Ramesh Damani, Member, BSE, if of the view that the market needs consolidation and has not yet peaked. He expects the market to trade in a range of 12,500-15,000.
Damani is skeptical of real estate and feels that valuations are ahead of fundamentals. He added that interest rates in India may have peaked.
Q: How do you look at the current phase that we are going through in the market?
A: Since May 2003, we have had four years of almost unprecedented double-digit gains, with the index may be quadrupling in value. At some point, the market had to take a pause, build a range, and test its values before it went higher. You finally might have come to that range of may be 12,500 on the bottom and 15,000 on the top. We have gone up to the top end of that range and kind of sold-off sharply from there. Typically, we might go and test both the bottom and top end of the range before it breaks out. My sense is we are probably in a range right now.
Q: Looking at history and how some of these ranges pan out, how long would you expect this kind of consolidation or digestion range to last?
A: It’s very difficult to guess because in the last four years the market has not been able to trade in a range either. It has been vertically up or very sharply down. But within the context of a multi-year bull markets, stocks can go sideways for a year or a year-and-a-half.
I am not predicting that it is going to happen since it is probably too early to say that. Our market has shown a vicious ability to bounce back when people write it off. We are not at a bull market top or we are not at any sort of peak in the market. There are attractive valuations out there. What surprises me is the fact that even in this kind of market, at 14,000, we can build a basket of midcap and largecap stocks that pays you 5% a year. That is not suggestive of the market, which is at the top.
Q: What about the other cycle that’s playing out in the bond markets, a five-year high for yields in US bonds? Is there a point you think where this market might become more attractive than global equity?
A: It’s a very fine point and you could be right because we have seen a lot of growth out here, with inflation also moderating. My sense is that interest rates have peaked in India and they have come down. I don’t think you can categorically say what’s going on in the West. Because of the interest rates sensitive in that market, there is a shift between bonds and equities that are taking place there. But India remains to be a very hugely attractive destination for most foreigners.
Q: Any reason to be concerned about what earnings might throw up or the chances that earnings might get downgraded for this market in the next few quarters?
A: I think the sectors that people are very worried about is auto and two-wheelers, which is sensitive to interest rates and tends to be very cyclical in nature. In property stocks, we are all watching it very carefully with the big IPOs closing in a few days time.
When a sector tends to top out, there has been a large amount of papers issued and the market cap has been bloated very significantly over the last few years. I think property stocks are something to watch about. Across the board, you can look at midcap stocks and some of the largercap stocks. You are getting great companies that are doing businesses at 20-30% and sporting good dividend yields. I would remain optimistic on them.
Q: Do you remain skeptical on the real estate space or over time has some of that skepticism washed down a bit as DLF closes tomorrow?
A: I am skeptical over this space and I think that valuations are a bit ahead of fundamentals, especially after DLF. I think DLF will say through pretty well in the next few days. There are a whole slew of new IPOs coming in, so there will be a flood of paper in the property market. A lot of the valuation that we initially got in realty stocks was due to scarcity since not many listed companies were available. But now with DLF, Unitech, and a whole bunch of other companies there will be plenty of stocks available. People will be evaluating them, as they do with every other company, on the base of earnings, cash flow, and future growth. I do not see anything particularly fantastic from these valuations on for them.
Q: What do you make of those two holding companies - UB Holdings and McDowell Holdings? Did you have a look at how they should be valued?
A: UB Holdings is one of these great holding companies, because I bought at Rs 30. If you factor in the bonus it went on as high as Rs 1,400-1,500. So It is like a 50x move in four years you got in a UB Holdings company and that is largely because, Mr Mallya put in a lot of his assets like Kingfisher Airlines and a whole bunch of other stuffs, the real estate development in Bangalore.
My sense is, ultimately McDowell Holdings and UB Holdings will be merged at some point and will be a holding company for the spirit business and flagship company for any other things he might do for like hotel, entertainment or airlines. At the current prices they are trading at about half times book value. So it seems pretty stable to me. Typically the discount in holding companies is fairly large. But over time they will also operating business in terms of airlines, entertainment business. I will continue to hold them.
Q: What about the rupee and the way things have been moving in the currency market. What would you do with the entire technology space now?
A: It has been a big worry of mine other than the property sector or the two wheeler and auto sector. I think the technology sector has been a long favourite of mine but it is very hard not to come to the conclusion that the Indian rupee is in a long-term bull market. I think for 50 years as you recall the Indian rupee has consistently depreciated against the dollar; so once it has reversed that and start a new trend it is not going to end soon so I am among the rupee bull camp.
If you are in the rupee bull camp you have to look at technology very strongly; it is not they can’t survive or even thrive in this atmosphere. As the Japanese car manufacturers showed - Toyota for e.g. that despite a rising yen they moved up the value chain from Corolla to the Camry to the Lexus so they will tend to do that but there is always a pain for adjustment period when the margin shrink and typically when margins shrinks in a company the market contracts the PE so there will be a difficult period going ahead for the technology people. I am still well invested in the midcap technology; I have reduced my exposure to large cap technology.
Q: When we spoke in May last year, you were quite concerned about how things would shape up for the entire midcap universe after a long time, in the last two months they have begun to move. If things turn around globally, do you think this space can hold out?
A: We are actually being able to build a basket of 5-7 stocks that could have yields of 5% plus which is extraordinary good yield. I am confident that this will be able to grow 15-25% over the next 2-3 years and with market caps, which are very modest. My suggestion to retail investors is this is a good space to look at.
Q: A lot of people have been tweaking their asset allocation a little bit. Does it makes sense in the current context where some of the bond funds, maybe fixed maturity plans giving you close to 10% or you think this is just a temporary phase equity in 2-3 year horizon will beat returns from any kind of fixed income products?
A: It’s an article of faith with me I certainly don’t see valuations to be that extraordinary that would scare me that would move me into cash as I did in May. I am finding stocks, good companies with dividend yields.
There is always inevitable amount of pain in long term investing. But I am a grizzle patron after 20 years; I can live with that pain. I see no reason to get out of these companies and move into debt unless your risk appetite has gone down, or you are closer to retirement and don’t want to put your money in financial market because they can be choppy over periods of time. We are all building that the Indian economy will continue to deliver 7-8% plus growth and is going to attract huge amount of money because that’s why you come and monetize the growth. Particularly if you feel you want to build wealth over next 5-10 years equity is the place to be.
Q: What’s your call on aviation. I know you like that space. What have you made of the consolidation moves, which have happened in the sector and do you think you can still make money from buying something like a Deccan?
A: I have had some exposure to this sector particularly in terms of Deccan Aviation but I think it is good that there is a consolidation going on within the industry and when you had the first statement coming out of the Deccan that you are going to compete not on price but on network ability, it made sense.
Basically in India I have a strong belief that the low cost model will work in India; airlines are commodity business and the lowest cost producers will always survive but because of the inherent nature of the Indian market there are very few airports that are available as oppose to say Europe where a lot regional airports available. So a low cost model is not still efficient but in an economy which is going to go to 50 million passengers by the year 2010 from about 20 million now. As a portfolio allocation you could probably have a bit of money in aviation though to be fairly honest I am not particularly gung-ho in terms of a percentage of my portfolio into aviation at this point.