madhu kela: Where will we see higher earnings & PE expansion? Madhu Kela points to sectors that will yield hidden gems

There was a time when FIIs would sneeze and markets would catch a flu. The number which we would always look at is what the FIIs were selling; but the number which we get very happy about in the morning is what domestic institutional investors are doing. This is a mega trend but is it here to stay?
I would say this is definitely here to stay for multiple reasons; a) the number of investors participating in India has gone up from let us say 2, 2.5, 3 crore to roughly 9 crore today. People have tasted the blood. Many people call it a suckers’ rally. But it does not look like one to me at least.

The domestic money is here to stay because when we look at the domestic money in the context of our GDP, the affluent saving and still the amount of money which is coming to the retail public, there is still a disconnect.

Second, where are the alternatives? If I am not doing equity, what do I do? I get 5% in the bank deposits. If I pay 35% tax, then I am actually decreasing my money and not increasing it. I can put some in gold, I can put some in property but ultimately equities will have to be the answer.

Also, when I look at the absolute size of the GDP and absolute saving, still the money looks small and when we see the investor number go up from 3 crore to 9 crore, we are all getting excited because it has happened in a short period of time during the Covid pandemic. I think this is definitely here to stay and it is a coincidence that all these guys came at the absolute right time and they have made money.

The only word of caution which I would like to put here is that let us not extrapolate in our minds what has happened in the last two years because we have made tremendous money, there will be 100%, 200%, 300% average return on a lot of companies. Once you start extrapolating that in your mind, then you will definitely get disappointed because making money in equities were so easy then why will any businessmen do business they will only do share market business right because when I put money in a company, if it is a good company, I make 18% ROE. So how come, some entrepreneur who is making 18% ROE will allow you to make 200-300% return on his own stock?

So we are back to basics, we are back to stock specific, we are back to reasonable returns and be prepared because after so much money being made, be prepared for the volatility. You may call it agnipariksha, you may call it volatility. You may call it a routine test of the market but be prepared for it basically. It could come for any reason, it could come for global, local, oil price etc. but the view always tends to be mean reversion.

If so much money is being made, there is a possibility that there could be some hiccups down the line but personally, if that hiccup were to happen, I am a buyer for Indian equities from a five-seven year perspective.

Are you fully invested in this market apart from little cash here or there?
Fully invested, little leverage but sensibly I would say.

You are called a market maverick. Will you tell people how to invest and more importantly where to invest?
Just to clarify, I did not mean that this 9 crore will become 18 crore investors in the next one or two years. I mean in the longer term horizon because there is no real alternative to equities. Hence this volatility.

There has been a tremendous clean up in corporate India in the last two, three years,. A lot of companies have made a lot of money and the leverage on the balance sheet of companies has come down considerably. In the last five, six years, the competition in a lot of sectors has receded very significantly.

So for those who have a very strong balance sheet, I do not think there is a real dearth of opportunities for those companies and subsequently for investors. So you have to just do your work properly, if you have done your work, if you are a bottom up investor, I would be very disappointed if I did not make high teen CAGR returns in my portfolio in the next five years.

Where do you think there is a possibility of this kind of return? For stock prices to go higher, market price is a function of EPS x PE. Where do you think earnings will go higher and PE will expand?
I am not trying to evade the question but I would hate to say a particular sector because ultimately even from that sector one has to buy companies because if one had identified the auto sector three years back but bought the worst company, that does not mean that you have done well.

I see maximum opportunity in the next five years in manufacturing, China plus story. Basically. it is here to stay. Our costs have become very competitive. Let us say you talk to companies like Dixon. This manufacturing was not possible in India five years back but they are now saying that maybe we are 2-3-4% away from China including the benefits of the PLI scheme which the government has announced and which covers a wide range of sectors.

So try to find companies that are doing well domestically and also have a large export opportunity. I will give an extreme example. Look at the EPC companies. The total market capitalisation of all companies put together ex of L&T is less than Rs 50,000 crore. No one has made money in the last 15 years but that is where you make money when the whole world hates it. That is where the gems are hidden.

So I, as an individual investor, would like to really search here. There is no doubt that the government over the next two, three, four years will invest an enormous amount of money on infrastructure and it is already happening. If one sees how the sector has evolved in the last 10 years, there are so many companies which have disappeared. So, competition to that extent has lessened. I would say the buffet is laid out.

What about the India growth story? What about the PLI scheme?
Just put this PLI into context. The government has said that they want to give Rs 2 lakh crore of PLI thus roughly 5% on the turnover, which effectively means companies will have to do Rs 40 lakh crore turnover to avail this Rs 2 lakh crore. If I do Rs 40 lakh crore turnover on an average of say 15% EBITDA, including good, bad and ugly, you are talking of Rs 6 lakh crore of incremental EBITDA happening only because of PLI schemes. And it is all likely to happen in the next five years.

You got two lovely daughters. I am sure your daughters would be asking you about investing. So what is Madhusudan Kela the investor telling his daughter about investing?
Unfortunately my elder one is only interested in arts so she does not ask me such questions. But the younger one is quite curious. She is only 14 years of age and whenever time permits she catches me and I tried to explain to her that you are born at such a brilliant time, you are born in a country like India and the world is waiting for you. Believe in the country and invest in equities.

I thought you will say give money to Prashant uncle (Prashant Jain) or Nilesh uncle (Nilesh Shah) and not to papa?
I would say be atmanirbhar (self-sufficient).