"Whatever we have gone through in the last three-four years, the pain, policy paralysis, scandals is ultimately par for the course for democracy maturing and trying to improve and do things in a better way," CEO of Amansa Capital, told Ramesh Damani in a freewheeling conversation.
A general complacency emanating from the mid 2000s' global economic boom, coupled with a complete lack of governance by UPA II, was the script that became the Indian economy's undoing, he said.
Prakash said that whichever government comes to power, "it has to recognize the way we govern, the way our bureaucracy, systems of approvals and processes are, it doesn't work for a USD 2 trillion economy trying to grow at 9-10 percent a year. We have to redesign the way we govern and approach economic growth and large projects."
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Among his long-term bets in the Indian stock market, the veteran hedge fund manager said media remains a robust play on consumption. "Digitisation is a huge discontinuity. It is a huge disruption in the media space. It is not very clear who will benefit but it is going to fundamentally change the media."
Below is the transcript of the interview.
Q: You published an article in July, which was headlined 'India's darkest hour'. [They were] prophetic words: markets collapsed after that but isn't it true in markets that in the depths of depression a new bull market begins?
A: I ended the article by saying that when things seem so grim and bleak, that is normally a time you should be working the hardest to find investment opportunities.
The idea of the article was just to say that at that time people had become little over optimistic because there was a new finance minister. People thought that economy was on the verge of recovering immediately.
My point was that things are going to take longer than people expected and things were going to get worse first before they get better.
Q: Would you say the low we saw during those grim days of August are the lows of the market and the market is now discounting a better future?
A: I think so.
Q: What leads you to believe that?
A: Two, three things. One is, the government genuinely has started functioning economically in the sense that some of the stuff that Chidambaram is doing, some of the steps to clear bottlenecks in projects, some of the decisions being taken in terms of natural gas pricing and trying to move to coal block allocations, trying to get things resolved, I think there is a sense that the Indian government is once again functioning and some decisions are getting taken.
Also the sentiment was incredibly negative at that point in time. Sentiment is also starting to stabilize a little bit. People are starting to believe that for India, 5 percent gross domestic product (GDP) growth is probably the bottom of the cycle and that growth will tick up from here.
I do believe that is the bottom. I think that was the time of maximum pain partly because of the over enthusiasm on India on a short-term basis. Plus also the fact that you had this whole crisis of tapering and there was perceived extreme vulnerability of India to external capital flows, which I think also is far reduced today with the USD 35 billion it has got with the FCNR deposits.
Also the current account itself on a sustainable basis has pretty much halved. So, India is far less vulnerable today.
Q: 2008 India was the BRICS poster boy. 2013 we are world's basket case again. What went wrong first?
A: In hindsight, we being considered a part of BRICS probably laid the seeds of our own doom. We became incredibly complacent, the politicians became incredibly complacent. We started believing that we are destined to grow.
I said to you earlier that there is no God-given right for any country to grow 8-9 percent if you look at economic history.
Instead of saying BRICS is a pathway which we should aspire to and if we take the right steps we can get to, we started believing that this has already happened. There was tremendous complacency on the part of policymakers and politicians and even business men that India has arrived. Our moment in the sun is here, nothing more needs to be done and we will just grow. That complacency is what has been our undoing.
Q: You are saying it seeped into the government and industry. In the government are you referring to the tax cases that the government launched against Vodafone, IBM? Are you saying that a country dependent on foreign investment should be more welcoming of it?
A: There are two things. One, the government, UPA-II, in the last five years has been almost zero economic reform. It has been so embroiled in one scam after the other that they just haven't been -- I don't think there is any sense of a long term vision of what they want India to deliver on the economic front. There is no sense of a coherent master plan of what they want to do for India economically.
There is a sense that ministers are doing their things on their own, there is no cohesive binding force or vision behind everything.
The tax case is just a manifestation of that. At USD 90 billion, India has the absolute largest of the current account deficit after the US. With the deficit at 4.8 percent, with that type of dependence on foreign capital, you can't go out and start shooting yourself in the foot by putting case after case on foreign multi-nationals. It will totally vitiate the investment environment.
I don't know right or wrong, I am not a tax lawyer. So, I am not sure who is in the right and who is in the wrong.
But the reality is whenever you talk to any investor in the US they constantly ask you these questions because they read the same headlines.
Q: You said India corporates have been complacent also. Where would you fault Indian corporates in the last five years? They have been pleading policy paralysis.
A: They have been pleading but if you look at the infrastructure developers – Credit Suisse, Barclays and CLSA have written all these have interesting research notes on the extent of over leverage among a part of corporate India.
The developers who built 65 percent of India's infrastructure in the last five years in the private sector are all massively over-leveraged. They can't meet debt payments, corporate governance, bust balance sheets, no cash flows. So, there was a feeling in a huge part of corporate India that the gravy train in terms of access to capital is unending.
