Ramesh Damani - Grab stocks this Diwali

The mood is euphoric as Indian market opens for a brief session of Mahurat trading. However, there are whispers that the ECB meeting announcement tonight might just spoil the Diwali mood. Despite the concerns in the global markets, some experts are hopeful on Indian market.

Ramesh Damani, Member BSE is optimistic and bullish on market. In CNBC-TV18's special show Mahurat Trading, Damani says that the worst has got the market the bit of value that is emerging for investors because stocks have been sold away and they are fairly cheap.

Ramesh Damani - will invest in midcap stocks

Will put money in midcap technology stocks: Damani

Indian markets are still not out of the woods and are trying hard to negotiate the highs of last year. Infosys' December quarter results, low November industrial output data and inflation are dampening market sentiments.

Ramesh Damani - expect corrections

Q: Very divergent performances this year from various sectors. A lot of them have not performed in this festivity at all, and a lot of them like capital goods, banks, metals have been tear away performers. Do you see that kind of divergence this year as well? What would be your favourite horses if you just look at themes going into the next one year?

A: Why has it been divergent is because, this market for the last 4,000-5,000 points has been led by the FIIs. The romance with Indian equities was in full bloom for the first half of this year. And then tend to prefer the bigger names, because they can invest serious amount of money in one shot. So, whether it is a Reliance, Reliance Capital, ICICI Bank or Bharti, that was the favoured stock.

As we are well aware, the retail investors have been selling; they have not been convinced of this bull run. But there is evidence that they are now being convinced that this bull run is for real. My sense is that at falls they would be buying the cash shares and B group shares. So, the breadth has started to improve at least anecdotally in the market. So, I would wager that if the market regains its health, if it crosses 20,000, it would be on a burst on stream with good breadth and by good participation in cash shares and by the public investors.

In terms of the themes, my sense is what I have been saying for the last few years is that we want to focus on domestic consumption stories. Companies insulated from dollar depreciation problems. So, I continue to look at cement, logistics, banking, these are great shares. One basket of stocks that we are recommending to our investors in our brokerage firm, is a lot of these MNC companies is my understanding are going to be privatized over the next year or so. If one looks at a basket of these MNC companies, over a year, they have quite a lot of safety in terms of lack of depreciation. And when the buy would happen, there would be a significant premium to current market prices. So, domestic consumption themes and MNC privatisation stories are two themes we are zeroing in on.

Q: Has anything surprised you as a sectoral performance, as a story and do you think that is going to be the big star to watch out for over the next few months?

A: I think there have been some great calls in this bull market starting 2003, the real estate story, Reliance Group. How it has absolutely dazzled in terms of its performance, the telecom story, it has been a great story. As you have also said it has been a great bull market and these kinds of bull markets produce these kinds of spectacular returns. So, yes a lot of these old hands including me were caught surprised at the vengeance of the real estate move, the vengeance of the Reliance group has moved. And congratulations at the end of the day these managements have delivered for their shareholders. So, yes it has surprised me.

In terms of headline in the future, the trick in the stock market is to buy cheap, buy value, things worth Rs 100 for Rs 25. So, these stocks may not be particularly cheap at this point. But in a mature phase of the bull market momentum begets momentum. So, the big gets bigger. So, it is typical behaviour what happens in the bull market. The leadership breaks away from the pack and dazzles the market with superior returns. I think we are seeing something like that happen.

Q: The way some of the stocks have moved 20-25%, have they rung any alarm bells or not quite? They are just part of any big bull run?

A: It has raised alarms. When the midcap or smallcap stocks went up, we were worried, but they didn’t have an impact on the markets because they were relatively puny at may be 2% of India’s market cap. After these kind of blow-off runs, investors should pause for thought.

Bull markets do not end with retail investors selling their shares. Many bull markets in India has ended when the IPO pipeline faded or when huge sums of money were raised on prices that were not justifiable. I have not seen that kind of frenzy take place in the Indian IPO market. I am sure given time, a lot of corporates will raise upwards of USD 50-100 billion over the next one or two years in India. The Mundra IPO and many such IPOs suggest that there is latent demand for IPOs in this country.

