Roundtable Conference
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Transcripts

Of

Investors’ Round Table

Held at

Bombay Stock Exchange

On 15th June 2001

Brought to you by

capitalideasonline.com

And

HIREN GADA, (Home Trade): Welcome everyone. May I have your attention please.

I request all the panelists of today's roundtable to please join us at the dias. On behalf of www.capitalideasonline.com and Home Trade -- I am Hiren Gada from Home Trade -- I welcome all of you all to today's Investor Roundtable. I invite all the panelists Mr. Ramesh Damani, Mr. Raamdeo Agrawal, Mr.Rakesh Jhunjhunwala, Mr. Vallabh Bhansali, Mr. Sanjoy Bhattacharyya, and Mr.Chandrakant Sampat to take their seats.

Bull or Bear? Where is the market headed? Where is the economy headed? What should a small investor do today? We have seen so much of volatility in the last 15 months. TMT -- is it going up, going down? I guess today everyone is grappling with these questions. That's why Home Trade and www.capitalideasonline.com got together and we decided to call some of the best known personalities in today's market and a mix across brokers, fund managers and investors who are institutions in themselves. We felt that it was the right time to call all of them and bring them at a roundtable and really question them to see what their views are? How they see the market going forward? What the investor should do? What they have to say for the investor? That's really the whole purpose of today's session.

Just to give you a brief background. Home Trade has just been launched -- couple of months back and we have been having these type of sessions on our site -- online, off line, trying to promote a whole lot of awareness and education among investors and this has been really a part of that effort.

I will just pass the baton to Mr. Ramesh Damani who will introduce our elite panel today and carry the discussion forward.

Thanks a lot.

RAMESH DAMANI, (Moderator):... and of course Home Trade who has sponsored this show. Let me welcome you to this second investors' conference that the website www.capitalideasonline.com has held. The first one was held by them on 29 January in the year 2000. The Sensex then stood at what now seems a lofty level of 5350 and as you can imagine the smiles were easy in the room that day, optimism was rampant and there was a great belief that there was a renaissance of India, renaissance of technology. Of course a year and a half into the bear market we are all seeing the world differently. It's just not the weather outside that’s gloomy today, it's the entire atmosphere in Dalal Street.

This roundtable conference was going to be held a few months earlier and then we got into the middle of the SEBI investigation, the New Delhi investigation and you know every investigation on the earth was going on at Dalal Street, so we postponed it because no one was really thinking about stocks, thinking about stock ideas. Hopefully all that has quietened down now and we feel you know are their values out there? Is there light at the end of the tunnel?

Some of the panelists rejoin us from the last conference. There are two notable abstentions whom I will point out to you later. Maybe I'll just go ahead and make my introduction of the panel to you.

You know recently they had the general election in the United Kingdom and I was reading about general elections in the UK and about the history of the UK, I came across a fabulous quotation by Sir Winston Churchill, which I'd like to share with you this morning. Churchill said, "The empires of the future are going to be empires of the mind." Now that's from the man who once said that the sun would never set on the British Empire, the man who believed so much in the physical world (smiles wryly). Now he did see -- he was a prophet of sorts of course, Churchill -- he saw the rise of Hitler, he saw the menace of the Cold War, but I think what he was referring to was not the fact that he was a new economy bug or he was a technology bug but the fact that what would shape the post World War II environment would be men of ideas, men of intellect and would be men of integrity and I think if those were the criteria and those were the drivers for the new economy: intelligence, integrity and intellect, I think we have a house full today. We have over 200 watt IQ panel out here and it will be a great pleasure to introduce each one of them to you personally.

