The central government has full power with a clear mandate, but guidelines from the Center must be properly implemented at the state level. So there are many things that Modi is still not in control of, said Raamdeo Agrawal, Joint Managing Director, Motilal Oswal Financial Services in an interview with Narendra Nathan and Sanket Dhanorkar.

Are we looking at a multi-year bull run?

I think the market hasn’t priced in the full potential of the economy yet. For the first time, a genuine nationalist has come to power with a clear majority. There is a new found energy all over the country. I feel that the market has not yet understood the difference between 300-plus seats for NDA and 272-plus seats for BJP alone. Look at how the cabinet posts are allocated – BJP allies have limited posts and their bargaining power is reduced. Full power is in the hands of the government. The political scenario is now drastically different. The economy is on the brink of a historically positive change.

It’s the same vehicle, but the driver has changed. It is now driven by a Formula 1 driver. So the acceleration will be dramatic. It will become visible very soon. Today we are growing at 4.5 percent. Growth is likely to pick up quickly in the coming years. A lot will happen in five years. It will be interesting to see the index level at that time. In the process, investors will make tons of money as the market will discount that growth two years in advance. It will not wait for the fifth year. If all domestic and global factors align, markets will go through the roof.

Are there challenges to the fragile economic recovery?

The current optimism is because an important variable – the chaotic political setup – has been corrected. There is no doubt that the new government is fully empowered in these elections; the mandate has been given to a highly competent person. Everyone is bullish right now. But one must have tempered expectations. Finally, the Center’s guidelines must be properly implemented at the state level. Otherwise it will be a waste. There are many things that Modi still doesn’t get their hands on.

Many other factors will also play a role. Good monsoons, favorable global environment, peaceful borders, etc. can change the whole scenario. But only time will tell how many stars will align. Much will therefore depend on external factors. I’m also looking closely at how the new government is tackling inflation, which is just a symptom of a much deeper problem elsewhere. The government must tackle bottlenecks on the supply side. A weak currency cannot make a strong country. That is why inflation has to come down. It will be the beginning of development, investment, and so on.

The rally so far has been driven by hope. When will the fundamentals take over?

News headlines and making money are two completely different things. We should not get carried away by the headlines. The focus should be on who will actually make money. In most cases, it will be a business making money now. Very rarely will a company that is out of business today make money tomorrow unless the business dynamics changes completely. Today we have nothing to rely on. So wherever there are anomalies in the economy, they will return to normal levels. Right now it’s all about the promise of a better future. Some of these commitments will have to be reflected in the budget.

What should be the first priority for the new government?

India needs to become much more businesslike. Finally, the country needs to create jobs for its growing young population. Who will create these jobs? More than the government, it is the companies that will create jobs. Companies can only create jobs if the business environment is favorable. Nor can they sustain growth without creating jobs. The government must therefore become business-friendly. All obstacles must be removed. We need to take more risks for companies because this will result in more jobs.

Will mid-cap stocks continue to outperform large-cap stocks for now?

It really depends on the company. Midcaps lagged for quite some time; small caps even more. Eventually it should converge. Large caps now look high priced. Investor appetites are limited at these levels. Most of the action takes place in the low-end, low-priced segment. Smaller investors are clearly buying low-quality stuff, assuming the price is low. But even if it goes to an area with high ratings, the low quality remains. This is where the whole game ends. Of course, high quality stocks are expensive right now. But that doesn’t mean you have to have clutter in your wallet. If you find quality at a reasonable price, buy with modest expectations. Such names are rare. But even if you get 3-4 such ideas in a year, you can make money. The challenge is to be patient and keep the investment. Filling with junk is going to be a disaster, but when it works, you end up with a multi-bagger. High quality investors may underperform in a recovering market, but will outperform over a cycle.

Can we expect a profit upgrade soon?

A profit upgrade of 12-15 percent is certainly possible this year. As the economy recovers, sectors such as cement, steel and automobiles will accelerate. Oil & gas can also contribute to profit growth. Right now, corporate profits contribute about 4 percent to GDP, which is near the bottom of the band. At the peak of a cycle, this can be as high as 7-8 percent. Assuming a nominal GDP growth rate of 13-14 percent, it will double in rupees to Rs 220 trillion in the next six years. Now the question is whether the current profit will rise from Rs 4 trillion to Rs 8 trillion or Rs 16 trillion. If it maintains the current ratio, it will go to Rs 8 trillion. If it hits the top of the band, it will go to Rs 16 trillion. If this happens and the PE multiple stays the same, then the market will rise four times. Profits will increase as the economy moves from 5-6 percent to 8-9 percent growth. Therefore, there is a potential for the market to move into the stratospheric levels from here.

This post Raamdeo Agarwal: We may see rapid growth in the coming years: Raamdeo Agrawal

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