There would be huge IPO offerings and some of them might time the markets. But for now, look at the positives. Liquidity should remain okay. We are seeing direct tax collection shooting ahead of indirect tax collections. The breath of the market and GDP growth are okay. Markets will see a repeat of the violent corrections that we had in 2007. Broadly, the markets will hold. At present, the bull market seems intact.

Rakesh Jhunjhunwala - Huge Sucess of Public Offers worrying

Big Bull Rakesh Jhunjhunwala is raising concerns about the short-term direction of the Indian stock market.

Addressing an audience of about 200 brokers here on Tuesday, Jhunjhunwala said, “I am circumspect and rather careful about the market for the next six months.”
He says he is concerned about the way Indian initial public offerings (IPOs) are getting huge subscriptions not only in India, but globally.

Jhunjhunwala was talking at the launch of India’s Leading Equity Broking Houses 2007, a publication of Dun & Bradstreet, a business information providing firm.

The recently concluded domestic follow-on offer of ICICI Bank Ltd attracted close to Rs1 trillion against an issue size of about Rs9,000 crore.

In mid-June, New Delhi-based realty firm DLF Ltd’s Rs9,500 crore IPO was subscribed three-and-a-half times. Dozens more IPOs, including those in real estate, are on the cards.

In early 2005, when India’s benchmark stock market index Sensex was hovering around 6,000 point levels, Jhunjhunwala surprised investors by predicting that it will go up to 25,000 by 2009. Two years since that prediction, the benchmark index has been hovering around 14,500 levels. It reached its lifetime high of 14,723.88 on 9 February.

Over the past month, the 30-stock Sensex has risen marginally from 14,397 points to close at 14,43.06 on Wednesday. The broad-based 50-stock S&P CNX Nifty has risen from 4,256 levels to 4,263 during this time.

Despite being cautious in the near-term, Jhunjhunwala’s speech had its usual bullish undertone as well.

“It’s not that the market is going to fall from a cliff tomorrow. After an year from now, we will once again enter a long-term bull phase.”

Jhunjhunwala, who runs Rare Enterprises, an investment firm here, says he’s surprised that many investors who come to him tend to focus on the negative aspect of the Indian growth story.

Ramesh Damani, a member of the Bombay Stock Exchange and a well-known markets commentator, is also worried about the money being thrown in the recent IPOs.
“I think it’s time to get scared,” he said. “After four years of strong double-digit returns, we are likely to see consolidation in this year. Sensex could be seen in the range of 12,500-15,000,” he added.

However, Damani still thinks that there are stocks available at great valuations and investors just need to focus on picking individual stocks instead of chasing the market movements.

Manish Chokhani, director and CEO, Enam Securities Ltd, foresees the market entering into a consolidation phase in the next six months.

“In last two weeks, three Indian companies have raised around $9 billion from domestic and global markets,” he noted. “This shows the huge appetite of investors for Indian papers. But the secondary markets still haven’t taken off in a big way.”

However, not all market pundits who have huge investor followers are bearish in the near term.

For instance, Raamdeo Agrawal, managing director, Motilal Oswal Securities, is comfortable with the current state of markets and he doesn’tsee any dangers in the nearfuture. “There is a clear distinction between performers and non-performers,” he said.

“Sectors which have not performed well have been decimated or severely punished by investors. But the ones which have performed well have been more than adequately rewarded,” Agrawal added.

Ramesh Damani - skeptical of real estate and feels that valuations are ahead of fundamentals

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.

Roundtable Conference 2007

Chetan Parikh: Good evening Ladies and Gentlemen,

On behalf of Capitalideasonline.com, I would like to thank all of you for taking time out to be with us this evening for the Annual CIO Investor and Fund Managers’ Roundtable.

Let me first tell you an anecdote:

“In the 1930s, out of power and financially strapped, Churchill taught a lecture course at Cambridge on human sociology. One afternoon standing at the lectern and, always prone to the dramatic, he turned to the large class and demanded, “What part of the human body expands to 12 times its normal size when subjected to external stimulation?”

The class gasped. Churchill, obviously relishing the moment, pointed at a young woman in the tenth row. “What’s the answer?” he demanded.

The woman flushed and replied, “Well, obviously it’s the male sexual organ.”