I will start with Chandrakantbhai Sampat.. He is of course the oldest and the wisest man called the conscience of Dalal Street and when we were at the conference last time and if you read the transcripts which happen to be still on www.capitalideasonline.com he warned that there is an unsustainable bubble in the tech market and of course a lot of young people said "Oh, Chandrakantbhai is too old, he has forgotten you know what it means to be in technology. He doesn't understand the growth story coming out of India" and there has been various brokers who have come and told me that Chandrakantbhai had warned them two years back that the software shares will become like soyabeans and we all laughed at him and of course I think today the soyabeans look pretty attractive to me in retrospect. But there is a time to him and we can ask them that also but he has been so much fond of these MNC stocks, people buying you know the blue-chip, blue blooded companies in India, who have also done a lot of hanky panky, whose returns have been subpar, who have not done things above board as far as shareholders are concerned and so has his love for these MNC companies blinded him to the prospects of the great secular growth story in technology in India? That's some of the questions we will address to him.

Next I'll introduce you to Vallabh Bhansali, who is sitting to the night. Just raise your hand Vallabhbhai so people will appreciate where you are sitting. He is soft soft spoken and he is the kind of man that you can talk just easily about values as you can talk about valuations. You can talk to him about market cap, you can talk to him about morality. He has been through a lot of personal tragedies in his life in the last year with his family and does that change a person? Does personal tragedies make him look at risk, returns, reward ratios differently? Those are some of the questions we will ask Vallabh Bhansali, director of Enam and one of the most influential merchant bankers in our country.

The third person is very close friend of mine. He has a very opinion on everything. Of course you all know I am talking about Rakesh Jhunjhunwala. He will have an opinion on everything. His investment style is `invest first, investigate later’ and he has been a big bull on the BJP government. So I would really like to ask you know how he felt about the BJP government's performance a year and half into their term of office and what is his view on the markets? He has generally been very bullish throuhout the budget, throughout the last year and a half -- markets of course have collapsed, though he was cautious at the time of the conference. Has this – the new realism dawned on Rakesh? Those are the questions we will be asking him.

Next on the panel who is a new entrant this time is Raamdeo Agrawal. He is managing director of Motilal Oswal and Raamdeo and I think Motilalji is also somewhere out there, they were two kids living in a hostel who had a dream that -- it was called pipe dream in comic books and TV serials -- they wanted to build a first class brokerage house, they have done that. Now Raamdeo is the kind of guy who will go and meet Warren Buffett, he will read about stocks, he is a big picture guy, but he has a very keen eye for stocks selections and if you ask his friends, as I have asked once in a while, that if you give him a choice -- and I think his wife is here, Sunita, so I am sure she will be happy to hear that, you know give him the choice to go out with Aishwariya Rai or spend an evening with a book on Warren Buffett, he will think about it! So that's Raamdeo Agarwal for you.

Rounding up our panel is a man I have met occasionally, I haven't had the good fortune to meet him in the last year or so is Sanjoy Bhattacharyya. He is chief investment officer with HDFC Mutual Funds and I asked him -- I asked my friends about him and they all came back saying that he is passionate, he is well read, he is a renaissance man. So we are going to take up on his bluff. We're going to delve into his mind to come out with some great ideas and the great values that are going to shape the Indian economy, the Indian stock markets over the next few years. Sanjoy Bhattacharya, chief investment officer with HDFC Bank.

Let me just set the agenda of just how we are going to go ahead and run this discussion.

In part 1 which is going to be about 20 to 30 minutes I am going to ask them one big question and some follow-on from the other panelists that might want to ask and rather than go around the table at ask the predictable what you think of the M3 supply or what you think of inflation, I'm going to -- because I happen to be a good friend with most of them -- I'm going to delve into their personal knowledge and ask them things that I know touch of a raw nerve or things in which they have some sort of expertise. And we will hopefully have some interaction in the panel so we can flesh out larger pictures or larger ideas.

In part two we have requested all the panelists to come and give us three to five stock ideas and that’s going to be the most interesting part. We have the ideas that they said last time and I would critically evaluate them and lay done before you what has worked and what has not worked. We are going to ask them for some fresh new ideas and then the panelists amongst ourselves, we are going to challenge those ideas and either approve them or disapprove them based on the intellectual conviction that the panelists put forth before us.

And in part 3 we'd like to get you involved. We will have a Q&A session. We would love to hear from you and hear your question answers on what you feel is the important topics that they might have missed or some clarifications that you might need.

