Foreign insurers bet big on their Indian ventures

Src : http://www.business-standard.com/article/finance/foreign-insurers-bet-big-on-their-indian-ventures-116012001179_1.html

Once foreign insurance companies' fears over management control were allayed, they spent large sums of money to up their stakes

M Saraswathy | Mumbai January 20, 2016 Last Updated at 21:30 IST

In February 2015, when the Insurance Laws (Amendment) Act was passed, the cap on foreign ownership of Indian insurers was raised from 26 per cent to 49 per cent. This, it was widely believed, would open the sluice gates for foreign investment in the capital-starved sector. However, a new term in the rule book, "Indian management control", began to haunt the industry.

With no clarity on what this meant, the industry was understandably apprehensive. The FDI limit change was meant to be a game changer. But doubts persisted over control and Indian management. Some interpreted it as no foreigner being allowed to be a part of an insurer's top management, while others saw it curtailing their voting rights.

Several estimates of FDI inflows, ranging from Rs 20,000 crore to Rs 30,000 crore, were aired, yet analysts were reluctant to provide timelines, because they felt that Indian management control could be a dampener - with a higher stake, the foreigners were bound to ask for more say in the management.

Ten months later, the fears have proved baseless. At least 12 insurance companies have sent their applications to the Foreign Investment Promotion Board (FIPB) to increase the stake held by their foreign partners.

Bharti Enterprises became one of the first to state that its overseas investor, AXA, would step up its equity investment in the life and general insurance companies to 49 per cent. Shortly afterwards, it applied to FIPB.

In December, AXA increased its stake in Bharti AXA Life Insurance and Bharti AXA General Insurance to 49 per cent after receiving approvals from FIPB and the Insurance Regulatory and Development Authority of India (IRDAI). FIPB had approved AXA's proposal to invest Rs 1,290 crore in Bharti AXA Life and General Insurance.

The future, say experts, looks promising. Amitabh Chaudhry, MD & CEO of HDFC Life, says clarity from the regulator on Indian management control has helped insurance companies, and now more of them are going to FIPB for approval of a higher foreign stake. He says a couple of billion dollars will come in as FDI in the next 12 months.

"Companies will have to comply with Indian management control first before getting into valuation discussions. They are involved in that," he adds.

Bringing clarity

In October, IRDAI defined Indian management control, which includes the right to appoint a majority of the directors and authority over management decisions, including by virtue of shareholding, management rights, shareholders agreement or voting agreements.

It also said control over significant policies of the insurance company should be exercised by its board. Quorum shall mean and include presence of the majority of the Indian directors, irrespective of whether a foreign investor's nominee was present or not.

Insurers have been given three months to comply with the guidelines, but IRDAI will grant them another three months to meet the requirements.

High valuations

However, in anticipation of the policy changes, the valuation process in the insurance sector was set off much before the new policy was announced. In December 2014, Housing Development Finance Corporation had said the Azim Premji Trust would buy a 0.95 per cent stake in its life insurance venture, HDFC Life, for Rs 198.9 crore. The deal valued HDFC Life at Rs 19,890 crore.

In August, Standard Life announced it would buy a 9 per cent additional stake in its Indian insurance venture, taking its stake to 35 per cent. The foreign insurer was to pay Rs 1,705 crore for the 9 per cent stake, valuing HDFC Life at Rs 1,8951.4 crore.

In October, ICICI Bank said it would sell a 9 per cent stake in ICICI Lombard General Insurance to Fairfax Financial for Rs 1,550 crore. The deal valued the company at Rs 17,225 crore, making it the most valued private general insurer.

Valuations previously unheard of came into play. In November, ICICI Bank announced it would sell a 6 per cent stake in ICICI Prudential Life Insurance to Premji Invest and its affiliates, and Compassvale Investments Pte, a unit of the Singapore-based Temasek, for Rs 1,950 crore. The deal values the life insurance company at Rs 32,500 crore, making it the highest valued private insurance company.

