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00:00On Talking Point today, our guest is Pratik Agarwal, MD and CEO of Motilal Oswal Asset
00:17Management Company.
00:18We talked to Pratik at a point of time when the AMC has hit a cumulative AUM of over one
00:25lakh crores and we talked to him at a point of time wherein if you get the case for a
00:28chat up, you will see what really is the key thing and which is two or three factors.
00:35Because India's weight in EMs is almost within the knocking doors or knocking on the doors
00:41of hitting fresh, the highest ever for India of course, but more than any other country
00:48including China, can it pull further FPI flows and will that turn?
00:54Further lengths for defence theme, do they exist after the last two days of some bit
00:58of revival there and will renewables continue to be the key power play?
01:04That and more.
01:05He is the MD and CEO of Motilal Oswal Asset Management Company, joins us right now on
01:08the show.
01:09Pratik, good having you.
01:10Thanks for taking the time out.
01:11I hope all is well.
01:12All is good, getting better.
01:15Getting better, I can understand that Pratik because for an AMC to reach a milestone number
01:19of one lakh crores is pretty strong.
01:22Pratik, tell us, one, this growth obviously has come on account of this inherent belief
01:30within the Indian retail investor that the story will continue.
01:34Do you believe the story will continue?
01:36Yes, we believe the story will continue.
01:41I think more important, if you flesh it out, if you dive a bit deeper into this, trends
01:49continue.
01:50Trends continue for many years.
01:53So, for example, 2000 to 2008 was the period of CapEx driven growth, CapEx intensity of
02:00the economy went up and 8 to 2021 was a period of consumption driven growth.
02:09And again, from 2021 onwards, we are seeing increase in CapEx intensity in growth.
02:15So the point is, these trends last for several years.
02:20In the new trend, we are just in three years.
02:24If you test the trend for various events that happened over the past quarter or so, you
02:30know, new government coming in with the fast budget and all of that.
02:35I think reason to believe that the trend of CapEx driven growth continues deeper into
02:41the future.
02:42Okay.
02:43Pratik, there were question marks around whether the new government in its avatar wherein it's
02:52a coalition, NDA coalition government of sorts, for the first time, will there be some checks
02:58and balances on the frenzied activity of CapEx that was there in the second term of the NDA?
03:06You don't find any concerns around that?
03:09We don't find any concerns around that.
03:11If you look at the budgetary maps, you know, very clearly for various reasons, maybe fertilizer
03:16subsidies are lower, etc.
03:18But subsidy as a part of budget is going down and CapEx as a part of budget, and hence GDP
03:26is strong.
03:28So we think the trends continue.
03:31Even after that, whatever we are seeing on the ground in terms of new ordering, etc.
03:36has retained momentum.
03:39Well, you know, some bit of this is vindicated by the fact that if you look at the EM pack
03:43year to date, India is arguably maybe the only one or only large market to have given
03:51the kind of returns that India has, and which is a telltale fact of the kind of buoyancy
03:57that is coming from the domestic investor.
04:00The point is, viewers, I just want to mark before, and I would love to know Pratik Agarwal's
04:04view on this, because it will be lovely to know.
04:06Look at that.
04:07Look at that.
04:08First for currency adjusted returns, India is 15 percent, China, South Korea, Brazil,
04:13all of them YTD have been negative.
04:16The other piece, other bit is because of this, India yesterday eclipsed China in the EM-IMI
04:22index as the top weighted emerging market.
04:26And as per the Morgan Stanley note, India is knocking on the doors of being the largest
04:32emerging market in the MSCI EM index, the weightage rather.
04:37And that is a big deal.
04:39That's in some sense a vindication of what India has done in the last four or five years
04:44since Covid.
04:45Pratik, I would reckon, I mean, you understand this better.
04:48I would reckon there are good, there is a good side or a good case and a bad case of
04:54something like this happening.
04:56India for far too long in the in the recent 12 months, 18 months, for far too long has
05:01been ignored in terms of foreign flows despite the weightage moving up.
05:06Now that we are on the cusp of a central bank easing cycle plus such a high weightage, do
05:13you think that draws in global flows or do valuations become a hindrance and even passive
05:21flows will be hard to come?
05:23How does this unravel?
05:25Because to a normal mind, the normal mind would think that if the weightage is up, then
05:29at least the passive flows will be forced to come with the rate cuts.
05:36Now, so if we look at month by month, FDI activity in various countries.
05:46One shall find that while in India, FDI has sometimes come, sometimes gone, but versus
05:53other countries, we have got more consistent inflows.
