stocks that you held went down. I believe that things are reversed now. Has the last year been good for you?
Ramesh Damani: If you haven't done well in the last year, you're probably in the wrong business. It's been a fabulous year. But here's the thing: Not all the stocks have done well. Some have underperformed, some have overperformed.
When I joined the market, we had a physical trading floor. The index was 800, the Sensex was 800. Today, it is closer to 60,000. It's been a 60x move in the last 30 years of the index compounded in roughly 15-16% without dividends out there.
So, what it has taught me and a whole generation of investors is to buy good quality businesses and remain invested. You cannot time this thing because the beast will slow down for three years and suddenly spark up.
To give an example of a particular technology stock in my portfolio. I have had it for 20 years and the CAGR is 12% or 13%. So, there is nothing great or extraordinary about the returns. Safe stock, gave me a good dividend yield. And because of the pandemic, the stock went up 10x and suddenly the CAGR is gone from 12% to 32%. So, the lessons I've learned is that if you buy a good quality business and are fairly patient, there is a proverbial pot of gold at the end of the rainbow.
Everybody gets worried by the rise from the lows of March 2020. But if one looks at this bull market arguably from 2008, it's not been a very meteoric rise, it's been 12-13%. So, it's a fairly normal return giving market. And people shouldn't try to think the returns are growing too fast and too soon. Right?
Ramesh Damani: That's exactly my point. Those returns are back-ended now in the last two years as opposed to from 2012.
India has gone through various phases of economic policy but finally, we are seeing buoyant tax collections, thanks to GST, personal tax collection, and indirect taxes collection. So, the government, for the first time that I recall, has more money than they know what to do with, and they have a huge surplus. Wages are rising in India.
The big question that plagues the global market is inflation and whether it is transitory or more of a spiral inflation. Given the fact that this inflation was at 6.8%, the highest in 40 years, the Fed had no choice but to act. They can't twiddle their thumbs in the face of 40-year high inflation. So, whether they believe it is transitory or a spike, they had to act. I think they acted properly in terms of warning the market that there could be rate hikes ahead and by cutting down the tampering.
But as the months roll on, they will realise that the inflation due to oil, the surge in energy prices is already coming down. Oil has already become more reasonable.
And secondly, the supply bottlenecks which caused a huge surge in prices of goods, the dislocation, is now starting to ease. Container traffic is easing, used car prices are coming down and there's been no inflation in services anyway.
The stimulus that had come and which will leave a huge bump-up in demand for goods is now coming to an end. While the Fed is ahead of the curve and trying to curb inflation as the number one priority, they had to make the announcement they made.
As you move on to the balance of 2022 in June-July, inflation will start coming down to a more reasonable 2-3% because the reasons that led us to this part of the economy — a huge savings grab, China's deflationary of product — is still intact in the world.
So, notwithstanding all this threat about de-globalisation, the world will continue to be globalised and continue with cheaper sources. What helps India in all of this is the new China plus one policy. A lot of industries are now going to be positively impacted — textiles, specialty chemicals, a little bit of manufacturing. So, a lot of this policy actually helps India.
And, of course, tech. At the end of the day, the boys that brought us to the global table are still going to take us to a higher level by its contributions -- $200 billion worth of software exports, a huge amount of value addition that goes on in the business, etc.
For the first time in maybe a decade or two decades, India can actually beat to its own drum. We will of course be buffeted in the short run by global flows. What happens in global markets if Dow is going to be down, then Dalal Street is also going to be down. But at some point, India will start overperforming.
Having looked at various themes in various cycles, how do you look at the IT exporters. When I speak to corporates, they are all talking about the demand pipeline looking rock solid, valuations have inched up a bit but is it justified? Can there be more upsides over the course of the next few years, or do you think they have run the course?
Ramesh Damani: If you want to build a portfolio in the market today, you probably would put a good 25%-30% into technology.
I used to always believe that India will do better in products at some point, but that hasn't happened. It is basically the services (sector) that brought the bread and butter home.
You’ve seen the large-cap sector. Tech stocks still doesn't seem very challenging, according to me. The big debate raging is that the people who missed the tech boom, in say 2000, are now missing the new digital economy boom.
What I'd like to remind my friends who tell me that is that when Infosys became public —I was on the floor of the exchange when it became public — it had a Rs 30 crore market cap. That's hard to believe. Even at the rate of Rs 30 to the U.S. dollar it was $10 million. These companies are now coming with global market capitalisation of Rs 1 lakh crore, Rs 1.25 lakh crores.
So, part of investing is knowing what price is high enough or what price is low enough. In this whole digital spectrum that's playing out, I would favour the services company — the four or five major service companies that do an outstanding job.
Someone pointed out in another interview that TCS is a hiring machine. They keep hiring. Assuming they are hiring three lakh people a year, training them, putting them in the mid-level, and has the lowest attrition rate — it is a real tribute to their management of people, their HR systems.
So, I think this is the sweet spot. We have an advantage, and valuations can get a lot crazier than they are at this point in the tech space.
You look at some of the global businesses and then try and imagine what could happen in India. Over the last 18-24 months, have there been things like that happening across the world where you believe Indian businesses (existing or future) could come and make a mark for themselves?
Ramesh Damani: A lot of brokerages are now digital, and they will achieve global scale in a matter of time. So, I'm bullish on them.
On the other hand, the so-called e-commerce space, they're great businesses. Something like a Zomato, which I'm not recommending but I am just explaining. It's a great business and is a great service but the starting point of the valuation has to be palatable and no matter what kind of accounting I put it through, no matter what kind of sales forecast I put it through, I don't see myself getting a margin of safety in those businesses.