Wrong!” said Churchill. “Who knows the correct answer?”

Another woman raised her hand. “The right answer is that it’s the pupil of the human eye, which expands to twelve times its normal size when exposed to darkness.”

“Of course!” exclaimed Churchill, and he turned back to the unfortunate first woman. “Young lady,” he said, “I have three things to say to you. First, you didn’t do the homework. Second, you have a dirty mind, and third, you are doomed to a life of excessive expectations.”

The reason why I recounted that story is that the key to successful investing is expectations and you can make money and much more than 12 times when your expectations differ materially from those embedded in market prices and you are right.

And you increase your chances of being right when you have an edge.

Bill Miller, the market beating portfolio manager of Legg Mason, wrote that there are three sources of competitive advantages that an investor can develop: informational, analytical or behavioral.

Informational is when you know something material that others don’t. It is extremely difficult to get that edge in large, well researched stocks unless you act unethically on inside information. But small and midcap stocks, which are outside the radar of most brokerage houses, offer possibilities of developing that edge.

Take the second sort of edge: Analytical advantages come from taking publicly available information and processing and assessing it differently from others. And finally, there is the behavioral edge and there are ways to systematically exploit human behavior in the financial markets. I don’t want to go into prospect theory, support theory, cognitive psychology and neuroscience but behavioral finance and investor psychology are as important as understanding financial statements and valuation metrics.

Capital Ideas Online has promoted Capital Ideas Club. You may be seeing the banners and pamphlets of Capital Ideas Club and may well wonder why you need a CIC when you have CCI in Bombay.

Capital Ideas Club is an exclusive investment community where the best value investment ideas are presented and reviewed by other expert investors.

I urge you to apply for membership because this will be a great way to become a better investor and analyst as your ideas will be shared in an online forum with other expert value investors.

Membership is free, but will be limited to only a few sophisticated investors who will join based on the quality of their investment idea. Just 200 members will qualify for the Club.

The admission will be granted only after a careful screening of candidates.

Each person applying must submit an application at www.capitalideasclub.com that includes a current investment recommendation.

The quality of the applicant's investment analysis and research will be the main criteria for admission. Entrants submitting the best ideas will be accepted as members of the Capital Ideas Club and will be eligible for a quarterly cash prize. Let me emphasize that I suspect that for members the main motivation will be the thrill of playing the game and not the spoils.

There will be a 45 day delayed Access to ideas posted by members for non-members and only members will be eligible to post ideas.

With the investment community and your blessings and support, I would like to today formally launch the Capital Ideas Club.

We had released the book “India's Money Monarchs” last year. The book has done extremely well. There are a few copies available for those who wish to buy them at the stall at a special 40% discount.

Capitalideasonline.com would like to thank the Bombay Stock Exchange for allowing the use of this Convention Hall and the help and support they gave us for today’s evening. In particular, I would like to thank Mr. Kalyan Bose, Mr. Jeevan Sakpal, Ms. Saheli Chatterjee and Mr. Balasubramanian. Capitalideasonline.com would like to thank Reliance Mutual Fund for sponsoring the event and Emkay Shares and Stock Brokers Limited for being the associate sponsor and Business Standard for being the media partner. I would also like to thank Mr. Rakesh Jhunjhunwala for his support.

Capitalideasonline.com would like to thank the members of the today’s panel Mr. Ramdeo Agrawal, Mr. Anoop Bhaskar, Mr. Sanjoy Bhattacharyya, Mr. Prashant Jain, Mr. Rakesh Jhunjhunwala, Mr. Madhusudan Kela, and the moderator Mr. Ramesh Damani for taking time out to be with us today.

I would like thank Mr. Chetan Ahya of JM Morgan Stanley, who looks after India and South East Asia and who is the Indian economist most quoted in “The Economist” for his spontaneous agreement to giving the closing remarks and the vote of thanks.

I would like to thank all the members behind Capital Ideas Online – Mr. Navin Agrawal, Mr. R N Bhaskar, Mr. Manish Chokhani, Mr. Ramesh Damani, Mr. Jamshed Desai, Mr. Bharat Shah, Mr. Utpal Sheth and Mr. Avinash Wadhwa. Above all I would like to acknowledge the contribution made by Mr. Chandrakantbhai Sampat and his guiding values.