At a time when insurance penetration is low, IRDAI is of the view that FDI will enable more funds into the sector, thereby improving penetration.

The additional funds brought in by foreign joint venture partners will be used by insurers not only to expand presence across the country, but also for digital initiatives to make the process of buying and selling insurance more efficient and easier. This would include creating new distribution channels and enabling tablet-based sales to allow insurance agents to access all information they need about products or the client on the go.

In addition, in places where internet connectivity is an issue, insurers are also looking at setting up branches and offices adjacent to their bank partners. The idea is to not only increase the number of sales points but also be closer to the policy holder so that better after-sale service can be provided. At present, private sector insurers are lagging large public sector insurers when it comes to their presence in rural and semi-urban areas.

While foreign insurers are a little disappointed over rules that restrict their rights, given the potential for business, newer players are also expected to enter the country.

How the insurance landscape is changing in India - BusinessLine

Src : http://www.thehindubusinessline.com/economy/policy/how-the-insurance-landscape-is-changing-in-india/article8116917.ece

How the insurance landscape is changing in India

RADHIKA MERWIN

BL RESEARCH BUREAU

After grappling with regulatory changes, the industry is now looking at balanced products and better profitability

January 17, 2016: 

Insurers have been grappling with a host of regulatory changes the last couple of years. Here’s a look at what lies ahead.

Life Insurance

Regulatory changes, volatile capital markets and decline in financial savings have impacted the performance of private life insurers in the last five years. In 2010, the focus of the insurers was on first year premium growth and market share gains. However, post the regulatory changes in product structures, particularly ULIPs, companies have been focussing on cost rationalisation. The operating expenses as a percentage of total premium have been trending lower in the last four years.

Looking ahead, increase in financial savings and low insurance penetration vis-à-vis other countries should drive growth. Coming out of the regulatory overhang, players are looking at a more balanced product portfolio. Life insurance policies are broadly categorised into traditional and ULIPs. Within traditional policies, life insurers sell participating (bonuses declared at the discretion of the insurer) and non-participating policies (bonuses clearly defined; pegged to an index).

Non-par products, though a smaller portion of traditional polices, typically provide higher margins. Due to regulatory changes in 2013-14, many life insurers, had to withdraw non-par policies and shifted the product mix towards par policies. Players are now rebalancing their portfolios, with focus on higher margin non-par policies and ULIPs. This should aid margin improvement. ICICI Pru and HDFC Life have a higher proportion of ULIPs, while Reliance, Max Life and Bajaj Allianz have a traditional (policies) heavy portfolio. Max Life has a sharp focus on participating policies, while SBI has a balanced mix between participating policies and ULIPs. However, diversification will be important as dependency on a single product — ULIPs in 2010 and NAV guaranteed products in 2013 — can be risky.

Also, distribution mix will be critical. Over the last four years, bancassurance has come into focus as agency distribution became less cost efficient. Insurance players will continue to improve the productivity of agency channel and build a diversified distribution channel. Besides, given that the top seven players account for over 70 per cent of the private insurers’ markets, there could be consolidation of the small players who are yet to achieve scale.

General Insurance

The Indian non-life insurance sector, which was opened to the private sector in 2001, has also gone through various regulatory changes. The sector’s performance can be tracked in two phases — 2001 to 2007 before de-tariffing, and post de-tariffing in 2007. Pre-2007, premium rates of policies were fixed by the regulator except for marine and health. The private insurers had an excellent run between 2001-02 and 2006-07 — their gross premiums growing at more than 70 per cent annually during this period. In 2007, the Insurance Regulatory and Development Authority of India (IRDAI) decided to de-tariff most of the policies except for motor third party pool. This triggered a price war amongst players. Between 2007-08 and 2014-15, gross premium for private insurers grew 17.8 per cent annually. Growth has been healthy, thanks to the strong prospects in the health and motor insurance space.