05:58Now, FDI as a basket, I mean, if you if you think of emerging market funds as of now are
06:05a very difficult sell.
06:06I don't think the pool of money in emerging market funds is really expanding at a fast
06:12clip.
06:13So it is, you know, reallocation of monies that are happening.
06:17So in Feb to I think April, May kind of a period, Chinese market moved up 30 percent
06:24and monies moved there and we saw flows after the Chinese market consolidated, moved down
06:30a bit, things again normalized for us.
06:34So is is one thought.
06:36So if you look at consistency of flows over the last one year, over the last two years
06:42versus most emerging markets, India has received more consistent flows on a monthly
06:50basis. If our weightage moves up.
06:56So, yes, you know, when when interest rates get cut and people find emerging market
07:04risk taking more competitive versus investing in their own markets, the flows will come
07:10in. And with that, monies will get allocated globally.
07:15And if our rate is higher, we should expect to see more money coming in.
07:20Now, other markets not performing well, it's not new.
07:24If you look at from 2010 now, the only market which has proved in some manner competitive
07:32to U.S. returns is India.
07:34Other emerging markets, frankly, have disappointed big time.
07:39So the thought today is whether we look at emerging market pack and we look at India
07:47as a part of it or increasingly going forward, we are ultimately now fifth largest
07:53market by market cap, bigger by number of securities listed.
07:59And sooner than later, over the next one to two years, we would probably be the third
08:03largest market. Can India become an asset class in its own right?
08:10You know, out of the emerging market basket, ultimately emerging market baskets were
08:16created because every emerging market then was small and, you know, they needed a
08:21bigger pool of market cap, bigger pool of securities to entice global investors.
08:28Now we have become large enough in our own right.
08:32I think the thing to watch for is, can we become an asset class by ourselves?
08:39OK, OK, so Pratik, I know it's usually difficult to time these things and therefore I
08:45won't ask you to do that. But I just wonder if the nature of the winners, if the market
08:52were to move higher over the next 12 to 18 months, would change with the nature of the
08:56flows. Hitherto DII flows, a lot of bottom up ideas, banks not doing all that well
09:02despite the weightage, etc.
09:04Does that change in the next 18 months because of the nature of the flows?
09:07If indeed the FII flows become maybe not as strong as the DII flows, but stronger relative
09:13to the past?
09:16Now, so let us look at reasons why FDIs come into an emerging market.
09:24You know, it is for growth, right?
09:27Because if you are seeking value, if you want to buy cement as a business and see how is
09:33the capacity priced, I think everywhere in the world capacity may be priced lower than
09:39in India. So it is for growth.
09:43India as a country offers growth.
09:46Now, banks, large IT were the growth drivers last time when we got very strong FDI flows.
09:58This time around, they don't seem to be the growth leaders.
10:04OK, the newer growth leaders is what we believe will attract the active flows,
10:13passive, of course, will go as per the index weightages and so on.
10:17Now, in December of last year, we had one instance where, you know, yields dropped
10:24sharply in the West and, you know, something happened to our market.
10:29Now, in the first month of that correction happening, it is the shorts which are getting
10:36cut. OK, so these spaces, which actually may not do very well over the next
10:42period, do very well because it is driven by shorts getting cut.
10:48So in the month of December, you actually saw banks and IT do very well, the large IT.
10:55And after that, they have again continued to not do as well.
11:01So I think, you know, if the yields abroad drop and there are rate cuts in the direction
11:09that gets more known, yes, flows will be there, short covering will be there.
11:17That may cause a month, month and a half of change in the sectors which are doing well.
11:26But if the reason is really short covering, then I think the current spaces, which are
11:33the growth leaders, should continue to do well.
11:37Good. OK. Pratik, how are you as such a large AUM under your belt now investing?
11:46Because you mentioned that FPI has come for growth.
11:49I'm guessing you are investing for growth as well.
11:53But if anybody who's investing in growth for the last 12 months in financials, for
11:58example, hasn't quite made money, right?
12:01So therefore, do you take a contra view and not be as high or be much lower than the
12:07than the benchmark weightage, let's say, on banks?
12:10I'm not including the whole financials because AMCs, brokerages have done well.
12:13It is banks which are sulking, particularly private banks.
12:16How do you think of this as such a large AUM?
12:19How do you kind of navigate through this?
12:22No, one hour AUM is not large, we are very small.
12:25So one lakh is the total AUM on the mutual fund side.
12:30It may be just 50,000 crore on the AIF, BMS side, 27,000 crore and the rest of it is
12:35passive. But yeah, that said, we are out and out growth investors.