They are very attractive businesses and they probably, as long as they are able to get funding, will continue to show good growth numbers. But I think the return to profitability or justifying the valuation will take a lot more.
I don't know if this is still in the private space, but they're talking about a $50 billion market cap for Byju’s, which is India’s largest ed-tech company, which seems in the stratosphere to me. I mean, you have to go through a lot of pyrotechnics to justify or even try to justify this kind of valuation. So that part of the markets is extremely frothy to me.
But there is a part of Indian businesses that have digitized. Whether they are brokerages or whether they are some other businesses. Somebody was mentioning Asian Paints and the fact that it has digitised its dealership. There are many businesses in India that have done an outstanding job of digitising their businesses and those are great ways to play.
Some new businesses like the recent listings of spatial and geospatial maps in India look fairly interesting to me. The valuation, while high, are not in the nose-bleed territory.
So, I don't think I'll paint them with the same brush. But at the higher end of the spectrum are the three-four IPOs that everyone talked about and those are running at about Rs 1 lakh crore market cap. They seem a bit excessive to me for the current business and the current business outlook.
There seems to be a consensus on the other side for the capex theme and the valuations, say for the MNC ones are a lot more reasonable... maybe order books get filled. Maybe as you said, the government revenue running so high induces government capex and then subsequently to private capex. Do you like that argument?
Ramesh Damani: This is the first in 10 or 12 years, there is going to be a good capex cycle in India. Why hasn't it started already? Because it takes time. You earn the profit, you look at your capacity utilisation, and then you start planning for new projects. So it's just breaking ground on that, if you will.
Over the next two- three years, I expect a very strong capex cycle. A lot of the people that get into the capex cycle will probably be good bets at this point. I think, most of it is coming in steel, cement, and data centres. So a lot of people who benefit from that would probably be the stocks to look out for.
But if we are wrong about the capex cycle, then of course, the case for the bull market diminishes considerably. My feeling is that those are the pillars that will push this bull market ahead.
One sector that I have often been associated with is the public sector; stocks offer reasonable valuation. Just like how much is enough for a higher valuation, you have to argue the reverse or how cheap is cheap. And a lot of the companies in the defence (space), in the Railways, they're facing extraordinary healthy order books and capex cycle. In my humble opinion, (they) are extraordinarily cheap.
It takes a lot for a man of Uday Kotak’s stature to come out and say that the incumbent financials haven't been at the forefront of the digital revolution. What do you think about financials, because they are getting disrupted? Or maybe, the world believes they might be getting disrupted by this whole new wave of fintech companies. How do you look at that sphere?
Ramesh Damani: When Uday Kotak says something, you listen to it carefully. He has a seasoned eye for investments.
As you look at large-ticket items, you want to spend Rs 200 crores, Rs 500 crores, Rs 1,000 crores. So, there are only five or ten bags in there that can fulfill that kind of ticket size.
So, while the fintechs are nimble and give these buy-now-pay-later options. They are good business models. But I think both will coexist for a long time.
Can you talk about some of your best years of trading and investing? Why were you able to make those investments back then? Is it likely to see a repeat of sorts?
Ramesh Damani: I started in 1989. The secret to doing well in the stock market is simple — it's (all about) compounding. I haven't had some extraordinary year. I have had some good stocks and some bad stocks.
But ultimately, no matter what amount you begin with, say Rs 10 lakh, Rs 20 lakh, Rs 40 lakh, Rs 50 lakh, or Rs 1 crore, if you compound that money at 23-24%, which is broadly what a lot of us have been able to do, at the end of 30 years, you are going to end up with a significant amount of money. My life is more a testament to that.
A lot of people made some brilliant calls and maybe bought 1-2% of Infosys or maybe 1% of HDFC Bank or got the bear market right and managed to go short completely and clean out a lot of money in a single year or so.
But I have not done any of that. I pick good businesses and remain patient with them. Broadly they have compounded for me at about 20% to 23%, which is why the result is extraordinary.
I mean, you may not term yourself great because you clearly weren't strong enough to buy 5% of a Wipro or Dr. Reddy’s or Asian Paints. But you bought some and you held on to it, and that stock's compounding for you for long periods of time and the result is extraordinary.
So, my point is that getting rich is never easy. But it is simple, and the trick is to buy quality businesses at good prices and keep the faith.
Keep the faith in India, in Indian demography and democracy. There's such a big market. The domestic market, even when the global market doesn't do well, with the right policy can do well for itself.
There are those who have kept the faith and who remain invested in India. I’m mostly 95% invested, whether it is good or bad markets. Maybe at some extremes of the market of 2008, I've taken 20-25% cash, but otherwise, I'm always invested.
Even in the pandemic, I was 98% invested, and today I am 97% invested. So, we remain well invested in high quality businesses and that has worked. What I'm saying is that, at some extremes you can get out of some positions. But otherwise, remain invested in a high-quality business.
The nature of the beast is volatility. So, you say, I will try and sell it and buy back but that rarely happens. Sometimes you miss the great boom, that happened after March 20. So, what you have learned, maybe it will be true for the next 10 years too, is to stick with the high-quality businesses and remain invested.
And even if you're not the sharpest analyst on the street, by just compounding your money at 22 to 23% and that is with dividends, you end up at a fairly decent place in life.
So, I've had some good years, I've had some bad years. But when I go back and tell my track record to my son, I said that I've seen the 1992 bull market, the 2003 bull market, the 2008 revival and now this bull market.
Each bull market must make you richer, stronger and wiser. So, it's not good to make a lot of money in a bull market and lose it in the bear market. You need to retain that money and move on to the next bull market. I think a lot of those who have kept the faith and invested in Indian equities have grown richer, wiser, stronger at the end of every bull market.