We'll start with Chandrakantbhai because he is the oldest and he should go first I think. Chandrakantbhai, you know the Americans have a saying you know that the country is going to the dogs. What is your feeling about India? Where do you think is this country headed over the next few years?

CHANDRAKANT SAMPAT: Well, I would say this that we can only change with the chaos. The reason is very clear -- the lack of productivity. We are misusing the resources that we have. One example which I gave on CNBC was for instance on cotton. Around 22 million acres of the Indian land is under cotton. The average yield per acre is around 550 and the average price of cotton is around 50 rupees. So the total production is around Rs 96,000 crores. Now we don't have to go to developed countries to understand the productivity part of what we are doing. Go to Pakistan, they produce 850 kgs/acre; go to China, it's 1850; go to Australia it is 3750. Now what are we doing? Are we not destroying our assets by utilizing them badly, i.e. in an unproductive manner?

Or let's look at another part, the important part. The wheat consumption in UK is equivalent to wheat wastage in India. Now why is this so? The only reason is we don't have a reasonable infrastructure, we have no resources to do it and unless we get the resources as China does -- they have about $40 billion a year in foreign direct investment (FDI) -- for next 10 years, we will be unable to build up this infrastructure, we will be unable to close what does not work through the process of VRS, we will not be able to put our monies into education because education is more important than the monetary inputs. We will not have the baskets of currencies to look after the volatility of the capital flows. I recall one summer day when I was at Dallas, when, in one day Mexico lost $27 billion of the capital flow in just half an hour! The interest rates went to 40 percent a month! Capital flows ultimately go where there is productivity.

And then the last example. Keep the interest rates sufficiently high as not to go into the mala coordination which is the thesis of the Austrian school of economics on which I have remarked. The only way to do it is open this country to all the capital flows without bureaucracy and the politicians, let the new entrants get listed on the stock exchange to the extent of 74 percent and that can be done through the tax incentive. If you are quoted, you pay 35 percent and if you are not quoted -- 70 percent. So we need resources and our resources requirement as a developing country is about $40 billion.

Now let me sum up this. By 2025 there will be 10 billion inhabitants on this earth instead of 6 billion today. Today per capita income is $4700; then the per capita income is expected to be $18,000 and if we want to participate in this kind of a prosperity that's the only option open to us.

RAMESH DAMANI: Chandrakantbhai, is there a sense, then, that this country is not taking those tough decisions?

CHANDRAKANT SAMPAT: It isn't taking any decision at all. Where is the question of tough decisions?

RAMESH DAMANI: Can such tough decisions be taken in a democracy?

CHANDRAKANT SAMPAT: It is only the chaos that will make us do that.

RAMESH DAMANI: So 1992 revisited?

CHANDRAKANT SAMPAT: I think so.

RAMESH DAMANI: All right, Rakesh, let me move on to you. Rakesh of course as everybody knows in this hall is the quintessential speculator. Is there -- first -- Rakesh, is there going to be life after ‘badla’ (the indigenous carry forward system that has recently been scrapped by the regulator) and will the derivatives market takeoff and please explain to us why, despite a good budget, did the market fall?

RAKESH JHUNJHUNWALA: Well, I think all of us including myself underestimated the velocity or the depth of the effect of the international decline in equity values. We also underestimated, it appears, the accumulated positions or I would say the amount of floating stock that was there in the market here -- I think that was one of the main reasons. Then I think Tehelka (expose into corruption in defence deals) episode also paralyzed a lot of thinking among the Indians. I think these were the three paramount factors, which led to the decline of the market and proved me at least blatantly wrong.

As regards life after badla I think this is not a matter of life and death. There is going to be life after badla and as Hindus we believe in rebirth even if it is death. (laughter) So I personally feel why should I rue it– I mean I know one thing that if everything that has changed has been blatantly opposed by all of us. Whether it was trading on the screen, whether it was the fact that -- it was in this ring that one very prominent broker of the BSE had told me that if they don't allow renewal in B1 scrips, the Bombay Stock Exchange will close down forever. It cannot operate and see how smoothly it has operated. Similarly for dematerialisation.