However, the main overhang for this sector has been the losses on account of the motor third party pool. In 2007, while IRDA deregulated the premium for all other general insurance products, it continued to fix the tariff for third party motor insurance. The third party pool was created to make available Third Party Insurance to all commercial vehicle owners at reasonable rates. Hence, players did not have the leeway to price in the higher risk but the claims were unlimited. This led to huge losses for insurers on account of this portfolio.

In 2011, the IRDAI dismantled this pool and set up a declined risk pool. Insurers are given a minimum quota of standalone third-party policies that they have to underwrite in their books. If the quota is not met, then the shortfall has to be met from the declined pool (policies rejected by individual insurers).

However, the losses in the motor segment continue to persist because the pricing is still regulated. In the long run, however, implementation of the Road Transport and Safety Bill of 2014 which, among other things, proposes stiff penalties and streamlines the process for dealing with accidents, may help to bring down the frequency and severity of accidents. This, in turn, should help reduce claims cost.

Insurance companies have been generating losses in recent years, mainly due to the third party motor pool. But there are some signs of improvement in profitability of players. Besides, insurers have been delivering healthy growth in premiums driven by retail products, such as health and motor insurance.

Importantly, prices have dropped substantially since 2007, post de-tariffing. However, insurers believe that given the experience of players in the last couple of years, there is likely to be more sanity in pricing of products and premium rates are likely to recover from here. This should bring more value and margins to the business.

(This article was published on January 17, 2016)

Lessons from the money-spinners

http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/lessons-from-the-moneyspinners/article8089207.ece

The Big Story

Lessons from the money-spinners

Aarati Krishnan

It wasn’t the obvious stocks or sectors that created epic wealth for investors over the last 10 years. Here is an analysis of the multi-baggers

Let’s admit it. Most of us don’t invest in stocks to ‘beat inflation.’

We do it to create wealth on an epic scale. The secret wish of every stock market investor is to unearth that gem of a stock that goes up fifty or hundred-fold in 10 years, and helps him bid goodbye to his day job.

So, what are your chances of hitting upon such a stock? Is there any science to it?

BusinessLine studied all the NSE-listed stocks for which we had data going back 10 years (a universe of 788 stocks), to distil the lessons from the multi-baggers. The analysis also helped bust some common myths surrounding multi-bagger stocks.

The odds aren’t high 

First, banish the thought that buying and holding any old stock will deliver untold riches to your bank account. In the last 10 years (from December 2005 to December 2015), finding multi-baggers has been an uphill task for an Indian investor. This was a period in which the Nifty 50 delivered only a 10.8 per cent CAGR (compounded annual growth rate).

Mid and small-cap stocks didn’t fare much better. The Nifty Next50 (formerly Junior Nifty) clocked 13.6 per cent and the Nifty Midcap100 earned 12.7 per cent.

But if you were shooting for a 26 per cent return (that is, doubling your money every three years) 60 of the 788 stocks made the cut. That’s an eight in 100 chance of unearthing them.

Take the top wealth creator Ajanta Pharma. Had you plonked ?1 lakh on it in 2005, you would today be a crorepati. Eicher Motors (up 73 times), Amara Raja Batteries (67 times) and Indo Count Industries (40 times) were a few other toppers. (All stock returns in this analysis are adjusted for bonus and stock splits, and don’t include dividends).

Consumer isn’t king

There’s a misconception among investors that consumer firms are the kingpins of wealth creation, while industrial stocks are washouts. Is it not consumer companies that have a strong ‘moat’ by way of their brands, pricing power and high return on equity?

That may be true, but our list of top twenty wealth-creators features more B2B companies than B2C ones. There are four pharma companies (Ajanta Pharma, Lupin, Aurobindo and Natco Pharma), two auto ancillary firms (Amara Raja Batteries, Motherson Sumi) and even industrial plays like Somany and Kajaria Ceramics, Indo Count Industries (textiles), Shree Cement and Supreme Industries (plastic products).