For making Capital Ideas Club possible I would like to thank Mr Bhavya Jain for his untiring effort and guidance. I would like to also thank Mr. Mayank Sharma.

I would like to thank Mr. Ramesh Wadhwa and Mr. Ravi Wadhwa for going well beyond the call of duty to make this evening a success. I would like to thank my wife, Sheila for all the work she put in behind the scenes. I would also like to thank Praveen Parola for the effort he has put in.

Value investors often refer to short-term price movements as noise. May I request you not to add to the noise by switching off your mobile phones.

It is a pleasant duty for me to hand over the remaining part of the evening to the wizard behind the wizards of Dalal Street, Mr. Ramesh Damani. He is a famous and familiar figure in India’s capital markets and his contribution to educating Indian investors is unparalleled.

Rameshji has been a member of the Bombay Stock Exchange for over a decade and a half. He is probably the most listened to financial commentator. He is one of the India’s savviest investors. Rameshji will be in charge of the rest of the evening. So join me in welcoming the magical money maestro, Mr. Ramesh Damani.

Ramesh Damani: To start the discussion we turn to the king of the panel first – so I’ll start with you, Rakesh, as always. Well, what do you think of the market?

Rakesh Jhunjhunwala: The bullish market is not the index, it is the bullishness of the Indian economy. And as long as I don’t come to a conclusion that India’s growth is not going to accelerate or we are not going to maintain 8-9 per cent economic growth constantly – this bull market is always going to remain alive whether the index is 12,000 or 20,000. The bull market is in the Indian economy and not in the stock market.

Although you could have the economy growing but you could have very high interest rates which is a big factor in the valuation of the market. That could temporarily disturb the market.

As long as India’s economy is doing well and I see no reason why it shouldn’t – the bull market is very much alive and kicking for me.

Ramesh Damani: Sometime they say stock prices are slave to corporate profits over the long term. What is your outlook for corporate profits or the Sensex in 2007?

Rakesh Jhunjhunwala: Well, to be very frank, I don’t do too much mathematical research. I don’t say that India is going to have consistent profit growth of 25-30 per cent y-o-y.

But I do believe that you have the biggest market and the biggest opportunity for all companies is the economy. Look at any sector, everything is at such an early stage of growth.

Ramesh Damani: I now have a question for you. We have had four years of solid gains in the Sensex. Do you make it five years in a row for 2007?

Rakesh Jhunjhunwala: Well, seeing the apprehensions that people have, I don’t see any reason why it shouldn’t be. Because if you have 15 to 18 per cent earnings growth, unless P/Es dip or those earnings dip, I don’t see any reason why there should not be a positive year.

Ramesh Damani: Sanjoy, in the 2006 roundtable, you had said that India will grow but it might be unprofitable growth. Were you here too early? Will margins shrink this year or inflation lead to unprofitable growth?

Sanjoy Bhattacharyya: I got it wrong the previous year. Clearly, I missed the way the economy would respond to a number of different stimuli – whether it was policy driven or liquidity driven – and many of those remain in place. To not have learned from that would be a tremendous sin.

Much of what has transpired in the past 12 months is indicative as Rakesh said of a turning point for this nation’s economy.

This market bears a burden of very high expectations. And the way people are pricing future earnings suggests that, the penalty for getting that wrong will actually be quite serious.

I don’t doubt that if you have an economy growing at 14-15 per cent in nominal terms and you have certain advantages which are there to stay and which are long term in nature, things are improving. That is a clear indication that things are getting better. That can only help productivity.

Ramesh Damani: And margins then?

Sanjoy Bhattacharyya: Margins are a function of where you are. I mean clearly in manufacturing margins are driven by factors which are not solely in the control of our economy.

Today we are much more open as an economy. There is much less tariff protection; much more global impact of commodity prices. So you are not able to insulate yourself from them and as we speak today, a lot of these things suggest that margins will be under pressure.

Ramesh Damani: If you were to say outlook for 2007 in terms of the Sensex, would you say it would be a negative year?

Sanjoy Bhattacharyya: I do think though that 2007 will not have the kind of returns we have seen in the last four years. We will not see 30-40 per cent plus type returns spread. The last four years actually have seen the index multiplying 4 1/2 times.