I also have one observation that 95 percent of the volumes in the earlier system was taking place in 10 scrips. So I think it is the people who have holding in those 10 scrips and who are trading in those specific 10 scrips who should be worried. Because if you see the volumes, if you analyze the volumes of the last one year or the last 24 months, 95 percent of the volume was in 10 to 12 scrips. Right? You look at ITC. ITC may have a market cap of Rs 20,000 crores. I mean it is a company -- I think it has the highest pre-tax profits in India and apart from -- but still there is no volume in ITC. So I think one factor against -- one argument against the fact that there will be no volume is let us examine what volumes were taking place earlier.

RAMESH DAMANI: But still wasn't the 10 percent a large enough chunk to support the others shares?

RAKESH JHUNJHUNWALA: No, but that 10 percent will be least affected in my opinion and let us remember one thing that the earlier system was giving way to arbitrage. Who was paying for the arbitrage ultimately? Why should we encourage a system in which the market players are paying 30 to 35 percent arbitrage charges? I think it's fair enough that this arbitrage should stop. We should have uniform settlements; we should have single day settlements. It may affect our volumes for some time, but volumes will come back. And one thing I can say that you know if you close the race course in India -- in Bombay, all these are card clubs will get lot of volume. (laughter)

CHANDRAKANT SAMPAT: Please don’t do it. (Chandrakantbhai walks at the racecourse daily; he doesn’t go to the races.)

RAKESH JHUNJHUNWALA: There has to be an outlet for people's idea to trade and invest. I feel there could be some -- maybe a month or two when volumes maybe affected, but I think the impact of volume drop would be felt more by the likes of Himachal and Global and DSQ and Silverline rather than on the other scrips, which I think is a healthy trend.

RAMESH DAMANI: Were these overriding factor causing the market to fall after the budget? I mean was that the simple explanation?

RAKESH JHUNJHUNWALA: Ramesh, I don't agree that you know the technical factors -- I think the technical factors limit the rise, right? and deepen the fall to some extent. They are never the cause of the fall or the cause of the rise. You know a technical factor can take a scrip of you know Infosys instead of Rs 9,000 it can take it to 14,000. A technical factor cannot take Infosys from Rs 500 to Rs 9,000. So basic trend according to me is established on fundamental reasons. Right? And the technical factors only hasten it and give it greater depth.

RAMESH DAMANI: So what is the fundamental trend from here on onwards?

RAKESH JHUNHUNWALA: Well, I am a speculator. Better ask the undamentalists. (lots of audience laughter)

Well, I remain as bullish on my country as I ever was. Right? And I agree with Mr. Sampat that there is -- that we can come up only in chaos. But we are in chaos already and we were in the chaos for last 55 years. Who says we are not in chaos? We're always in chaos yaar, but always remember one thing that it is only chaos it brings order, which is orderly. If you try to impose like Malaysia you may have some kind of prosperity but problems are going to arise later. So I think we are in chaos, we will remain in chaos, my only hope is that the chaos will hasten so things will -- and I'm confident that it will.

And as far as the BJP Government I think goes although you know I think they have been paralyzed partly by their own doings, partly because of the fact that lack political support for what they want to do. But I think in all the Governments we have had, they are the Government who have exhibited biggest resolve to take the reform process forward. I ask you, which Finance Minister has said that we should have labor reforms? Look at the politicians. The biggest employer of contract labor in Maharashtra is the Maharashtra State Electricity Board and the Maharashtra State Road Transport Corporation. How could Shiv Sena oppose labor reforms and what would it do to the biggest and losing corporations? So what are you going to do as a Government? I think the realization of what has to be done is absolutely there but it is -- it's just the lack of political will. And I wish India had no Bihar and no UP or at least no politicians from those states. So I mean I don't -- I think the Government has realized what should be done but that is a lack of political will. Now I think -- I thought the lack of political will the lead to lack of finances and I think that will lead to the reforms.

RAMESH DAMANI: I told you, Rakesh is strongly opinionated...

RAKESH JHUNHUNWALA: At least I have that right in a democracy.