That they can constantly access capital at any point in time they want which obviously was true in 2005-06-07 and before the crisis but it stopped. When the music stops, we will see who is left standing.
Q: Someone who follows British elections told me that in America when they vote it is like choosing between Tweedledum and Tweedledee because the right and the far right are fairly close in terms of economic policy. Is there any difference that you see looking ahead between Manmohanomics and Modinomics as far as India is concerned?
A: Manmohan Singh is an outstanding economist. Look at his credentials, his background and track record. The difference is just in terms of decision making. The impression being created today to the external world is in Manmohanomics, there is no decision being taken, either good or bad.
A lot of the good economics are being held hostage to a Congress high command, which seems to believe entirely in populism.
The Congress view of the world seems to be that we just need to constantly dole out more money and freebies.
Q: The other party has also supported the massive food bill, NREGA. So, what are we fighting for?
A: I have never met Modi personally but I have spoken to many people, industrialists and businessmen who have met him extensively, who have extensive dealings in Gujarat. There is a sense that he is a very decisive individual and he is willing to take decisions yes or no, so, one is that.
Second is, it is undoubted that the BJP's economic gameplan is more pro-business than the Congress. If you can say both are centrists, BJP is right-of-center and the Congress is left-of-center.
Q: This is the same government that opposed FDI in retail. So, where is it right-of-center?
A: There are sound bytes that everyone makes and does to cater to their respective electoral constituencies.
Q: You think they would have a more aggressive economic reform programme?
A: You look at history. If you look at 1998 to 2004, a lot of building blocks of the growth acceleration that India got were laid in that time. They that time had the same issues, they had the RSS, they had the pro-Swadeshi movement, a lot of stuff was done then which this current government for 10 years has not been able to do.
I don't think any of us are against social transfers or against more money being pumped into rural India. How can you be against that? You see how poor India is. The dispute we have with Congress is they don't seem to understand that if you don't have economic growth where will the money come to redistribute?
Q: Let me make a simple hypothesis to you about India: a burgeoning middle class that might become as much as 400-500 million is that the romance? Is that the promise of India that you still bet on?
A: India is still a market which attracts stock-pickers because you can find the individual companies, which you think have outstanding long-term prospects, have good governance and the market values them and you get rewarded for that.
Q: Tell me where do you stand? You are still bullish on India, you believe a new bull market may have started?
A: I think it is possible.
Q: New bull market creates new leaders, new opportunities, new money. Where do you sense the opportunity?
A: We are still very optimistic on media. We think digitization is a huge discontinuity. It is a huge disruption in the media space. It is not very clear who will benefit but it is going to fundamentally change the media.
Ad spend to GDP is very low in India, at less than 0.3 percent. It is far lower than any global averages. The ticker price for ad spots is very low. Media is a derived play on consumption.
The whole economics of the media business are going to undergo a significant change.
Q: Content or distribution where would you bet?
A: I think both. As of right now, we bet on content because that is an easier to play on. Distribution between DTH and cable it is still not clear. How much time it will take for the cable players to cut the local cable operator layer out and make it a proper B2C model is not very clear. So, we are still doing some more work but undoubtedly in my mind huge value will be created here.
Q: Would you be more pro-active towards the electronic media or the electronic and print media?
A: More [towards] electronic. We own one company in print: DB Corp that owns Dainik Bhaskar. We think they are an outstanding management team, vernacular media in six-seven states. Readership in India is still growing as you know.
The electronic media in Indian language is not yet that much of a competition. You don't have the Google, Yahoos of the world like you have in English, which is already hurting the English print. So, vernacular print is a very interesting area to be in and electronic of course.
Q: But in India, a lot of government control is exercised on the media.
A: Much less than other markets. If you talk to any multi-national, Comcast, Disney or Viacom, they will say India is the single most exciting media opportunity in the world today because it is the only market in the world where they can come in and take 75, 100 percent stakes in the distribution part. Even in the channel part they can take 51 percent. They can take more.
Q: What other sectors? You mentioned media and the great management teams that is the perfect combination of a bull market -- unloved sector, great management team and great opportunity, media is one example. Any other way to express your hypothesis?
A: Others are very stock specific, it is not a broad theme. For example we own a NBFC called Cholamandalam Investment and Finance . We think they are a great management. The CEO of Cholamandalam is an outstanding individual, very aggressive, he talks a lot of sense, a young guy.
Others are more stock-specific stuff like we own something in IT services, we own 2-3 medium size IT services companies.
Q: How about pharma?
A: We own two pharma stocks. We own Lupin and we own Cadila . We owned Lupin for seven years.
Q: Still a good prospect for a bull market?
A: I think so.