Ramesh Damani: Raamdeo, you started this great Bull Run with low interest rates as you said because previously capital was always crowded. In 2003 capital became easily available.

Now you’re seeing the tightening–prime rates are going up, housing rates are going up. Can that then stop all or even finish this bull market because interest rates are now swinging from low to extremely high?

Raamdeo Agarwal: This is the first globalised bull run in every asset class all over the world. The world economy is struggling to figure out all this noise about inflation, and only time will tell because there is no dearth of money.

The government is worried about the response to inflation and is saying the rate will fall in April. But the issue is that it is responding by closing down exports. So what happens is when sugar export was possible, you banned it. You got the inflation under control but what happened? It has shattered the entire sugar community.

Ramesh Damani: Raamdeo, what are your (Motilal Oswal’s) forecasts for 2007 Sensex earnings?

Raamdeo Agrawal: By the last count when this quarterly results got completed, our team had an EPS of Rs 710 for FY07 and more like Rs 840-845 for FY08 for the Sensex stocks.

Ramesh Damani: Madhu, Jim Rogers says that there is a 20-year bull market for commodities. But yet commodities sold off quite sharply recently. If you see, oils, zinc, copper have all sold off. What is your view on the commodities price going ahead?

Madhu Kela:

See, I am not a commodity expert. But however you see there are pockets of commodities which will do well. Soft commodities in the world would do well.

Things like food grains which have not seen any price – real rise in the world – will do well. But, I am truly scared when I look at let’s say something like zinc. You know on a five-year perspective is there a possibility that zinc prices can be stable at $3000-3500 a tonne while your cost of production is $500-600 for an efficient player? So these commodity prices which have really hit a significant high from their lows may not sustain. But that does not mean you will have bearishness across the board in commodities.

Ramesh Damani: Madhu, you have been one of the most successful stock pickers. Any particular themes that you think will work in 2007? In 2006, Madhu had come here and had said the thing to attract is real estate. What do you think of real estate now?

Madhu Kela: I am certainly not as gung-ho as I was last year. And in my wildest of imaginations, I also didn’t expect that stocks will go 100 times in a matter of a year. So, having said that, I don’t think you can completely ignore this sector because this is where 30-40 crore Indians are interested. Land and property would always be an interest to India. So you have to be far more stock specific and try and find value which will emerge in this sector.

Ramesh Damani: Tell us how the Sensex will end this year, plus or minus?

Madhu Kela: I am positive in a longer run. Making money is going to be tough if I take a 12-18 or even 24 months period. There are not companies which are available at 5 or 10 P/E multiples. However, we have had 50 years of under-valuation in India. What is the big deal about over-valuation for 12 or 18 months?

Ramesh Damani: Prashant, how seriously should investors view the threat of inflation and what do you tell your investors and how do you protect your portfolio in this case?

Prashant Jain: Real inflation is actually much more than probably what the numbers are suggesting. The largest component in any household expenditure is a house and houses are clearly unaffordable by whichever measure you see. If you look at the inflationary impact on the total consumption expenditure of the household, inflation is way in excess of what these numbers suggest.

Banks are offering 10-11 per cent on deposits, and as we go into March they may start offering 12 per cent. So over long periods of time, there is certainly a strong case to be made that exposure to equities in Indian households which is very low should increase significantly but I don’t know at what pace it will happen – given the fact that fixed maturity plans from mutual funds offer virtually safe 10 per cent return, which used to be 5-6 per cent two-three years back.

Economic growth will still accelerate, but profit growth will slow down. Profit growth will be lower in 2008 than the profit growth in 2007, and 2009 will be even lower.

Ramesh Damani: Does Raamdeo’s Sensex earnings target of Rs 840-845 seem too optimistic to you?

Prashant Jain: Yes. I don’t look at the Sensex as one composite.

In fact, Sensex has two parts to it–the secular growth companies which would be companies like telecom, IT, consumer goods and the cyclicals. If you split the Sensex into these two parts, you will get a more realistic picture of the valuations. And it is not very good. If you look at the secular growth companies they are all trading at close to 20 times FY09 earnings – two years forward, which is not cheap.