RAMESH DAMANI: Fair enough. Thank you.

We'll move on to Sanjoy. Sanjoy, you are a thinking man’s fund manager and I'm going to -- you see the world as an oyster, that's what your friends told me, you watch the global scene. I want to ask you two questions. Bush, president Bush has been waiving the red flag at Taiwan. Does that spell an opportunity for India because its a natural competitor for China in Asia as a sphere of influence and 2. I think after Vajpayee recovers from his knee operation, he is going to have peace talks with General Musharaf of Pakistan. Is there a peace dividend to be had? Is there an exciting growth story if these two countries can come to some sort of peace? Sanjoy?

SANJOY BHATTACHARYYA: Yes, these are I think pretty tricky questions but to the best of my abilities let we see whether I can tackle them.

I think the one on China and president Bush's initiative in terms of playing hardball with China is actually fraught with considerable risks and very different from what his predecessors did and to the extent that what the Chinese economy has as the main driver of economic growth and the way they are going about it is considerably different than ours and where we are in the stage of you know evolution of our economy. I don't think that there are that many opportunities that will arise for us from a change in the relationship between the U.S. and China essentially because Taiwan is some kind of a negotiating block for that relationship.

Having said that however I think what it will do is make a lot of people realize that there is another big opportunity geopoliticaly in this continent and some American companies have already chosen to do so like General Electric. Jack Welch for instance realized this quite some time ago, I think what it will serve to do is send out a very powerful signal in the U.S. which is the world largest economy that there is an alternative to investing in China. Many people now see China as the only option. And that can only work in our favor given the fact that right now the sort of FDI we receive is really miniscule. But it will have to be accompanied by a lot of political initiatives to make that FDI come into this country in a manner that is far easier than it stands today.

RAMESH DAMANI: Does it impress you that you know U.S. presidents visit India once every 20 years. Suddenly in two years we have two U.S. presidents and one ex-president come and visit us. Does that kind of excite you?

SANJOY BHATTACHARYYA: I guess it should, but it doesn't. No. I don't think so, because I think it's more the nature of that event does not seem to get reflected in economic developments. It's more I think some kind of ‘engage China policy’ and send out -- and in fact they are coming here to send out signals to other people, they are not coming here because they think India matters. They are coming here to actually use it as some kind of signaling mechanism for a whole range of other things -- Pakistan and China being the two major things.

And the second question actually is a take off on I think what you just asked which is Pakistan’s General Musharraf coming here and speaking to Prime Minister Vajpayee. Two things there. I think really he doesn't have a choice. His hands are more or less tied because the U.S. is much too important in his strategic map for him not to, in effect, comply with what they want him to do. And there is a very strong and clear signal from the United States of America at all levels, whether it's at the Undersecretary level, whether it's at the Presidential level, Cabinet level, Dick Cheney's level that they want Pakistan to stop encouraging militancy and creating an environment which will not deteriorate politically and light a tinderbox here. And given the fact that they are very economically strapped and he doesn't want to be un-seated like any ruling potentate I think he sees this as a matter of survival. That's why he is coming here. Now I suspect because he is not doing it out of choice he will do only as much as he is forced to do, which means, to cut a long story short, that I’m not very hopeful. I don't think that that initiative will lead to opportunities, which will help us to you know benefit in terms of business.

RAMESH DAMANI: If India were to sign the CTBT, as also Pakistan and India were to get say representation in the U.N. Security Council as part of Bush's long-range program to move India, would that change it geopolitical dynamics of our country?

SANJOY BHATTACHARYYA: Yes, I think that certainly would have much more far-reaching impact simply because it would then force policy makers in the United States to say that okay this is the country which had a long-standing principled position which it is now agreed to change because under the promise that certain goodies will be delivered. So we can't renege on our side of this contract because it's in some way it's a moral contract between two nations and if we keep our end of the contract and the U.S. then doesn't deliver I think there will be a fair amount of international outrage, not expressed in terms of outrage but expressed in terms of subtle criticism of the U.S. -- much like what has happened for instance in the Middle East where now I think people are seeing the U.S. as some kind of a biased negotiator. So, I think that would be, yes, far more -- it would put far more pressure on the U.S. to deliver.

