Indian stock market will double in five years, says Motilal Oswal’s Raamdeo Agrawal

{"text":[[{"start":null,"text":""}],[{"start":9.52,"text":"Good morning. After a two-year slump, is India due a stock market boom? One person who thinks so is Raamdeo Agrawal, chair and co-founder of one of India’s largest integrated capital market services firms, Motilal Oswal. Agrawal has been investing in the Indian stock markets since 1987. Across its various businesses, Motilal Oswal has assets under advice worth Rs6.6tn ($69bn) for nearly 16mn clients. I sat down with Agrawal for this month’s India Business Briefing Q&A to understand what the prospects of a market turnaround really are."}],[{"start":45.52,"text":"Note: this interview has been edited for length and clarity."}],[{"start":49.18,"text":"You recently predicted 15 per cent annual income from Indian equity over the next five years. We have had two years of flat-to-negative returns. What are the key indicators that have shifted to move into the growth mode you are predicting?"}],[{"start":62.4,"text":"If you look at the data series starting in the year 2000 — so a 25-year series — you’ll see that Indian corporate earnings, at an index level, have grown at around 12 per cent compounded. If you look at a five-year moving average, that too is at about 12 per cent. The price-to-earnings (PE) ratio now is around 20 — this has been the average since 2015. It moves to 18 in a very stressed situation — it did not fall below that during Covid even — and the high is around 24-25. Right now it’s at 20."}],[{"start":93.94,"text":"If it simply maintains this, it will take six years to double your money at 12 per cent rate of return. And if there is a little mercy on the upper side, because of improvements in the economy such as the increased credit flow we are seeing, then we could do it in five years — at 15 per cent. So the index will double in 5-6 years, at 12-15 per cent return. Of course, smart traders can make higher than index returns, but this is my calculation to predict that the market will double in about five years."}],[{"start":123,"text":"How do you explain the last two years, where the market has been flat or negative?"}],[{"start":127.28,"text":"The first thing is that post-Covid we grew at about 25 per cent for three to four years. There was rapid growth and it was essentially a one-way street from 2021 to 2024. The index [Nifty 50] went from 8,000 to 24,000, that is 3X in three years. It was too much, but that’s the nature of the market. Then it corrects. It moves 10 steps forward and then it will either come back three-four steps or it’ll stay flat. The market is now hovering in the 22,000-26,000 zone. PE multiples have corrected from 25 to around 20. But because of the strong inflow from domestic investors in the last five years, which itself is a big revolution, despite intense selling by FPIs [foreign portfolio investors] our market has not gone down that much."}],[{"start":171.88,"text":"But it has seen downgrades. Bank of America ranked India as the least preferred equity market in Asia. India’s weighting in the MSCI emerging markets index has gone down to 11.9 per cent. Why is it that even though GDP is growing, consumption is growing, credit is growing, the market is not? What explains this dichotomy?"}],[{"start":191.86,"text":"As the saying goes, you know what is going to happen but you just don’t know how long it is going to take. This is the deceptive nature of the market. In 2024, when everybody became bullish on India, something went wrong, in the sense that corporate earnings slowed down. As an analyst, in my mind, if corporate earnings are growing, you are pretty good, and the market will come back. But when earnings slow down, even God cannot save you."}],[{"start":216.12,"text":"After 2024, credit flow slowed down so much that last year it became 9 per cent. Then there are other aspects like expectation of a drought, which put pressure on food prices. The Iran war has taken oil prices above $90, global logistics have gone haywire, shipping costs have gone through the roof etc. And through all this, the world is consuming. India is also doing well. The real economy is rocking. The only problem was that corporate earnings were not growing until last year."}],[{"start":245.12,"text":"This [fiscal] year, in the first quarter, corporate earnings have come in at 15-20 per cent, depending on which index you are looking at. So earnings are coming back, but the market is sceptical — it is wondering whether this is a one-off or if it has legs to sustain. By the end of the current quarter, we will have confirmation that the earnings are good. The other big factor is that foreign investors have sold India like never before."}],[{"start":271,"text":"Since we are talking about corporate earnings, one big complaint, even by the finance minister, has been that they are not increasing capital expenditure. Bankers I spoke to this time last year were hopeful of a capex cycle starting this calendar year. Has there been much evidence of that?"