And there are risks – telecom will certainly slow down by then. You cannot have 100 crore mobiles in India in the next four-five years. So it has to slow down. You can only argue whether it will take three months or six months or one year.

Cyclical growth companies are trading significantly above replacement cost and we are somewhere close to a peak cycle. So how the sectors will pan out, how zinc, lead, aluminium and steel prices behave, how the margins behave is very hard to forecast. One thing is clear that these are economically unsustainable prices and these profits are not likely to sustain for long time.

Ramesh Damani: Anoop, what is your outlook for the market? Are you more cautious or optimistic?

Anoop Bhaskar: Last year has been quite camouflaged. If you look at the large-caps, there are only six or seven stocks which have contributed to the entire movement of the markets.

In terms of small-caps, we have been in a bear market for the last 15-18 months. So, it is only six stocks which have made this whole audience come out here and say that we are still in a bull market. The bull market has stopped around 12-15 months back, frankly.

People with only small-caps and mid-caps in their portfolios would have only gained about 8-12 per cent in the last eight months, which is not a bull market. I think we’re taking a breather.

With interest rates being where they are, a rational investor would take a three-month deposit paying about 9.5-10 per cent. So, people should invest in debt rather than equity with such returns from the markets.

In equity it is more like a marathon–you cannot run a sprint all the time. This is the point where you conserve your energy for the next 12-18 months and make sure that you conserve your capital for the next round. You cannot keep on running a 100-metre sprint for the next 20 years for sure. There are times when…

Ramesh Damani: …you got to move to debt or the like. Having said that, for the record, I think everyone knows the answer, but what would 2007 end for the Sensex, plus or minus?

Anoop Bhaskar: It will depend a lot on liquidity because what really matters today is not value, it’s only liquidity. I think the Sensex will be down between 7-10 per cent.

Ramesh Damani: In the first part, we surveyed the forest. Now we take a look at the trees. How do you turn the big picture view about the economy, interest rates, equity markets into winning stocks? There is, of course lies the essence of successful investing. The panelists have a vested interest in the recommendations they are making. Moreover the panelists may change their views on the stock recommendation at any point and therefore investors are requested to do their own homework before acting on this advice. I will start with my favourite stock-picker, Bhattacharyya… I would like to see three good stock ideas from you, for one year or three years…

Sanjoy Bhattacharyya: Tata Elxsi, Grindwell Norton and Rane (Madras). Tata Elxsi is in a focused business, it has gone away from doing things which it didn’t do well earlier. So, it has learnt from the past mistakes and is actually a rare company in information technology where the margins are becoming higher and higher progressively.

Second, the valuations still remain very attractive. This year it will earn Rs 16 per share. If you leave out the fact that it has had a difficult and troubled past, its earnings power relative to capital that it is employing is very impressive, a reasonably impressive management team and the growth is definitely sustainable.

Ramesh Damani: And a merger with TCS on cards?

Sanjoy Bhattacharyya: That would be a cherry on the top. I need not worry about that at all, even if it does not merge with TCS. Next one, Rane (Madras) is a play on the Indian automotive industry. It is in linkage products and manual steering gears.

Fortunately, in the Indian passenger vehicles, tractors, LCV business, a very large proportion of vehicles manufactured in these categories have manual steerings. So, growth is assured. Second, it has a very strong dominant competitive position with only two serious competitors – Sona Koyo and ZF Steering, and the record of all three suggests that the industry as a whole is doing very well. Third, it has been through a major financial restructuring. So, you will see a dramatic change in terms of the efficiency with which capital is utilised to prepare and grow for the future. And in exports, it has a link with TRW, a major global player.

Hopefully we will see Rs 100 crore exports in this to TRW by the year 2009 which will actually change the operating margin profile of Rane (Madras). Because right now the EBITDA margin is very low at 9.5-10 per cent which over time should improve and there should be benefits of scale.

It is cheap, it is going to earn about Rs 11.50 a share and it will continue to grow at 20-25 per cent for the next three years. Reasonably competent, trading at 8 times this year’s earnings, you should be all right.

Grindwell Norton is a quasi player at the middle of the abrasives market, with only two other big players: at the bottom is Orient Abrasives and Carborundum is the other one at the high end with coated abrasives.

