Equities only option: Damani

Agreeing there is a need to exercise caution around all-time high levels, Ramesh Damani, member of BSE, says there is no reason to believe liquidity will run dry in the short term. Bull party will continue and liquidity will be ample since global money will continue to chase India, he told CNBC-TV18. He claims to be 95 percent invested in equities and insists he will not offload unless there’s a calamity.

Damani is concerned about rupee’s steadfast decline that highlights the plight of economy, but says the market is prepared to get over concerns of a weak rupee and macro data. He sees equities as the answer to negativities and continues to dissuade investors from getting into real estate or gold. "It takes only a good sense of stock-picking to be able to make money in the stock market," he says adding that the absence of domestic participation in the rally to 6100 is disappointing.

He suggests Tata Motors and Godrej Properties to investors willing to take a bet but is clearly embarrassed of his own investment in MTNL. Damani had earlier preferred HPCL and BPCL but hopes the stocks not go the MTNL way. He is also bullish on media stocks.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Do you think this very narrow bull market in anything related to consumption can continue or is it pushing against the valuation bar?

A: To be honest like most market participants I have been moving from utter dejection to delight depending on the news flow of the day. What I find is that if you are a decent stock picker, it pays to be invested. You are making money by being bullish.

The index is close to lifetime highs. Good quality companies are at lifetime highs. So if the question is will the party continue, then I think for the near-term, yes. The liquidity is fairly good in this market. There is a huge overhang on the market today for the GDP data and for the rupee which is actually sending nervous waves across the market. But somehow the market seems to be able to conquer all these problems.

Q: Nervous waves only over the last couple of days. Through the month of May, this is what the rupee has been up to and the equity market has actually been shrugging it off. Does somebody of these two markets have it right and the other wrong?

A: I am in the world camp. To me it is disastrous if the rupee goes back to 57. It just shows an economy spinning out of control. What is my alternative because central bankers across the world have made cash probably the worst possible asset that one can hold and given my negative view on real estate and gold, equities is a good option. And the kind of dividend cash flow that these kind of companies are generating whether it is HUL or Godrej Consumer those seems to be fairly benign space to put your money in there and you have also got capital appreciation in respect. However, if you are ask what keeps me up at night – it is the rupee depreciating. It is actually a very bad sign for us.

Q: Does the narrowness of the market bother you? You own a lot of these consumption theme stocks which have done very well, but when one ask around people who are in other sectors, they have just not been included in this move up to 6,100. You would like to see a much broader market, would you not?

A: Absolutely and even more public participation. That has generally been true over the last few years; it has been a very-very selective market. Good cash flow, good dividend yields, visibility of earnings strength of the basic core business and more importantly capital light models. Companies do not require huge amount of debt or repeated amounts of financing, that is the favoured sector in the market and that has also been true across the world. If go back and look in America and look at through the new high list, it is dominated by stocks like Johnson and Johnson, ADP which have very stable cash flow. Even today their yields are better than the bond yields in the market. So it has been a global phenomena.

If I can just refresh viewers' minds - in the 1970 is America we had a phenomena called the ‘Nifty Fifty’ era, when 50 stocks that were picked by the fund managers at those times including household names like Avon, Kodak kept going up relentlessly in a bear market almost because the market thought process at that time was that the superior growth rates of these companies would make up for any price you pay. However, like all bubbles that ended badly too.

We are seeing a similar type of move in markets across the world for consumer facing high dividend yield stocks. At some price, the market will overprice them, but my sense is we are not there yet.

Q: Are you confident though that there can be follow-through to this consumption story? For the first time Jubilant Foodworks pointed to single store same store sales growth going into this year. Asian paints which is a bit of a holy cow in this entire consumption theme actually disappointed this quarter. Is it really all okay for this entire sector?