}],[{"start":288.32,"text":"Good question. The issue is that the private sector will never spend ahead of demand. They did that in 2009-10. They put up steel and power plants and all kinds of things after borrowing heavily from the banks. Then some of them went bankrupt. Now corporates are saying, show me the demand, then I’ll increase capex; don’t show the promise of demand, I want to see actual demand."}],[{"start":null,"text":""}],[{"start":310.68,"text":"But if you look at the sectoral analysis of the credit flow in the June quarter, the fastest-growing segment is corporate capex. That is clear evidence that there is a revival. Also, if you look at the order books of the capital goods companies, they are booming. And look at the carmaker, Maruti. In the last 45 years, they put up four plants. Now they are putting up three new plants in the next three years. They are going from 2mn to 4mn car production by 2030. That’s some $8bn-$9bn in capex."}],[{"start":342.16,"text":"You mentioned foreign investors earlier. They have been selling massively in India for several quarters now. Structurally and fundamentally, what will bring them back?"}],[{"start":351.56,"text":"What will bring them back is performance. Everyone wants to make money, whether you are a domestic or a foreign investor. Domestic investors do not have an easy option to go out of India; FPIs can go anywhere in the world. What should bring them is the secular growth story of India. It is the fastest-growing economy, and this is not a phenomenon for one or two years."}],[{"start":372.84,"text":"India is poised to be a decadal fast-growing economy, much like what happened in China between 2000 and 2015. They grew in double digits year after year. India is a democratic set-up, so we cannot be that fast, but we are still at a good pace at 8 per cent, and we will be growing for a much longer time period. We are also not a one- or two-company country, we are a diversified large economy."}],[{"start":399.76,"text":"But from a foreign portfolio investment point of view, there is also the overhang of the capital gains tax. Funds I speak to in London, for example, say it is a problem."}],[{"start":409.52,"text":"It is an issue. If we are trying to make India the most attractive country for capital flows, then we should be as good as anywhere in the world, particularly other emerging markets. We should follow their example rather than America’s, because that country has a different power in the world — it is the largest market globally, its currency dictates global trade etc."}],[{"start":431.2,"text":"One pain point particularly is that FPIs are bringing in dollars, and in a scenario where our currency is continuously weakening, they have to pay capital gains tax calculated in rupees. That directly hits their returns. That one change must be brought in immediately. I believe some work is happening on this front. But I don’t think capital gains tax is the deal-breaker."}],[{"start":452.56,"text":"Then what is?"}],[{"start":453.8,"text":"The deal breaker is returns! If corporate earnings are not growing at 15-20 per cent, what money will they make? The issue is that the earnings have slowed down, and they are losing on currency and losing on tax. That is the problem."}],[{"start":467.48,"text":"Let’s talk about some specific sectors now. The IT sector has been a bellwether for the markets for more than two decades, but they have had an extended downturn. Do you think the sector will see a turnaround?"}],[{"start":478.64,"text":"AI innovation is here to stay. It is making technology services less labour intensive, and so the headcount-driven service model looks unsustainable. Now the question is: in what shape will it come back? Fact is, enterprise solutions cannot be entirely app or technology driven. They will need people to implement AI."}],[{"start":497.28,"text":"I can see this in my own company. I run a reasonably large company of $1bn-$1.5bn revenue, with $7bn-$8bn market cap. We use a lot of tech, we are also implementing several AI solutions. But we cannot do without people to run it. So I think the Indian services sector will remain. Growth might slow down, but it is not going away. Also, technology diffusion will take time. As Bill Gates says, in the short run we overestimate the impact of technology and in the long run we underestimate it. We are going through that classic situation now."}],[{"start":null,"text":""}],[{"start":532.6,"text":"What about banking? At one point it was your favourite sector. Do you still love it?"}],[{"start":536.68,"text":"Yes, I still love it, but the issue is which bank?! [Laughs] Between 1995-2015, I had no doubt the sector would be led by HDFC; it was everyone’s darling. Right now our total credit is around Rs240tn. That is growing at 15 per cent. In the next five years we will need another Rs500tn. Who is going to underwrite so much credit? We need big players."