With the industry growing at 9-10 per cent, an abrasive is like a consumable. To that extent, demand is assured, no hiccups.

The interesting thing is that Grindwell has managed to become far more efficient on the working capital front, sales growth has been 12-15 per cent and the company is now moving into higher and higher value added products as it has consolidated market share at the bottom end. So, there is a scope for increasing profitability with virtually no incremental capital employed.

Other names that I like are as follows: EIH Associated Hotels, which has gone through a major transformation. Another company called Steelcast and the third one is a company called Amara Raja Batteries.

All are on the same theme: cheap, sustainable earning power, volume growth, well managed. Oh, and one more company, ABC Bearings which has margins higher than the industry leaders. It is growing and it is very cheap at 8 times this year’s earnings.

Ramesh Damani: Raamdeo, what ideas do you bring for us?

Raamdeo Agrawal: I prefer business leaders – globally competitive and somewhat unpopular. One is Tata Steel. In 1994, it was struggling with half a million tonne and see the transformation of its balance sheet in the last 12 years. Although it is a cyclical business, this is one company that can execute, has competence, passion and trained people who understand steel like nobody else does.

The opportunity to make money in steel is going to be huge in the next five-ten years. I am not happy with the price it has paid for Corus, but one thing can happen. Corus’ average price is about $950 whereas that of Tata Steel is about $550.

The opportunity is that Tata Steel will borrow the technology and competence from Corus to bring up its entire 10-12 million tonne steel to fetch

$900 average. And Corus doesn’t know how to operate blast furnaces.

They pour hot metal at $450. These guys will supply them the technology to bring it down to $150. That is what should pan out. Whether it will or not, at this price you cannot lose much. If it happens, then this should give a very good return.

Second leader in its own category is Glaxo. It has underperformed the market in the past year. The reason is twofold: its earnings didn’t grow much and valuations were pretty stretched at the beginning of the year.

But in 2008 there are 3-4 patented products which are going to be launched globally from Glaxo’s portfolio and they will be launched simultaneously in India. I think at current valuation of 22-23 times CY07 earnings, you are not paying a very high price.

The patent law is in place, the products are being launched and it has a very good, transparent management. Of course, it is not a momentum driven stock, one cannot predict whether in six months one can make money or not.

Ramesh Damani: Any mid-cap, small-cap ideas?

Raamdeo Agrawal: One idea, a mid-cap called Dena Bank. A Rs 1,000-crore bank, it dominates half of Gujarat, about Rs 6-7 EPS this year, Rs 10-12 earning next year. The bank’s book value is going to be Rs 50 next year, and there is no bank stock today which you can get below price-to-book-value of 1.

Ramesh Damani: Madhu, last year you whispered ‘real estate’ in our ears. What are the themes or sectors and what are the magic words you would whisper today?

Madhu Kela: I would like to mention the contract research and manufacturing theme out of India. If you analyse this space, and as Raamdeo said, that now we’re discussing post-patent, so people are not scared to venture into whether it is outsourcing or contract manufacturing in this space.

Multinational companies annually spend something like $45 billion on research and another $45 billion is spent on manufacturing of pharmaceutical products. So, this is one very interesting opportunity which over the next three to five years will pan out very well for India.

Ramesh Damani: Madhu you’ve also been invested in media companies. Can you shed some light on the prospects for the media group?

Madhu Kela: In the media business the biggest thing that will work in its favour is the entry barrier, which is humongous across the board. Like in newspapers, you only have 80 per cent of the advertisements in the top newspaper, 15 per cent in the second one and the remaining 5 per cent in the next twenty. The second thing is, when convergence really happens, content will be the true king.

Ramesh Damani: … and the low advertisement rates in India have to go up over a period of time, so that represents the opportunity on the balance sheet side. Anoop, give us some ideas. Mid-cap space is something which the retail investor is always enthusiastic about.

Anoop Bhaskar: There are two broad ideas I would like to share. We produce roughly around 220-odd million tonne of food grain, which we have to take it to around 340-350 million tonne in the next five-seven years, because of our population.