12:40QGLP is the philosophy that we follow.
12:43We put a threshold that, you know, any space that we want to be in and this is a team
12:49effort, should present on the space itself, growth opportunities 2-3% higher than what
12:56the index will deliver over the next 3-5 years.
12:59And today, if you see our portfolios as a house, we would be seriously underweighted,
13:06you know, practically not present in staples, practically not present in large cap IT, very
13:12little into banks.
13:14And this has been the position for the last one and a half years.
13:21We have gradually reduced it.
13:23The money is taken from there.
13:25So banks and IT is 50% of the index has gone to, yes, some mid and small cap IT names,
13:34but more to new tech, to spaces like renewables, spaces like electronic manufacturing,
13:44luxury consumption, etc., where the growth orientation is expected to be very high and
13:51in line with what we want to deliver to investors.
13:56So we are out and out growth investors, you know, to our mind, we run some of the highest
14:02growth in earnings portfolios in the country.
14:05So, yes, while we don't have banks, we do have some amount of insurance.
14:08We do have some amount of capital market presence in our portfolios.
14:14We have one more space that we have is defense.
14:18We continue to remain positive on these spaces.
14:25The other, Pratik, is the need for new paper to come in as the market broadens and more
14:31and more flow sticks in.
14:32So we've seen the new age companies do really well, right?
14:35I mean, Zomato will be up 6% today on a JP Morgan note.
14:39And but the thesis that let's say JP Morgan is putting out for Zomato or some other houses
14:43have put in for some of the other stocks is alive and kicking.
14:48What's your sense of these new sectors getting created?
14:53We also now have an electric vehicle listed, electrical company listed, and there is more
14:57coming. So what's your sense of the new age sectors
15:01getting formed? Are you constructive here?
15:04Very, so very constructive, very constructive, we may not own all of it, but we are very
15:11constructive. In fact, this is part of our thesis.
15:14We say this is time for Alpha and this is a theme that we have covered and covered for
15:18the last several months.
15:21Just like if I give you a similar situation that happened in the past, just like software
15:26as a sector came into being in mid-90s and delivered huge
15:32alphas to managers over mid-90s to 2000 kind of a period,
15:37look at the construct, new space not there in the index, large quantum of growth in
15:41earnings and five, six years of earnings growth on the trot,
15:47delivered large alphas.
15:49In the similar manner, the newer spaces like electric vehicle, electronic
15:54manufacturing, renewable defence, new tech, etc., are doing the same over
15:59the last three to four years.
16:02And the runway of growth continues to be long and in many
16:07cases getting stronger.
16:09So we are very plowed, very positive on
16:15newer age businesses.
16:18Got it. OK, so very positive there.
16:22Prateek, the other thing is sectors that have done really well in the last
16:27couple of years and now are starting to take a bit of a breather.
16:31I mean, defence may be up in the last couple of days, but otherwise has now kind of
16:35cooled off from the frenzy that it was in.
16:39You guys have a defence fund as well, if I'm not wrong.
16:42What is the, I mean, how do you think about the story here when the
16:47common narrative is that, yes, there is an order book, yes, there is execution, yes,
16:52there is indigenisation, but the multiples are extremely stretched.
16:57So how do you think about it?
16:59Please explain.
17:02So we have a passive offering on the defence side.
17:05Like I said, we are the largest passive strategy
17:10house in the country.
17:12We continue to be positive defence, I said that as a part of my earlier comment.
17:18To us, the current pause in the market is like a pit stop.
17:24You know, sometimes the narratives become very strong.
17:28Maybe valuations go a tad ahead of, or maybe let's say they rise so quickly that
17:36people get uncomfortable and there can be a period of pull off.
17:41But really speaking, we believe this is a space where 15 to 20 percent
17:48growth on sales should be delivered and with a higher growth in profits
17:55and for a very long period of time.
17:57So we continue to remain pretty positive there.
18:02If you look at our active portfolios, practically all active portfolios, one
18:07should expect to find a defence name or two.
18:11OK, OK, and Pratik, last couple of questions before we let you go.
18:17The other thing is, much like defence, is power, right?
18:23Power across the space.
18:25And I don't even think the finances may be expensive, but be that as it may,
18:29multiple ways to play, ancillaries, hydrothermal, green, what have you.
18:35And the sector is rallied, but the targets are very stiff.
18:39So is that also in line with the thesis that maybe there is a bit of a pause
18:43and the rally could continue?
18:45How do you look at power when you look at that very wide bucket?
