저자: CNBC-TV18 · 외국인
다듬은 글
welcome back to this special chat with Ramdeo Agarwal of Motilal Oswal. We've been speaking about their 28th wealth creation study report, as well as the new boom that we are seeing in equity markets.
Ramdeo, you've written about this hockey stick move in some stocks. You told us about all the Astrals and the JB Cams. How do we pick the next hockey stick stock?
Yeah, that hard work has to be done by the investor himself. I have given the framework. We read the book, *The Hockey Stick Strategy*, and *Beyond the Hockey Stick*. I think it's a fantastic book on the strategy, very practical. If you read the book and figure it out, they talk about the concept of economic profit.
The first thing is economic profit. We've done accounting, and there we talked about net EPS and net profit. But the very simple thing is that when you compute net profit as per accounts, you charge for debt, you charge for everything, but you don't adjust for the cost of equity. If you just take a simple approach, instead of going through alpha and beta, and take the cost of equity as 10%, because returns over the last 10 to 12 years have been about 10%, then you apply 10% to all companies, you arrive at a different picture.
We've given an example. Take IOC and Nestlé, or something like that. One company uses one lakh crore of equity and makes a profit of say 5,600 crore. Actually, there's an economic loss. Whereas another company makes, say, 2,000 crore profit or 2,500 crore profit but uses hardly 2,500 crore of equity, so the economic capital charge is about 250 crore at the rate of 15%. So its economic profit is about 2,250 crore, whereas the other company, though it looks giant, is actually an economic loss. That's why the market has punished it. The market cap of the smaller company is much bigger than the market cap of that large giant company. In the market you cannot explain all the difference in valuation this way, but yes, this explains what the market values. We are not practicing it, but the market is practicing it somewhere.
If by your logic of economic profit, you've given us a list, I'm trying to find it in your list of companies with the highest economic profit rather than accounting profit. I think SBI, NTPC, and their day has come. TCS is the largest, with about 30,000-plus crore of economic profit. We've given the entire Nifty list, showing where they stand in economic profit.
What happens is some companies, like Reliance, don't show up as economic profit companies, but they are an amalgam of three or four large businesses. They make tons of money in economic profit in their original business, but they are probably investing in Jio, Retail, and a whole lot of other things. That's why such fused companies look like they're not making economic profit, like the petrochemical business. It's a sum-of-profits situation, so one has to analyze it carefully. But when you look at single-stream, simple companies, their economic profit, as a concept, is worth pursuing.
What this study is about, the book is about, is that you must measure the success of companies in terms of economic profit. Economic profit is distributed in a power-curve situation. The top 20% of companies hold about 80% of the economic profit, and the bottom quintile holds the losses. The middle three hundred companies are all going nowhere. So you look at companies migrating from the middle to the top quintile. What it takes to go from the middle to the top quintile is the hockey stick journey. When companies do hockey stick earnings growth, the market rewards them with super-heated returns.
So the measurement is economic profit, and the way to go about it has three steps: endowment, trend, and execution. Endowment: any company starts its journey with some kind of endowment. They have competitive advantage, brand, distribution, people, business relationships. Those are the starting points. But endowment alone isn't enough.
That's where trend comes in. I'm the one who will keep saying this, and there cannot be a better person than me to talk about the benefit of trend. In capital markets, over the last 10 to 12 years, we've done so much corporate action, whatever is possible. We've turned the mountain, I'm telling you, and yet nothing much happened. We did well, you saw it, 2008 to 2018 was basically a lost decade despite massive action. When I look back, nothing happened because there was no trend. From 2020, the trend started, and we are literally up 10x in three years in terms of profits. That's the power of trend. It's massive.
Every business has a trend now. You just spoke about the government being into capex, and if they spend the money and private capex follows, do we look for capex companies? There's a trend everywhere. Multiple trends. It's like playing Scrabble, where your opponent can't see what trend you're seeing in the board. The whole universe is full of trends. Something is happening in AI, something in real estate demand, something in the cost structure of cement companies, something in cement pricing. You have to find the trend you can bet on. Trends can be short-term, long-term, cyclical, secular, all sorts. But you can keep thinking about trends without a positive one. It's like Skeletor on top of a running person: when a company's trend is a headwind, you're going to come down while Skeletor goes up.
If you were to pick the top two or three trends staring at us, what would they be?
The newer ones are the rise of the capital market, which is very close to me. Second is the savings boom in India, from 10 to 12 trillion over the last 25 years to 100 to 125 trillion of savings. That would be mutual funds, or banks. This is where one has to figure out who benefits. Banks will, of course, be beneficiaries because banking has scale economies. Second, all the asset management companies, broking companies, CDSL, NSDL, BSE, whatever comes in on the advisory side, all the wealth management will be enormous. All the global wealth managers will be sitting here. I'm telling you, in the next four to five years they'll all open shops. So financial sector and capital markets are one part of it.
In the real economy, every day you keep coming out with something new. Now there's a capex boom. The government has let the capex boom, and now the private sector is knocking on the door, so the capex boom will happen. All kinds of real estate is another one, which has had almost one and a half decades of absence, from 2008 to 2023. I think they will have a very big wave if they play their cards well. They also need that. There's an endowment there: they have everything, brand, opportunity, everything. But after that, they have to play their cards well. Management has to remain very disciplined, because it's very easy to be taken away by some crazy greed, over-leverage, overpricing, or nonsensical projects, or by not doing what the market wants. Being ahead of the market, producing the right quantity and the right product, and delivering it to the market: this isn't a five-to-ten-year thing for them. It's a multi-decade trend. It's a very large industry.
You have a voracious appetite to read the report. I've read it, every word of it. I would strongly recommend that serious investors go ahead and read it. Of course, you can fall back on mutual funds, or on the Focus 35 or Focus 45 funds, as you please.
Thank you very much, Ramdeo Agarwal, for discussing your report and for joining us on what's a really big day for the markets. What stays with me is that the biggest of all bull runs, the grand finale, is still ahead. Those are the words we should carry from this interview.
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