The only true-blue consumer firms were consumer durable makers like TTK Prestige, IFB Industries and Hitachi Home.

In fact, the top 20 featured so many different businesses that one cannot pick any single sector that yielded sure-shot winners. Who would have thought to bet on a textile or ceramic tile maker in 2005?

In contrast, the losers list did feature one sector prominently — information technology. Eight of the 20 wealth-destroyer stocks which crashed 90 per cent-plus in a decade are from the software space.

Though the dotcom boom cracked in 2001, many tech stocks remained overheated for the next few years.

Investors who bet on 3i Infotech, Subex, Helios and Matheson at PEs of 16 to 33 times in 2005 saw both their earnings and PE multiple compress drastically, decimating wealth. Firms that turned out winners didn’t just get there by being in a fancied sector. They got there by focussing on their core business, scaling up steadily and avoiding hubris — no unrelated forays along the way.

The takeaway for investors is that to home in on real wealth-creators, you need to focus mainly on the company.

Hoping to make big bucks from identifying the next big ‘sunrise’ sector is a pipe dream.

Fundamentals do matter

Many Indian investors believe that the link between stock price performance and corporate earnings is tenuous. Doesn’t the Sensex sway daily to FPI flows? But experience from the multi-baggers shows that stock prices over the long term only respond to company earnings.

If the top 20 money-spinners delivered a 39 per cent CAGR in their stock prices over 10 years, they also managed a strong 32 per cent CAGR in their net profits over the same period. Don’t forget that this was a very challenging decade for the Indian economy, marked by two distinct downturns (2008-09 and 2012-13). Yet, profit growth for these firms ranged from 14 to 57 per cent, while their revenue run rates were 6 to 30 per cent.

Take the case of Ajanta Pharma. In 2005-06, this company was a pharma midget clocking profits of ?10 crore on revenues of ?205 crore, mainly from its bulk drugs business. Over the next decade, it proceeded to build up a basket of nearly 200 branded formulations in the domestic market and expanded aggressively into export markets such as Africa and Asia.

By 2014-15, its sales had scaled up six-fold to ?1,300 crore, and profits 30-fold to over ?300 crore.

Amara Raja Batteries, an automotive battery maker, clocked net profits of ?24 crore on sales of ?363 crore and was one-fourth the size of market leader Exide Industries in 2005-06.

Over the next 10 years, it scaled up to ?413 crore in profit (75 per cent of Exide’s level) while managing to top its rival’s return on equity. This also saw its PE multiple expand threefold to 33 times.

In fact, for most 10-year winners, the mind-boggling returns have not come about steadily through the decade.

They have come about in a short burst within three-four years when the stock got re-rated. For many firms, even as earnings steadily improved, stock prices remained stuck in a rut for many years. But once the markets started taking note, their PEs were quickly re-rated and they turned multi-baggers.

Eicher Motors, for instance, was an under-the-radar auto stock until 2008. Between December 2005 and March 2008, the stock had inched up from ?229 to ?249; but as the LCV market took off, the stock took the elevator to zoom to ?16,855 by 2015.

The lesson here is that, if a company is delivering decent earnings growth but the stock isn’t budging, you shouldn’t dump it in haste. You never know when the markets will take a shine to the business, no matter how unglamorous it may appear to be!

But the bad news is, the link between stock price returns and earnings has been equally strong for the wealth-destroyers too. It is not a coincidence that all of the bottom 20 stocks that have wiped out 95 per cent of their investors’ money have gone from profits to losses in the last 10 years.

Bargains may not deliver 

While selecting stocks for your portfolio, don’t assume the cheapest stocks in the sector are the best bets. Quite a few of the top wealth creators weren’t the biggest bargains in their sector ten years ago. With TTK Prestige at 20 times, Somany Ceramics at 19 times, Shree Cement at 18 times, Gruh Finance at 10 times, none of them was the most inexpensive in its sector.