A: I do not know but you will know it when this quarter's results come out, but anecdotally the people I talk to people in the watch business, someone in the shoe business, someone in the clothing business all three are reporting extremely strong sales for the month of May. So, let us watch this quarter a bit more closely. The stocks are getting a long rope because of their basic business model, the cash flow and the dividend yield that they come out with. Last quarter the government had tightened a lot of liquidity flows into the market, but it seems to have eased out in this quarter and at least anecdotally May has been a good month for a lot of these consumer companies.

Q: You have seen many global liquidity parties in the past. Does this look like one which can actually continue for a few more months at least in which case despite mixed fundamentals out here markets can actually get better before they get worse?

A: I am betting on that, I actually believe that. There are some good stories. The Indian market is not hard because positions are extremely light in Indian markets. There is absolutely virtually nil domestic participation whether by retail or by financial institutions. It is the foreigners who are supplying the money and building out this party. I think it will continue.

Markets tend to sell-off when they get extremely leveraged or buoyant in terms of sentiment and I do not see that happening. I see global money still finding attractive returns in India. I think yes the market will get better. Individual stocks will get better before this party will get over.

Q: How are you approaching the market now? It is 6100. In another 4 percent we get back to an all-time high. Would you take guard once again if the Nifty were to make it to an all-time high or do you think this market is exhibiting enough momentum to form a significantly higher top in the next few months?

A: I would be very careful around the absolute old highs only because the little part of me that is technical suggests that that is where a triple top performs based on indexes at 2009, 2011 and now 2013. Technically it is not a good idea and you have to watch the market very, very carefully at that point.

 I am almost 95 percent invested, and I am unlikely to sell-off until I see something dramatically go wrong in the market. It has not paid to be in cash. It has rewarded stock pickers. It has rewarded being in the index. So, we call it as we see it. I am hoping it will breakout and go higher, because bull markets will climb those proverbial walls of worries. However, it is hard for me to disagree with the bears who say that it is only liquidity driving up this market, fundamentals have not yet improved and my answer to all of them is that market tends to be six months, one year ahead of the real economy. Looking one year ahead in the Indian map does not seem a pretty picture. There are elections down the road for which the market feels there will be another hung parliament in place. So it is a tough thing. You have to have leap of faiths to remain well invested in Indian equities.

Q: We got a small taste last week of what kind of impact there could be for markets if indeed liquidity is withdrawn. With all this talk of the market heading to new highs are you feeling more confident about the downside risk for the market or do you think that remains as wide open?

A: Equity markets have taught me that you just never know when a squall hits sea, even a calm sea and to always be prepared for it, to try and minimise your use of leverage, to have at least within constraints a well-diversified portfolio. I am well aware that if the Fed decides to taper off the QE and interest rates just threatened to harden it will have almost immediate and instantaneous effect on equity markets across the world. I have no doubt about that.

According to the transcript of Warren Buffet's Annual General Meeting (AGM), he said something to the effect there will be a "shot heard 'round the world" and I do not think he was understating.

If you look at it from the other point of view, Japan has just introduced their version of QE, Abenomics as they call it and what they are saying is print new money, spend for public structure, depreciate the Yen and the market responds 60 percent. So what is the European government is going to do? Right now no central bank has the courage or the wherewithal to start raising interest rates. They all are desperate to keep interest rates low and have growth percolate up before they start doing that. So at best it is a postponement for that uptick day right now.

Q: At what point would you consider diversifying your portfolio away from the sectors that you have been in over the last few years? Is it getting to the point where you say I want to take a bit more risk-on, maybe some cyclicals, which are not generating great cash flows right now, but will probably be the big multibaggers over the next few years. Have you started doing that or the world is too risky for you to consider those options?

A: I do that and look for value. The thesis is that you want to buy Rs 100 worth of assets for Rs 25 if we can. For example, we tend to bullish on Tata Motors now. The results came out very gratifying to me. They will have a good run ahead. It is a cheap stock relatively speaking compared to its peers. It will probably do well. I have been overweight media for a long time, which has done reasonably well, but it is chugging along. It has ways to go yet.

