Bull run is getting bigger! There are 70 million bulls in the market now, says Raamdeo Agrawal

After a big run we will have a consolidation or maybe some correction for some time. It is not necessary that from one Diwali to next, if one makes 50%, it will be another 20-25% in next Diwali. That is not a given, says Raamdeo Agrawal, Chairman,

Motilal Oswal Financial Services


After a year of re-rating, solid price action, earnings comeback and recovery, what is in store for us? Bulls are back but are they here to stay?
Not only are bulls back, I think many more bulls are coming in. That is the biggest change this time. It is not the same number of bulls who are going to play in the market. In 2007-2008, there were just about 10 million bulls. In 2012-2013, there were 20 million. By 2021, there are 70 million bulls! I am talking about the Indian bulls and my sense is that in the next three years, it will be anything between 150 and 200 million bulls. So you can decide how big the bull run is going to be here!

Bull runs ultimately are a reflection of the economy which gets captured in earnings. So while earnings recovery and earnings trajectory are headed in the right direction, valuations are way above the historical averages. If the inflationary environment comes back and interest rates go higher, value stocks will start coming down.
It is quite possible that after a big run we will have a consolidation or maybe some correction for some time. It is not necessary that from one Diwali to other Diwali, you made 50% and so next Diwali has to be another 20-25%. That is not a given. Maybe it is flat, maybe it is a little over. There are so many IPOs.

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Incrementally there will be that virtuous circle from stock market to the real economy, real economy to demand revival and things like that. So, the market can take a breather and that will be very good as other people will come in and corporates get the money. Some people are getting more than what they should get and valuations are quite stretched. So let the market stop here in terms of run and let the primary market take what it can take and let the valuations there become reasonable and let the earnings also catch up. But the bull run is not about 6 months, 12 months, 18 months. My sense is this run is going to be a much longer run. If we do not get too high too quickly, then this run has steam for a much longer run.

For next two to three years, let us pide the market in three pockets; where do you think markets are likely to give low returns? Where the markets are likely to give no returns or negative returns and which end of the market is still capable of giving parabolic returns?
It depends on a lot of external factors. The economy still has to recover. The slowing economy and Covid had given a kind of fatal blow to the financial sector books. All the books can be provided for and a new credit cycle is going to start. My view is that the entire financial sector — be it NBFCs, banks or even insurance companies, all the intermediaries — are going to have a much better time in the next two-three years.

In any case, IT and other sectors are also doing very well. It is going to be a good mix. The real estate sector has not been participating in the market after 2008. Now real estate is in a new cycle thanks to low interest rates and massive liquidity. How that can boost real estate which in turn will boost tile companies, cement companies, steel companies and contracting companies, I think it is going to spread out.

We have to buy reasonably good companies at reasonable prices. So buying a great company at a reasonable price is the whole idea. It is very difficult to chart out the next three-four years. We have to see what the government policies are and where exactly the government is going to be comfortable because we have seen a lot of disruptions in the last five-six years.

But if there is any other disruption coming in from the government side in the next two-three years, then the story could be very different, but otherwise, in natural course the economy will recover.

Is India in for a multi-year bull run like the US? Here’s what can extend it further

A combination of technology driven businesses, consumer facing businesses and manufacturing led businesses are going to basically have excellent times going forward, says Nilesh Shah, MD & CEO, Envision Capital.

We are discussing a bull market like never before. Where are we headed? It is a bull market which has not seen a correction. Are we in for exciting, better and unbelievable days ahead? I want to draw context to what has happened in the last 18 months.
Absolutely. I still believe that we are at the start of this round of the bull market and this is a bull market which is going to last for several years. This is not some kind of a flash in the pan. This is not a bull market which is going to be short lived. This is not just one ordinary up trend. These are extraordinary times for India and I believe that this bull market is going to extend for several years. Just look at how the markets have risen from the lows of March 20 but that may not be the right way to look at it.

We are going to see what India has done over the last five years or ten years as a market and in that context, we are probably still around high single digit or low double digit returns and bull markets do not end with these kinds of returns. Bull markets probably end when the returns are terribly extraordinary over five to ten years and I believe therefore that this bull market has a long way to go. This is going to be a multi-year bull market.

I still believe that the absolute peak is still several years away and this is again stemming from the kind of reforms that have happened in India over the last five years, the transformation which has happened. We have seen the J-curve of that. We are going to see solid business momentum over the next several years which will continue to translate into even a much more vibrant and stronger bull market.