The losers list, in contrast does feature stocks that appeared to be “value buys” in 2005. Surya Pharma (at eight times), Todays’ Writing Instruments (eight times) and Malwa Cotton (four times) started out with a low PE. But as their subsequent financial performance shows, the market wasn’t really under-valuing their prospects.

This argues against using purely quantitative filters such as low PE or low price-to-book value, to select stocks for your portfolio.

PSUs aren’t safe-havens

Hard as it is to find a unifying theme across all the multi-baggers, one does stand out — public sector firms are nowhere in the picture. For investors who think of government-owned firms as safe havens, it should be an eye-opener that the top wealth creator among PSUs (Bharat Electronics) barely delivered a 15 per cent CAGR and ranked a lowly 166{+t}{+h} in the listing. BPCL and Petronet LNG, also barely made the bar of 15 per cent.

But many PSUs — BEML, NTPC, BHEL, ONGC and PNB — fared worse. They barely matched your savings bank account, with a 2-5 per cent CAGR in 10 years. Some PSUs have lost big money too — MTNL (down 85 per cent), IOB (down 67 per cent) and HMT (down 48 per cent since 2005).

That a large number of PSUs operate in commodity sectors that are down and out today could be one reason for this.

But another reason certainly is policy intervention in every aspect of PSUs’ operations, which curtails their profitability and makes these firms unable to compete with their niftier private sector peers. If you’ve been a regular bidder in PSU divestment, think twice about weighing down your portfolio with too many of them.

Overall, all this analysis suggests that there’s only one secret sauce to finding multi-baggers — identify businesses that can consistently grow their profits over a decade. Whether the stock belongs to a fancied sector, whether it’s a value stock or a growth one, whether it is a B2C business or B2B — it doesn’t matter all that much!

(This article was published on January 10, 2016)

One only needs common sense to make money in stock market: Porinju Veliyath

http://economictimes.indiatimes.com/markets/stocks/news/one-only-needs-common-sense-to-make-money-in-stock-market-porinju-veliyath-equity-intelligence/articleshow/50475099.cms

One only needs common sense to make money in stock market: Porinju Veliyath, Equity Intelligence

By Shailesh Menon & Nishanth Vasudevan, ET Bureau | 7 Jan, 2016, 06.19AM IST

MUMBAI: A popular theme in Malayalam cinema in the 80s was one where the protagonist aimlessly boarded a train from Kerala to Mumbai for a living and made it big in the country's financial capital. Kochi-based investor Porinju Veliyath's rags to riches journey probably has all the makings of such a blockbuster of that decade.

From being a phone operator in erstwhile Cochin to one of the most influential small-cap stock pickers in the country today, Veliyath, 53, has indeed come a long way though his recent ascent has been pockmarked with criticism about the quality of his stock pickings. Some of his more recent top picks are Shreyas Shipping, Jubilant Industries, TCI, NIIT, Force Motors and Alpa Labs. The total value of his share holdings is not known as he holds more than 1% in very few companies. 

In addition to managing his own money, Veliyath handles client funds of close to Rs 400 crore through his firm Equity Intelligence. Among his other small-cap holdings are FCEL, Unitech, KRBL, Selan Exploration, Samtex Fashion, Simran Farms, Accel Transmatic, Stylam Industries, IZMO, Eastern Treads and BDH Industries. Most of these companies would not pass muster with large institutional investors. Nevertheless, these stocks have jumped multi-fold amid the mid- and small-cap frenzy in the last couple of years.

In the most recent case of Alpa Labs, shares more than quadrupled in less than three months since early September after news of Veliyath's interest in the stock got out. Another of his picks, NIIT, has more than doubled in six months since early June. These winners have helped him gain a fan following on Dalal Street. ET caught up with Veliyath in a five-star hotel in Mumbai's financial hub Bandra Kurla complex in November. After hesitating to talk about his personal life initially, Veliyath opened up about his college days, early years in the profession and his investment philosophy. His hunger to make it big was partly because of an underprivileged childhood. 

