We have hit a pause button. Is this the calm before the storm or a pause which in a sense in hindsight, would be considered as a great buying time?
My personal view is that it is a great buying opportunity because I always believe that human brain is wired for the short term. I try and connect history with the current situation. It is nothing to do with whether history repeats itself. I think history repeats itself because it is all about human behaviour. So the way humans behaved when there were a similar situation and I think the behaviour will continue to be the same so that is the reason why I believe that we were in most of the situations which we came across between 1998, 1999 to 2003 we have seen a repeat of almost all those situations in the recent past. Give me example of what you are referring.
1998-1999 we had the banking crisis, banking NPAs went up to 10%, then government had to restructure the banks. They had to put in a lot of money into the banks. We had one of the worst periods between 1993 to 2003 when virtually market had not given any returns. Most of the infrastructure stocks had come out with bad results. And we had in 2001, we had 9/11. Prior to that, we had SARS. Because of that, there was, of course, it was not as bad as what we had seen recently. But still, it was pretty bad, especially in Asia and Southeast Asia. Then we had Iraq war. So there were a series of events which had impacted the markets between say 2000 to 2003. We had seen a similar situation. Now we had bad NPAs in the banks which now have corrected and now we are at 1.5%-2%. Recently we had COVID which impacted. We have a Ukraine war as of now. So I remember reading a communiqué from Reserve Bank of India in 31st March 2003.
Not 23, 2003.
That is correct, 20 years back. So which went on saying that though India is the fastest growing economy as of now in the world, we still have worries about the global growth. It is likely that most of the global growth will fall below 2%. In fact, some of the countries may go into recession as well. We do not know how the impact of Iraq war will be and it could hit India’s future as well and because of all of these things, we are extremely cautious. And then RBI had also increased interest rates at that point in time but things changed. We had a GDP growth of I think 3.8% in 2003, we went up all the way to 8.5%.Even oil prices went up during that time so we are seeing a repeat of that as well.
Let us assume that the setting on the table is pretty much the same which is we are in a depressed global growth environment and commodity prices could go higher as growth comes back. So while the setting on the table is same, I would say that the cuisine is different which is that you had China which started leveraging and started the insatiable appetite to consume from China came between 2003 and 2008 that will not happen again. The central bank’s balance sheet was at a much different level in terms of the debt levels and ability to spend; now they have to contract the balance sheet. And third and the most important aspect is the starting point of valuations. So the setup may look like the same, but the underlying circumstances are also different.
Okay. Let me come to valuations first. So most of the infrastructure companies were showing losses that time so their valuations were infinite frankly so that is as far as the infrastructure companies are concerned. As far as commodity companies were concerned, so commodity I think we have seen the first wave of the boom already there. So there are certain things which can change two-three years here and there. Same thing happened with hotels also. I mean hotels if you see, if they are in losses, the PE’s can be infinite and that is what we have seen till a couple of years back. But I remember Indian Hotels going up 10 times that time as it came into profits.
2003 to 2006 Indian hotels went up 10 times.
I think it is very similar. Yes I agree that in certain cases valuations may be high like at that point in time retail was not the flavour of the season but the growth had just started. They had just entered businesses. I mean whether it was Trent, whether it was Future Retail, most of them had just come into the market. Even Bata was at that point in time not doing so great as it was doing a few years back, now of course there has been an impact.
Of course, the per capita income that was significantly low. So yes the cuisine is different but the appetite still remains the same. In fact the appetite probably is higher and because of that I do see a repeat of 2003 to 2008 that could happen in the markets. And yes as far as China is concerned I think India can replace China. What happened between 2003 to 2008 in China, maybe India will drive it this time. If the markets have to go the 2003 and 2008 way, that time it was not TMT but it was old economy. It was power, it was infrastructure, asset owners actually outperformed. Are we in for that trade again because that trace is visible; NTPC, Coal India, these asset owners are coming back. L&T hit a new high yesterday.
Yes, it did. So industrials are likely to do very well. And there is one more similarity when at that point in time government spent again a lot on infrastructure. But at that point in time it was power infrastructure. This time they are spending on power as well as railways. So there is a possibility that industrials can do very well going forward. But again what I have seen in the markets is that the leaders of the previous rally normally do not lead.
So last time we had seen companies like Voltas going up 40-50 times, Larsen going up 25 times, ABB going up about 40 times, Crompton Greaves going up 100 times, Thermax going up 60 times so that may not happen.
What will go 40-50 times in this rally, in this leadership this time?
I have not been able to identify something which will go 40-50 times. But I think anything to do with consumption. And the reason I will tell you, I do believe that overall the per capita income can move from $2500 to roughly about $5000-$6000 dollars and if that happens the boom in consumption can be phenomenal. So I would still continue to identify companies in consumption which can do very well going forward. So I am not saying that like last time market may go up six-seven times. We have already gone, we have doubled ourselves. So maybe a double again from here possibility but within that which will go up five-six times as of now, I think if one wants to take a bet it would be in consumption.
Most of the consumption stocks are trading at PE multiple which are north of 50 that is the benchmark. History, since we are examining history here, historically when PE multiples have gone to north of 50, the future returns are always compromised. So why do you think history this time will not play for consumer stocks?
I will give you an example in apparel. I think overall apparel market in India is about 7 lakh crores and there is a 8 to 9% growth in the apparel market year on year so that means about a Rs 60000 crore growth is there in the market. If you add the sales of all the organised retail, it still does not add up to 60,000 so that is the opportunity. So if the opportunity is large, these companies can grow at 35-40% year on year for next 10 to 15 years also. And that is the reason why the PE multiples may not contract but at the same time, those 50-60 times seems to be difficult.