Plus, if you have more income, you’re going to consume better than in the past. And in the last seven years there has been no greenfield project which has been set up for fertilisers because of government policies, constraints of finance etc.

India buys around 30 per cent of the world market of urea. And we are paying around $260 per tonne to buy it from the market. If we were to produce it in India at whatever cost of gas we get, it would cost us around $180-190.

Another idea is lubricants, a market in which the pricing is not controlled by the government and where the government companies are as ready as the private sector to raise prices. For the last 12 months, the prices of lubricants have moved up by almost 37 per cent. And this is one segment when over the next two-three years, lube oil refineries around Asia are going to double their capacities.

Therefore, the price of lube oil could actually move totally opposite to that of crude oil. Because there would be so much of supply and the pricing of the final product is not controlled by the government.

These are companies which have some brands. If they are able to keep a part of the fall in lube oil prices, then the jump in profits of these companies would be very high.

Ramesh Damani: Prashant, you won’t bet on stocks but tell us some themes at least.

Prashant Jain: I think auto components. If India is to become an automobile hub, look for companies in the auto-ancillary space which bring scale, the opportunity can be very large.

And there are signs that India is likely to emerge as auto ancillary hub. And these oil companies – I’ve been wrong last year, but they are available at a fraction of the replacement cost, and now government intention is that at least the oil bonds will…

Ramesh Damani: … make up for the losses.

Prashant Jain: Yes. So the downside becomes limited. They are available at book values, and the book values are fraction of the replacement costs. So, I think there’s some value. If oil prices fall, the upside could be very fast and very significant. But clearly there is no momentum and it is an out of favour sector, so one has to be patient. They also have good earnings yields.

Ramesh Damani: Let’s hear the stock picks from the best stock-picker in India. Rakesh, you’re going to share your picks, so please, we’re breathless.

Rakesh Jhunjhunwala: I agree with Raamdeo, that Tata Steel could be an extremely good long term investment over a three-five year horizon. The steel industry has changed.

The approach to the steel industry has changed from one of government approach to one of profit. Second, when people say that Tata Steel’s acquisition of Corus is a bull market excess, what bull market is Tata Steel in when it is valued at 6 times earnings, and pre-tax 5 times?

Tata Steel will make iron ore intensive products and sell it to Corus. Plus, Corus can add 4 million tonne finishing capacity without much investment, which can be utilised with the same labour force. Tata Steel itself is going from 10 million to 12 million tonne.

Mr Muthuraman has said that the combined EBITDA margin will be 25-30 per cent. If you look at Rs 100,000 crore of sales, at 25 per cent EBITDA margin, it’s Rs 25,000 crore. Tata Steel’s equity is not going to exceed Rs 750 crore, even after an issue. And then you look at it, they are financing it perfectly.

Tata Steel has $1 billion cash, $2 billion equity will come – they put that into an SPV. That SPV will borrow $1 billion which may have recourse to Tata Steel and that money will be invested in Corus. Corus will take debt, which will not have any recourse to Tata Steel. So, Tata Steel is not really risking anything except that $1 billion, which is 6-7 month cash flow for the company. And if they succeed at what they’re saying, a 750 crore equity can produce Rs 25,000 crore EBITDA.

My second investment is Titan. It’s a very expensive stock, but there are certain companies which will produce dominance, and when they will be in their youth, they will produce huge cash flows. So I believe Titan can be one such company. It’s for a patient investor and investing in it is fraught with risk.

The third stock is Bilcare, and again this is for a patient investor for three-five years. If Bilcare is successful in doing what it has set out to do, it will be among the top companies of the world in the pharmaceutical package. It will have a fully diluted equity of about Rs 21 crore and this year it will earn about 50 crore.

It’s not cheap at about 20 times its earnings. It has invested in facilities in Singapore, it has gone into the clinical trials business. Both will take time to mature. But if they do well, this stock will give mind-boggling returns. And with this, I will conclude by saying that I’m feeling very bullish after this discussion.

Ramesh Damani: There’s a very nice philosopher, who’s an existentialist – Albert Camus and he wrote a very nice thing, which is a great way to conclude this discussion.

He said you’re forgiven for your happiness and success only if you generously consent to share them. I want to thank my panelists by sharing the joy and wisdom of investing generously with all of us today.