What are the takeways from this year’s wealth creation study?
If a company can make abnormal profits, markets will make abnormal profits. Instead of looking at the market for prices, investors should focus on company earnings. It’s much easier to study a company’s financials than predict the right price. It’s not hard to find companies like ITC or Hero Honda that have consistently delivered far superior returns than others. One needs to look at quality of the managment and its business. If you are invested in a company with good management and good business you have a winner. If you are invested in company with good managment but bad business, nobody can help you. Similarly, if you are invested in companies with good business but bad management, you still have a chance. But if you are invested in companies with bad managment and bad business you are sure to be taken to the cleaners.
So out of the four quadrants, only one is absolute winner and rest three are iffy. That’s why most of the people don’t make money in markets because they hold far many useless stocks. The second takeaway is that successful emergence of value creators is very rare. People often ask me which is the next ‘Bharti’, but one needs to spend a lot of time and research to find out such companies. But there are many companies which despite being in business for decades (like TCS, HDFC) are still growing at over 30%. If you own 10 such companies in your portfolio, there is no way you will lose money.
What do you make out of recent macro economic data?
Right now, there is nothing to suggest economic revival but at the same time we seem to be at bottom. We have got a very good central banker now and what is required is change in fiscal managment and return of investment cycle. Inflation has been in double digits and we have not been able to do anyhing about it. Similarly, though current account deficit has been controlled and forex reserves have seen somewhat build-up, the fiscal deficit is still worrying.
When do you see change in sentiments happening?
People are waiting for new government to come, to take a decision on investing or setting up a new plant. I think the mood will shift as the shape of new government gets clearer in coming months. But then whoever comes into power, we will see investment cycle picking once elections are over as economy can’t remain like this forever.
What’s your outlook on corporate earnings and equity markets from here on?
We are expecting corporate earnings to pick up from 5% levels last fiscal to 10% this fiscal, and is likely to accelerate to over 15% next fiscal. With the kind of GDP growth expected next year 12-13% kind of earnings growth looks sure. If we can rein in the fiscal defcit in the second half, then next year should be good. For equity markets, we expect positive momentum to continue on optimism about new government, provided the global events (related to Fed tapering) pan out in an orderly manner. The biggest risk for markets is foreign selling, which may lead to some correction but I don’t think selling is likely to be big.