At the age of 16, it dawned on Veliyath that his family did not have enough money to fund his higher education. The home they were staying in till then had to be sold to repay the debts. Soon, Veliyath shifted to Ernakulam, Kerala's biggest city, to hunt for a job to support his family and also fund his education. 

He started as an accountant in a private firm at Rs 1,000 per month and then at Ernakulam Telephone Exchange as a phone operator drawing Rs 2,500. "I had to start working right from my teens...It was not easy. We were homeless when I started working," he said.

"Those were tough days." To save on rentals, Veliyath enrolled for the law programme at Ernakulam Law College, which offered cheap accommodation and canteen to its students. The next five years were spent studying law and routing trunk calls for the Kochi elite. After graduating in 1990, and not immediately finding any gainful employment back home, he boarded the steam engine-drawn Jayanthi Janata, a popular train for Keralites till mid-90s, for Mumbai with dreams of getting rich. Upon reaching the city, an acquaintance of Veliyath found him a job with Kotak Securities, initially as an office clerk and later as a floor trader. 

Before hitting the trading floors, Veliyath changed his name to Francis. "Porinju was difficult for marketpeople to remember; so I used the English equivalent of Porinju, which is Francis," he guffaws. Veliyath stayed in Mumbai only for nine years. But, by then, he had learnt the ropes of the trade — mainly badla — from the best in market those days. The biggest lesson that Veliyath had learnt in his stint in Mumbai was that one only needs "common sense" to make money in stocks. 

In 1999, Veliyath moved back to Kerala because he was unhappy with the quality of life in Mumbai. Soon after shifting base to Kochi, he made his first investment, mopping up as much as 8% stake in Geojit Financial Services. Geojit was trading in single-digits those days and the whole firm was valued at around Rs 2.5 crore then. "I told (CJ) George (founder of Geojit) then, his company would trade at Rs 1,000 in a few years but he simply laughed it off," Veliyath said. "The decision to buy Geojit was fairly a simple one; here you have a dividend paying company having capital market exposure, clean management and no debt — all for grabs at just about Rs 3 crore. It was an easy decision," he said. 

The stock may not have touched Rs 1,000 but Geojit touched a high of Rs 280.65 in September 2006, helping him make big money in the investment. BNP Paribas acquired 34.5% stake in Geojit in 2007. This was the beginning of some larger fortunes to be made from the stock market. Armed with the newlyacquired wealth, Veliyath bought back the land his family sold decades ago to repay debt and built a luxurious farmhouse on it. Veliyath claims his investment portfolio has generated 33% compounded gains every year since 2003.

This could not be verified independently as portfolio advisors are not required to officially declare comparative returns. Veliyath's investment philosophy is far from conventional. He does not base his strategy on financial ratios or business cycles; on the contrary, it defies various established investment parameters. Many stocks in his portfolio are illiquid, while some of them do not make sense to orthodox stock pickers. His recent interest in some small-cap real estate companies have raised eyebrows.

"I feel there's price for everything. If a company is doing well and has good future prospects, ethics and corporate governance should not come in the way of your investments," said Veliyath, defending his investment strategy. "I don't keep any market cap limits nor do I believe there's value in buying big companies at obscene valuations," he said. "Illiquidity in a stock is fine by me. In fact, only because it's illiquid, these stocks have not grown in value," he added. Detractors dismiss Veliyath as a rash stock-picker with 'little regard for quality'.

The more acrimonious ones simply feel he is in cahoots with friendly promoters. "I don't befriend management for insider information," Veliyath said. "I buy lesser-known, high quality businesses to derive maximum portfolio value. I don't shy away from smaller companies like other 'knowledgeable people' do." Veliyath quips as an afterthought: "I don't buy a lot of great companies with clean balance sheet, honest management and clear business visibility. If you invest in such companies, even bank FDs would beat your portfolio returns." 