RAMESH DAMANI: Right. Vallabhbhai, we will come to you -- as often asked you, as you are a merchant banker, you visit Delhi, you have access to the minds of the Finance Ministry, the Disinvestment Ministry – again, in the last budget, credit has been taken for privatization to the extent of Rs 12,500 crores. Is it ever going to happen? What are the roadblocks still stopping it from happening? And just what is your sense about the drift in economic policy that some of us seem to feel is taking place in this country?

VALLABH BHANSALI, Firstly I am that kind of merchant banker who doesn't go to Delhi very often.

You alluded to renaissance in your opening remarks; I believe I think I was amongst a few who believed and talk of renaissance and here you're talking about economic policy and the drift in it. I think when you talk of renaissance, renaissance is not one massive tidal wave which just keeps coming. It comes in waves and I still like to believe that the renaissance is on and the renaissance will have its dips and ebbs. I think we're just going through that. At the nadir of pessimism in the month of March and April I used to tell all my colleagues, there is nothing to be so pessimistic about -- remember 1991 when this country pledged its gold. I mean we did not see any silver lining anywhere and yet we come out. That's the power of renaissance that when you don't expect a crystal to be born in a shell, it still gets born. So I am not waiting for a miracle or something, I am just looking at a process that a mind, which was enslaved for so long -- that's the collective mind of the country -- and which was again subjected to the socialistic autocracy of some kind, is emerging out of it. In this last decade we have already seen some entrepreneurs who are making a mark on the world, on the global scene. Whether it is a Narain Murthy, whether it is an Azim Premji, whether it is Subhash Chandra, whether it is a Mukesh Ambani, I think what will take place is more of this. As Rakesh said that we have had some of the finest ministers in this Government. I have had an occasion or you know more than once to meet people like Arun Shourie and understand. So I think these things will happen slowly because I think we are fighting a huge backlog. So I think yes the drift is partly predictable and partly very disappointing but I firmly believe that we are heading in the right direction.

RAMESH DAMANI: More specifically, for the disinvestment process do you think that the target will be met this year, which are companies which have the likelihood to get into it?

VALLABH BHANSALI: I think the Government is very sure of going ahead with VSNL, they might do IBP. I think the IPO candidate may just remain that. So I think it will -- the policy initiatives has wider and wider acceptance, the divestment process is being sorted out. So even if I would say that not this year, I would say next year we should see lots more divestment.

RAMESH DAMANI: But you know what happened at Balco, I mean do you feel that the battle has been won? Or that this has just been that one instance and that in future divestments there will again be opposition in Parliament, there will be opposition by labor, there will be opposition to this whole process. Do you think that this country doesn't have the political consensus yet to go ahead on disinvestments?

VALLABH BHANSALI: Yes clearly I think I don't see the country – and when I say country I mean the representatives in Parliament-- I think the 500 people in the Lok Sabha do not know how much they represent the country. But, because of the fractured polity that we have in the Lok Sabha, what they do is very different from what the masses really want. So I think everybody understands that divestment is not bad, the strategic sales are not bad, there are vested interests and only a stronger Government which is not necessarily in terms of majority but in terms of will and imagination and I hope a stronger kneed Prime Minister is able to take that leadership. (laughter)

RAKESH JHUNJHUNWALA: One thing I'd like to point out in Balco why you think there is opposition? Parliament approved it, no court has given any stay against it, the basic guidance of the Supreme Court seems that they are going to clear it and the labor had -- I mean the labor had to submit ultimately. What did they get?

RAMESH DAMANI: Mrs. Sonia Gandhi said she would oppose...

RAKESH JHUNJHUNWALA: No but she opposed, but what -- finally -- see the fact is that all that three organs -- the judiciary did not interrupt, Parliament approved it in a majority stake and the labor had to submit. I think -- it's my personal opinion that it's not Government agencies who are delaying the disinvestment process or neither the labor but it is the vested industrial interests in India who want to corner a large part of it who are delaying it. That's my personal opinion.

