Exclusive Interview by Mr. Prateek Agarwal, Executive Director, Motilal Oswal

1. Where do you see markets by FY24?

Over the longer term, equity indices have compounded at nearly the same rate as earnings growth. This implies that the market today has a high probability of compounding going forward at near the earnings growth levels.

Earnings growth itself faces the headwind of slowing economy on account of global slowdown but has the tailwind of lower input costs and higher margins. I think there is a good chance of earnings growth to be higher over the next few years as compared to 12% that we have seen over FY1997 to FY2021 period

2. What is your outlook on the Tech, IT, and Pharma Sector?

Global slowdown clouds the outlook on IT. However, while order book accretion may suffer on this count, profits would get buffered by the sharp INR depreciation that has occurred. Overall IT companies are trading at near pre-Covid valuations and may offer the earnings CAGR over next few year again of the pre-covid period. Overall the space should provide a good anchor to the portfolio and diversification from the currency risk. 

US is the largest market for generic pharm and this market continues to  see price drops. This impairs the earnings visibility of this space. Moreover, the regulatory risks are very high. We are more focussed on domestic branded generic market where the business could grow in low to mid-teens. Some companies in this space offer better than consumer space stability at better than consumer space valuations and can provide a good anchor to the portfolio. 

3. What are the 3 major Headwinds & Tailwinds for the global economy & markets currently?

Headwinds:

1. Commodity spiking on account of any reason (higher global growth or escalation in Russia Ukraine conflict) is the biggest risk to our markets. Indian markets do well in a low commodity inflation, low oil price, scenario. 
2. Sharp drop in forex reserves: Our large forex reserves provide a great strength in a global scenario where USD supply is being tightened. It is because of our reserves that our economy is able to continue to grow strongly while the global economy may be slowing down. I think we have to track the level of reserves. If they drop sharply, given large trade deficit, degree of freedom with our policy makers would reduce. As yet we, at Motilal Oswal are at very comfortable position there. 
3. Demand Slowdown as a consequence of higher interest rates and on account of slower global growth.

Tailwinds:

1. Easing Inflation: This could be a positive for the global economies leading to pause in further rate hikes and also avoid any further pinch on the consumer income thus helping to drive growth and demand.

2. Pause in Rate Hikes: Pause in rate hikes is good for high growth economies and businesses. Rate hikes should stop in India soon enough and rate cuts are expected in India and world by same time next year unless come un-foreseen events take place. 

3. Operating margins should improve going forward. In the first two quarters, margins were lower on account of higher commodity prices which were built into the inventories. From q3, this effect should reduce, leading to higher margins. Higher margins could sustain if the economy in India continues to be relatively robust. Pre-election spending expected next year should help.

4. How do you see the old fame of Motilal Oswal returning under your leadership?

I think that there are large positives that the house brings to the table.

Motilal Oswal is a power house of ideas. As a house we have Private Equity where we guage the newer trends and look at companies and founders when they are very young, helping us catch trends early. We have a large research desk in institutional equities business which puts out cutting edge work very regularly and accounts for a large share of ideation on the street. The AMC has its own large over 20 member investment team. 

We are a house that are completely focussed on equity (we hardly do any debt as a house). The conviction of the house is in equity and the house has invested substantially into its own funds. 

The strength of the house is seen in stellar since inception performance that most of our products have shown since inception. It is shown in the number of ideas that the funds may have been the first to invest into, which turned multi baggers and it also shows in the consistent outperformance that the funds delivered in extremely trying period of 2011 to 2019, when the breadth of the market was low and earnings growth was small. 

The strength of the house is shown in it being the first to adopt the QGLP framework to focus on quality and consistency and follow an investment discipline. 

Yes, in between, for the last few years, the house has faced a period of under-performance. It has been painful for the house and for our clients The house is working towards addressing the performance issues to regain the trust of our clients.

On this journey, support from the environment is necessary. Here we are getting the same. If we see how corporate earnings have shaped up from the covid troughs.. first the larger companies regained and grew on their pre-covid levels and in FY22 the midcaps delivered a strong growth. Policy making in terms of import duty protection, ethanol policy, PLI schemes getting rolled out, have all provided a great fillip along with policy focus on domestic production in many spaces in response to various geopolitical events. Capex is picking up in all spaces. Global tailwinds of China +1 are supportive also. All these, and many more, factors should keep the breadth of earnings sustain at high levels. FY24 would have the margin tailwind countering the effect of global slowdown.

Good breadth of earnings coupled with alpha seeking domestic money from HNI and retail investors should keep the breadth of the market good. This is a good environment for us at Motilal, to generate alpha. 

If you track our performance, this shows. Ideas are best manifested in a midcap fund and there our performance is top notch across all time periods. Large and midcap fund is following closely on it track. Similarly on the alternatives side BOP is doing very well and IOP is seeing a sharp recovery. Because of the change in the market environment, I do believe that over the next few months, major part of our house AUM should be performing very well. 

Attaining performance is the first part of the story. Sustaining it is equally important. There I believe, our focus on quality helps. Our discipline on following the QGLP process would help. On top of this we have put in several other processes after discussion with the managers and with their buy-in towards sizing of the portfolios, sizing of stocks, building diversification, profit taking process and also stop loss process. Avoiding excess concentration in few names. We are also encouraging cross pollination of ideas and we hope that this would reduce the errors of commission. The house would focus on smaller number of investible ideas across its funds so that research energies are exploited fully and we don’t spread ourselves thin. We do believe that these measures would help sustain performance also.

5. Will Motilal’s philosophy change & transition away from QGLP?

Our philosophy is time tested. There is a great belief around it. I believe in it. We will stick to it. Ultimately quality and longevity of growth is what results in a business become more valuable and our energies would be focussed on finding such businesses at decent valuations.