}],[{"start":561.56,"text":"Newer banks are emerging now, troubled banks are getting recapitalised, foreign capital is coming in. The opportunity is visible to everyone. Some of the smaller banks are doing a wonderful job, but they are on a low base. So the challenge is in finding the next HDFC Bank and betting on it. The sectoral opportunity is safe — bank balance sheets have never before been so clean and the size of the opportunity has not been bigger."}],[{"start":585.36,"text":"What are some of the other themes you are exploring?"}],[{"start":587.76,"text":"Let me tell you the trends I am excited by and we can derive the themes from there. The first is capital markets, where the entry of the digital infrastructure and [Indian financial regulator] Sebi’s decision to allow paperless onboarding of clients meant that we went from 40mn demat [digital investment] accounts in 2020 to 235mn now. Retail is the backbone of any market. Domestic investors’ ownership has gone up from 16 to 24 per cent and FII [foreign institutional investor] ownership has moved the other way."}],[{"start":618.96,"text":"But FIIs will have to keep buying at an index level. The MSCI emerging markets allocation to India was 21 per cent two years ago; it has now come down to 11 per cent. I was in Singapore and I believe the guys are 4-5 per cent below the index allocation; they are short on India. I believe they have oversold India. And they will come to buy. And when they do, who will sell? It will be promoters. You’ll see all kinds of IPOs, QIPs [qualified institutional placements] etc."}],[{"start":650.9,"text":"This wealth effect is not being fully reflected in the India narrative. Economists are stuck on the income calculation through GDP. Nobody is looking at the wealth effect in the overall economy. The rich are spending lavishly. You can see this everywhere: there is no vacancy in any of the five-star hotels, travel is expensive, high-end real estate is getting sold in a day. The more discretionary sector is pushing the economy forward."}],[{"start":651.4,"text":"Therefore, your investment themes are?"}],[{"start":675.96,"text":"All kinds of discretionary spending is going to go up. Credit support is important in India because we don’t have high purchasing power. So the sectors I am optimistic about are those where there will be a confluence of the wealth effect and credit growth. This includes automotives, capital market intermediaries, banks, digital companies, quick commerce companies etc. The key will be finding companies where there is tailwind in the business and tailwind in the management. Both of these need to come together to create a winner."}],[{"start":706.72,"text":"Lastly, what is the biggest investment mistake you have ever made?"}],[{"start":713.04,"text":"[Laughs] There have been so many! The only good thing is that the worst of them I made early in my career, so I didn’t blow millions. But overall, I would say I have not had many mishaps because I do not speculate. Most of my energy went into building the company, so my own portfolio was quite passively managed. Also, as you may have heard, I am a big bhakt [devotee] of Warren Buffett, so I too practised his patient capital model. I believe in finding compounders and sitting on them. As I grow older, I have become even more patient."}],[{"start":713.54,"text":"Recommended stories"}],[{"start":742.52,"text":"NSE, the world’s biggest derivatives exchange, is set for a $46bn market debut."}],[{"start":748.92,"text":"OpenAI ‘agent’ hacked an Australian health service website."}],[{"start":753.28,"text":"HSBC moves board meeting from Dubai to London amid safety concerns."}],[{"start":758.04,"text":"South Korea bets on Texas gas plant to satisfy Donald Trump."}],[{"start":763.68,"text":"Pakistan’s military cannot solve its Imran Khan problem."}],[{"start":767.4,"text":"Mark Zuckerberg unveils AI ‘charm’ device that can fit on a keychain."}],[{"start":772.72,"text":"China is reviewing its dependence on Broadcom switches in data centres."}],[{"start":773.22,"text":"Buzzer round"}],[{"start":777.04,"text":"Believed to have been popularised — or even invented — in the city of Glasgow, Scotland, in the 1970s, what popular dish consists of roasted chunks of marinated chicken in a spiced tomato-and-cream sauce?"}],[{"start":792.08,"text":"Send your answer to indiabrief@ft.com and check Tuesday’s newsletter to see if you were the first one to get it right."}],[{"start":792.58,"text":"Quick answer"}],[{"start":800.84,"text":"On Tuesday we asked if you are more productive when you listen to music. Here are the results. It’s a close one, with a shade over half of you saying yes."}],[{"start":null,"text":""}],[{"start":810.28,"text":"Thank you for reading. India Business Briefing was edited today by Stephen Harris. Please send feedback, suggestions (and gossip) to indiabrief@ft.com."}],[{"start":826.28,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1790307080_5012.mp3"}