2007 - Warren Buffett Responds to Shai Dardashti’s Question

http://www.fatpitchfinancials.com/556/warren-buffett-responds-to-shai-dardashtis-question/

Former value investing blogger turned private capital manager, Shai Dardashti asked Warren Buffett a very interesting question in a hand delivered letter this past January. Amazingly, Shai received an answer to his great question this week.

In his letter, Shai asks just one question:

At the Q&A I arranged you told me that today (May 23, 2005) you were “85%
Graham and 15% Fisher.”

If you were today 20-something years old, again looking to allocate less than $10 million, and free to allocate capital into well over 8,000 opportunities (before even considering anything overseas), would your Latticework of Mental Models primarily be searching for:

 a) Situations reminiscent of 1957 – akin to Daehan Flour Mills, or
 b) Situations reminiscent of 1987 – akin to Moody’s Corporation?

In response to Shai’s 1,091 word letter that accompanied the question above, he got a to the point, eight word hand written response from Warren Buffett.  Mr. Buffett writes:

“Either is fine.”
“[a] Better for small sums.”
“[b] Better for large sums.”

My guess was that Warren Buffett would recommend primarily searching for situations similar in quality to Moody’s Corp (MCO). However, Buffett pretty clearly indicates that for investing small sums, situations reminiscent of 1957 – akin to the Daehan Flour Mills opportunity in South Korea in 2002 are better. Those situations reminiscent of 1957 follow the Graham approach to value investing that focuses on very low PE and/or net assets per share greater than the current trading price.  You can view Warren Buffett’s actual response, which is attached to this letter from Shai Dardashti.

I must say, this response from Warren Buffett has me rethinking some of my investment strategies.  Is finding a company with a durable competitive advantage selling at a price with a margin of safety not quite as important as I thought?  Should I be also looking for deep value opportunities in net-nets and low PE stocks?  I’ll be thinking about these questions for quite some time.

Great opportunities still available in small, mid-caps - Ramesh Damani

Src : http://www.btvin.com/article/read/news/3942/-great-opportunities-still-available-in-small--mid-caps-

Abha Bakaya and Priyank Lakhia  | January 05, 2016

ABHA: How will 2016 fare for the markets? How to manage those expectations because even now investors are hoping for some kind of astronomical returns from equities?

RAMESH: That never happens. The richest man in the world Warren Buffet compounds his money at 21 per cent. If you can move your money at 21 per cent or double your money every three years you are doing absolutely fine because then the power of compounding picks up. As the base keeps growing you will end up after 25 years of investing fairly rich. So that’s really the magic. I hope 2016 is more like 2015. Market rewards efficient capital allocation. It is not supposed to reward ETF investing, index investing and large cap investing. It is supposed to reflect long term risk and long term growth prospects, which is exactly what the market did this year. I think you had the best market for stock pickers. You had moves in large cap, small caps, PSU banks and just about across if you had picked your stock correctly.  

PRIYANK: This rally and excitement that we are seeing in the market. Do you believe that will sustain in 2016 as well?

RAMESH: I think it will. The real GDP is ahead of nominal GDP because of deflation. The real interest rates are attractive, so savings are coming back to India, savers are getting rewarded and mutual funds are experiencing $1 billion a month in flows into their accounts. Now when they are buying large caps they met by selling from FIIs but while they are buying small and mid-caps these are virtually under owned shares, those are spiking up. Money is coming up and market is being very efficient about rewarding good corporate governance and it is tax free so it is great for Indian investors. There are great opportunities still available in small and mid-cap for investors.

ABHA: Talking about the money coming in the market, how do you see the liquidity situation?

RAMESH: I think domestic liquidity is very strong, and continue to remain strong. We are getting $1 billion a month coming into Indian equity funds. They are finding opportunities. Domestic money is good and will continue to remain strong. Indians have finally discovered equities are a good way to go, dividends are tax free and you need to move to equities. The process is slow but is happening. Foreign liquidity remains a question mark but I think India will stand out. Foreigners have been selling—it has mainly come from the sovereign wealth funds. But at some point after corporates earnings are up and country growing at 8 per cent, money should come back.