Q: Cadila because of the new molecule, new drug?
A: Because of the molecule and partly because Cadila has really done very poorly in the last year. If you look at Cadila's absolute EBITDA, it has been flat for three years.
It has put a lot of money upfront in terms of new facilities for vaccines, for biologicals and there is no revenue coming. 35-40 percent of the current gross block is into assets which are earning not even Rs 1 today.
So, the bet we are making is Pankaj Patel -- who owns 75 percent of the company -- is a good capital allocator and operating leverage will kick in.
Q: If you were to go by your gut and tell me this is the sector that will lead this whole market higher, which one would you say?
A: It can't be FMCG or pharma and unlikely to be IT. Pharma has done reasonably well, but it is also well valued.
So, media could be one. It will probably have to be some banks or may be PSU banks. I am not a fan of PSU banks, I don't like to buy them but it could be a cyclical trade. So, they may lead a rally or something in a cyclical sector, may be cap goods.
There are two big valuation disparities in the market, one is between defensives and cyclical sectors. The rally will be led by something which is a cyclical sector. I am not sure whether it is natural resources or infrastructure or it is petroleum, if the government totally decontrols stuff. It has to be something cyclical.
Q: In the 20 years that you have been following India who are heroes and who are the villains of the India story over the last 20 years period? Who would you say has done an outstanding job recognized or unrecognized?
A: There are many corporates. They have got the valuations, they are well recognized. They have put the India story on the map. It is universally acknowledged that we have some very good companies with some very good management teams.
The villain has been the whole system. We have shot ourselves in the foot. It is complacency, it is our system and everything else, the way our governance systems work, the inability to execute large projects, inability to get clearances in time.
We had an outstanding opportunity in 2007-08 where we were the toast of the world. We were seen as a country which will emulate what China has done – grow for 20 years at 8-9-10 percent and will do it in a democratic way which would create huge shareholder value.
The Chinese economy has been a home run but the Chinese stock market has done very poorly in the last 10-15 years. It has not been a great investment to be in China for the last decade.
India was seen as a place where you could make very good financial returns because there is capital discipline, there is a focus on RoE, there is democracy, it is a well functioning stock market and we were being seen as the next big thing.
Through our own complacency and partly some bad decisions, partly the economic environment turning, we have totally taken the air out of our own balloon effectively.
Q: A bull market needs various things, I am going to give you three or four things. Tell me which are the important ones for the bull market to continue. Continuing of quantitative easing, FII inflows into India, a stable government at the centre and fiscal discipline. Out of these 3-4 things what is important that the market has in order to get a new leg up?
A: A new leg-up in my view has to be a government that comes to power -- either Congress or BJP -- which is willing to break the mould and recognize that we have some serious flaws in our governance model that's holding us back from getting to 8-9-10 percent economic growth.
If we get a government – it could be BJP or Congress, I am no fan of either and don't care which comes -- they have to come and recognize the way we govern, the way our bureaucracy, systems of approvals and processes are, it doesn't work for a USD 2 trillion economy trying to grow at 9-10 percent a year. It has to be broken. We have to redesign the way we govern and approach economic growth, large projects.
Q: But it doesn't happen with a coalition government, right?
A: That is an excuse. What is the coalition government being voted into power for? To govern and to get economic growth. That cannot be an excuse. Is there anybody in India today who doubts that we can grow at 10 percent if we are unshackled? I don't doubt, I don't think anybody doubts that. So, what holds us back? It is our own system of governance, our own mindset and lack of decision making.
You just have to reexamine the way we do a lot of things.
Q: Does it help that you are in Singapore and away from Dalal Street?
A: I think so.
Q: How so?
A: Less noise. India is a very noisy place in the sense that six business newspapers, four business news channels, you can get obsessed all the time just trying to find the next data point on something.
Being outside you get a better sense of what's going on globally. What are the major trends globally, what are people thinking and talking.
If you ask me more than anything else, it is ultimately improvement in governance because in my view the next stage of the Indian bull market will come when local investors come in back. This market has been entirely propped up by foreigners. The entire mutual fund industry in equities is less than USD 25 billion. It is a joke.
Q: 20 years. Lots of ups and downs, do you still have a romance for Indian equities?
A: Of course. I always had the choice to do something else. When I started the fund I had the option to do a pan-Asian fund instead of an India-only fund. I am an Indian, I am an Indian passport holder, I have tremendous belief and faith in India even today.
I have great passion for the country. I do believe that our best years are still very much ahead of us and I believe that we have the building blocks in place. All the stuff we have gone through the last three-four years, the pain, the policy paralysis, all the scandals is ultimately par for the course for democracy maturing and trying to improve and do things in a better way. I still believe that India is a huge story waiting to unfold. It will be wrong to give up on India.
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