Are we in for a bull market like the one currently is in the US? It is a 12-year-old bull market that is still alive and kicking. History tells us that normally bull markets last three to four years maximum. Are we in for more this time?
We could easily be in for more and that is clearly because today what India offers is basically size and scale. We are a way bigger economy than where we were 10, 20, 30 years back and the big advantage that India has versus say US or China is that in the last 12 years of the US, it was a bull market driven by technology.

In the past, in China we have seen a bull market driven by manufacturing. I believe going forward for the next 5, 10, 15 years, we have both sides — technology as well as manufacturing and therefore the breadth of businesses are going to grow in a pretty strong and disproportionate manner and is much bigger than what the US or China alone had. A combination of technology driven businesses, consumer facing businesses and manufacturing led businesses are going to basically have tremendously excellent times going forward.

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For the bull market to go higher, earnings have to go higher. If earnings have to go higher, the shape of the economy will change. So if India has to go from $3 trillion to $5 trillion economy, what will be the shape of the economy because that will decide the next leg of outperformers and underperformers?
The $5 trillion economy is going to have significant contributions from different areas. But the sector which today probably has less than 20% share in the overall economy is manufacturing and industrials. The share of that is going to increase quite disproportionately and that is driven by a lot of the reforms which have happened which directly benefit the manufacturing sector. Increasing cost competitiveness and the increasing need for global companies to de-risk has made India a very vital component of the global supply chain.

We clearly believe that manufacturing will become a much larger part. Within services, it looks like technology led businesses, digital businesses will have a much higher share versus what the share is right now and therefore all of this will get reflected in terms of their valuations, market capitalisation and share in the overall market capitalisation as well.

We believe that it is going to be manufacturing led and technology led businesses which are going to thrive in a quite significant manner and on top of that overlay, those kind of consumer businesses which today are small but with the help of technology and with the help of digitisation will be able to reach out to millions of consumers across the country in one stroke. Those are the businesses which will grow disproportionately over the next several years.

But isn’t the thesis of how technology will change and how product/technology enablers will create wealth in the price already? Is not the market pricing in not FY23, but FY24 and FY25 blue sky scenarios.
Optically, the PE multiples are surely challenging. These are the kind of PE multiples for specific sets of stocks which give you any comfort as an investor. Today we are probably still kind of looking at these kinds of businesses growing at close to 15% to 20%. It is quite possible that some of these businesses could grow north of 20% for an extended period of time. These companies are very different from where they were five years or 10 years back. The skill sets have changed. The competencies have become very different. They have become hugely relevant for many more companies across the world and that to me is probably a big-big opportunity.

Some of these businesses which today are probably just around a billion dollars in terms of revenues, could become significantly bigger. They are not into the traditional stuff of application, maintenance and development. These are the companies which are creating cutting edge solutions for their clients who want to adopt digitisation and want to grow their businesses. These kind of companies have the skill sets to create those digital solutions in the fastest possible time span and these are the companies which are addressing very high growing sectors — healthcare, media, communications, consumer electronics, internet of things.

I believe that maybe they can grow at a rate even north of 20%. If that were to happen. I would not be surprised if in some of these cases, the higher valuations sustain. Of course that does not mean we won’t have intermittent corrections. There will be intermittent corrections where some of the stock prices could get knocked off by 15-20% also. But that does not mean the party is over in these kinds of stocks.

So what is the justified PE multiple or the IT sector? I will paint 12% to 15% growth for FY23 as margins remain north of 20%.
If that is the hypothesis, which means that growth rates of low teens and margins of maybe high teens, then the current stock prices probably reflect what is going to happen in FY23 or FY24. But if you get to a state where there will be a very limited set of companies which probably will deliver revenue growth in excess of 20% and therefore will be able to cross the 20% EBITDA margin threshold and expand it to 22-23-24%. The impact on the earnings growth is going to be stupendous.

Keep in mind that the biggies already have 25-26% margins. Infosys, TCS make 25-28% EBITDA margins if not EBIT margins. If a handful of some of these tier II technology services companies which are into the new growth frontiers, end up growing close to 20% in terms of revenues and are able to manage to kind of get to 25% of EBITDA margin if not in a year but maybe over say three years, the impact on earnings, the impact on bottom line is going to be phenomenal and that probably is not yet completely priced.

( Originally published on Oct 14, 2021 )