PRIYANK: What are your expectations when we talk about the banking sector?

RAMESH: Something that I have avoided all my life is investing in PSU banks because there is clearly a latent problem out there. It requires surgery to solve the problem. It is not a sector that I am very positive on.

PRIYANK: Taking a cue from the NBFC space, what are the other areas you are focusing on because NBFC was some of the hot pockets? Would that be a space you will watch out for?

RAMESH: I have some old investment in couple of companies that I will not recommend at this point. But owed Sundaram Finance and Gruh Finance and others and continue to like them. In terms of other sectors that I like I have often recommended media stocks to you and they are now breaking out the pact as whole. You have already seen the content companies break out. I think we will follow all the dish and cable companies now breaking out. So media as a whole sector looks very promising to me. I think there is a lot of value left over the next few years.

ABHA: Logistics was something you looked at very closely last year and it did not deliver as expected. Will it remain on your list for 2016?

RAMESH: Logistics will do well but they are not well priced. Stocks are up—some of them are 4x, 5x or something in that nature. What we try and do in the market is find the unknown because we get them cheap. I think value investors always hunt for things very cheap. I still retain a position in logistics. I do not think it in the bargain basement anymore. I would keep up on the holding but probably would not buy them.

PRIYANK: When we talk about the media sector and the potential out there, what are the recent changes taking place? What kind of potential do you see in content companies?

RAMESH: It is pretty enormous. I do not know how it plays out. It is very difficult. It is a huge challenge. But I am not sure which of these will work—cable, dish, internet—but people will want content. No matter what you do, you want something good to come on your laptop, PC or smart phone or your television. The first line of investing in media is to look at the content companies because that is where the big driver is. So you know whether you look at news or sports, if you can produce content, tap into digital, music, tunes, that are a good productive place to be in.

ABHA: What are the other themes that are going to emerge in 2016?

RAMESH: One that has caught a lot of people in Dalal Street is aviation. At some point Jet Airways was available for Rs 1,600 crore market cap—they built a fabulous airline over 20 years and company ran into trouble because of high oil prices. But things are coming back. IndiGo Airline was a wake-up call to the people. My sense is they will go from being under-loved to over-love because these are actually impregnable businesses. Industry is consolidated. Very few new entrants are going to get into this business now. So we are going to have these 3-4 players. Fuel, which is such an important component, is now sharply down and looks like it is going to remain down. They have also become ruthlessly efficient. These people have broken up their services and start charging you and I think profitability will return to this industry. Airline sector will move from being under-rated to probably being over-owned before it peak out.

ABHA: Do you see a turnaround story for hotels this year?

RAMESH: Hotels rooms are pretty much at sold out capacity, prices are still low and the minute they start raising the prices they start coming to the bottom line so I think it is a good area to look at in 2016.

PRIYANK: You said you were looking to increase the exposure to real estate side. Housing supply or housing product is something which has seen a lot of excitement with the government focus on new agendas as well, do you believe that is really a space, would that be a theme you would look at?

RAMESH: Absolutely, I have some good investments in major property companies. But you need interest rates to come down for that sector to start booming, if you see interest rates doing down by large margin you will suddenly see this sector flourishing. A lot of larger companies are taking strategic steps to clear of the debt from the balance sheet, go back to a good corporate governance model but at these prices I believe to tolerate higher prices or slow growth rate because these prices are throwing them away. I have never been a big fan of real estate stocks but for the last couple of years I have looked at them very aggressively because they are actually throwing these things away.

PRIYANK: Is it safe to conclude that the market is still very much a bull market?

RAMESH: Absolutely, no doubt about that. Last year so many things happened but the market kind of soldiered through all of that so I think will be able to do that again; the bull market that started is still alive. Money is being made on Dalal Street. Instead of watching just the headlines you should watch which stocks are doing well. Money is going to be made and bull market is a long way to go and we are still in the productive second phase.