18:49Yeah, so, so let's say energy intensity of the economy stays the same.
18:58Actually, if we increase manufacturing as a part of GDP, energy intensity
19:04should be expected to increase.
19:05It shall increase also because, you know, as per capita rise, people will offer
19:10more air conditioning and last summer's you saw air conditioners not being
19:15available at all, the shops were all emptied.
19:18So electricity consumption should be expected to grow stronger
19:24than usual into the future.
19:28Now, earlier there were other sources of energy, you know, coal,
19:35oil, gas, etc.
19:37Now, as we become more green, a lot of this will get substituted by electric power.
19:43So, you know, if we have, for example, all the two wheelers and the cars increasingly
19:49electric, you know, you need less of other fuels, you need more of electricity.
19:54So electricity demand will be higher on that count as well.
19:58Here, I think a good, nice way of playing is through new energy plays in solar and wind.
20:06There, the runway of growth is long and I think valuations don't capture it all
20:14because the start was very skeptical, you know, how long will it continue?
20:20Single-use plants, you know, what if it runs out?
20:24But the thing is, now there is no going back.
20:28Increasingly, if you look at FDRE beds, they are competitive, they are getting more and
20:34more competitive to thermal, which means the future is all going to be renewables.
20:41So, or mostly going to be renewables.
20:44So I think that is one way of playing it.
20:46The second way is, of course, to look at renewable energy.
20:51The second way is, of course, to look at stuff that goes into, you know, suppose one is not
20:58sure whether cold does well or wind does well or solar does well, you know, get into stuff
21:03which goes everywhere, you know, something like cables, etc.
21:07So it's the other thought that we have, you know, control stations, etc.
21:13And that is what we have in our portfolio.
21:17But in these spaces, again, you know, the longevity of growth is definitely there.
21:23Overall growth will be 7-8%.
21:26So that is significantly below the threshold we want.
21:30But in newer spaces, you know, solar, wind, etc., even, you know, pump storage, growth
21:36can be an order different.
21:38And that is where our interest lies.
21:41Got it.
21:42As we speak, the rupee has hit a record low of 83.99.
21:48Now, is this the storm before the calm?
21:52Usually it's the calm before the storm.
21:54But will we start to see the rupee strengthen at some point of time in the near future?
21:59Or do we continue to be weak?
22:01I mean, with crude falling, CAD improving, flows likely, rate cuts on the anvil, Pratik,
22:07a macro question to wrap up this conversation.
22:10A word on the rupee and what could happen ahead and if there are investing implications
22:15on the same.
22:17Yeah.
22:18So, theoretically, with rising forex and everything that you spoke of happening, which is, again,
22:25positive for forex accretion, rupee should strengthen, meaning, you know, from close
22:31to 84, it should be closer to 83 or lower.
22:35But the point is, you know, forex is just one bit of the equation.
22:42Competitive intensity is another.
22:45If you look around us and, you know, we compete with our neighbors in various goods, neighbors,
22:53you know, such as Pakistan, Bangladesh, China, on various items.
22:59And, you know, their currencies are not strong.
23:02Their currencies are weak.
23:04To some extent, it becomes difficult to retain, you know, our levels with the dollar as well.
23:12I think that is what is happening because otherwise our forex are at a high every week,
23:18every month.
23:19We keep accruing forex.
23:21We have gotten included in JPM bond indices.
23:25So, those flows are happening.
23:27We may get included in Roomba bond indices.
23:29More flows will come and so on.
23:32But I think it is this competitive thing which is keeping the rupee weaker than where one
23:38would believe it should be.
23:40Now, weaker rupee is good for corporate profits.
23:45You know, IT get tailwinded.
23:47Every manufacturing which competes with imports, you know, gets that much more protection and so on.
23:56So, depreciating rupee is good for profits.
24:00What is good for profits is good for the direction of the market.
24:04In the past, when currency depreciated, markets fell because FPIs were a large part of our
24:13market activity.
24:14And in the thought of protecting dollar returns, you saw rupee weakening also coinciding with
24:23lot of FPI selling.
24:25But now since FPIs are a marginal part of the overall ecosystem, it is our money which
24:32reflects our fundamentals and markets.
24:35I think small rupee depreciation should be taken as a positive for market rather than
24:40negative because it is positive profits.
24:43Got it.
24:44Pratik Agarwal, always a pleasure talking to you.
24:47Thanks so much for taking the time out.
24:48You may be small in your eyes, but this is a great milestone.
24:51Wish you all the best for many more.
24:55Lovely to be here.
24:56Yep, yep.
24:57Lovely to have you.