I am ready to put money into real estate, media, which have been not favoured stocks/sectors, by the market. Wherever I see ample opportunity, I find it astonishing that Indian media valuations are so cheap. Someone can decide to become Rupert Murdoch and he can become one in India, it is that cheap. The opportunities are plentiful. You have to exercise a large amount of patience for that though.

Q: You were talking about how you are negative gold and real estate. Would you extend that into the reflection on the stock market in terms of these gold Non-Banking Financial Companies (NBFC), gems and jewellery stocks and realty stocks on the other hand?

A: I have been at various times bullish on gold, but for the last year, year and half I have avoided gold altogether. In a deflationary type of environment that we are in (no one really knows deflation or inflation, no one has figured that out yet), I have avoided the gold sector completely. However, some real estate names like Godrej Properties, and then there is a government PSU called National Buildings Construction Corporation (NBCC), which is direct play on real estate construction by the government. I tend to be quite bullish on both those companies which I own by the way.

Q: Where do you stand on politics because that’s another hump which the market will have to cross, if not in the next six months then in the next nine months? Do you see that as a potent enough event which can determine whether you should be in equities over the next couple of years or not?

A: What the market is staring at perhaps is another hung parliament. We don’t know all this stuff. It is too early. It is pretty short sided view to say that I don’t want to be in equities. Where are you going to be, where are you going to put your money to use. You just can’t keep chasing real estate prices higher and higher till they are meaningless. And gold has shown that it is two-way street that it can also fall like it rose.

It puzzles me beyond belief that Indian retail has anathema to Indian equities, when the dividends are tax free, capital gains are taxed. You have actually had the index go up like 30 times in 20 years or so. So it puzzles me, it sadness me a little bit, maybe the street hasn’t done good job to educate Indian public but I am certainly not going to get out of Indian equity in a hurry.

Q: You think the big risk lies overseas though in terms of this global liquidity argument or do you think our domestic problems are bigger either in terms of the macros or these impending elections?

A: It will be of course both but globally, even our neighbouring country Thailand, I was reading yesterday, they are introducing capital controls because Thai baht has appreciated too much. We seem to be caught in an island of our own making, various and sundry problems due to the lack of political decisiveness of the centre.

I would tend to think that given that world is floating in zero interest rate almost, there is no constrain for demand if you can actually move the economy, I would have to think that the Indian macro factors are much more humongous probably facing us than the global environment, which is actually tailor made for country like India. You can borrow money cheaply; you can expand consumption and grow back at eight percent. Everyone will be smiling but typically, they are three steps ahead and two steps back. I just hope that the two steps backwards have been made.

Q: Did you pick up any of the recent offerings either from the offers for sale which have been happening at the rate of five everyday or at the Justdial IPO or any of the recent offerings from the government at all?

A: Not really. I haven’t really picked any of them. Justdial - just to add my two bits to the public debate, I think after a long time we are seeing street very excited about the IPO and it is quite sharply divided. The bulls think that this is a great play, and it would compound at 35-40 percent. The bears think that the valuation is pretty stratospheric. I happen to be more on the bearish side of the valuation on the Justdial IPO but I think it will have a bang up listing.

There is going to be enormous excitement the day it gets listed. I think there is huge amount of foreign interest in that particular issue. So, we will have a very positive listing at least for that. Beyond that, I am not very bullish on prospects in terms of a price earnings basis but I think there will be a lot of excitement on the street during its listing.

Q: We have spoken at various points through the last few months and you have turned incrementally positive on oil and gas - that’s the only space actually where policy is still rolling along. Do you think there is still money to be made on some of those oil and gas names?

A: I just hope I am not wrong. One time in my life I am also guilty, I picked MTNL and we have been clobbered ever since, for picking that stock. It is the one on which I made most loss in my investment career. I am embarrassed but I did it.

I hope BPCL and HPCL don’t go the same way. It just seems so silly. Something like HPCL at 0.1 time sales, stable business, oil prices going down, subsidy burden going down, good deficit, great marketing but to be honest, I have an investment in HPCL as I speak to you but it has been basically flat for me.