RAMESH DAMANI: But also, Rakesh within the ruling coalition itself there are fissures you know. People supporting disinvestment and people violently opposed to disinvestment. So if it is true within the ruling party, surely the opposition will make hay.

RAKESH JHUNJHUNWALA: No, but Ramesh in a democracy there can be differences but I think government is -- and you know also I think personally that although we would very much like that this the disinvested very fast, there are grave questions that whether should we sell our -- you know first of all that is a reality that you cannot disinvest any part of India's public sector unless and until you are ready to accept foreign ownership. Because I don't think that in India the private sector has the capital by which it can buy such large companies. Right? So first of all I think once the political consensus is built around that fact I think disinvestment will be far easier.

And I personally don't think there is political opposition or labor opposition. In State Bank 28,000 employees opted for early retirement -- I think it was the largest VRS in the world. In a single year! And I think the labor knows if they don't accept the reality, they would ultimately lose, for they have seen what happened to the tube mills in Calcutta. Ultimately the labor, all of them lost out. So I think it is the vested industrial and certain political interest that is blocking divestment. I also think we need to examine, whether we can sell everything to the foreigners. I am not as trustful of the foreigners as Mr. Sampat is and we have seen that in the action of some of the multinational companies towards their shareholders.

RAMESH DAMANI: Chandrakantbhai, can we sell our PSU jewels? You say open up the country to foreign direct investments completely?

CHANDRAKANT SAMPAT: The basic premise I work on is very simple. We have got to close what is bad, and open what is good. If it is bad please close it, finance it through VRS, which can come through the capital flows. The moment this VRS comes either it is spent in the economy, (that means the consumption would rise) or it will go by the way of saving. In both the cases the Budget is the beneficiary. The only one way is to close what does not work. Don't sell it. Close it down. Because you know on the productivity level where are we compared to other nations? If it is not productive, it is destroying the wealth of the country. The basic question here to look is this. Is this increasing the wealth of the country or it is destroying the wealth of the country? If it is destroying the wealth of the country, the ownership is unimportant. Please close it and finance it through VRS. You'll get huge amounts of money. My own feeling is around $40 billion a year will come as FDI; please use it for closing down what does not work, with a very generous VRS offer to employees.

Let me give you one another instance you know. Bank of Baroda, which is the most efficient bank in India, has a total of 28,000 people working there. It manages the same value of assets as any U.S. bank would do at 53 workers. Now we're simply destroying the capital. Can we go on destroying the capital and say we will be a great country? We will have to close down what is unproductive, but I say we have a social responsibility. We don't want to throw out anyone. We will have to tell the employees of failed units ‘here is your VRS. You take your VRS. If you are eligible for one, we will give you two. We have a source to do that.’

All those resources spent for VRS will come back to the Government either by way of savings or the taxes on consumption. See today China is getting $40 billion; we're getting $2 billion as FDI. We are 100 crore people getting only 0.06 percent of the capital flows. Look at that! What can we achieve out of it? Can we build up the infrastructure? Can we stop this waste? The whole question is how do we stop this waste? How do we build up the productivity? The two challenges are very simple. Productivity and innovation. If they are there and if there are no profits, they will come. If they are not there, all the profits will disappear; that's the answer.

RAMESH DAMANI: Thanks. Raamdeo, I haven't come to you. Let me get you in on the discussion. Raamdeo, you are always a big number guy. Also, you like to paint the economy by the numbers, GDP, M3, FDI, all those statistics that the rest of us barely gloss through, you follow in detail. Just paint the economy numbers for us, you know how is it looking to you? Where is the growth coming from or it is not coming? How is agriculture doing? What do you see for the year ahead for the fiscal deficit? Over to you.

 

RAAMDEO AGRAWAL: As far as the economic numbers are concerned, I don't think I have great fix on it but still I will give a try.

My approach has always been to focus on investing and I don't want to devote too much of my time on the macro economic picture. Warren Buffett also believes that there is no point in wondering about the economy and trying to figure out what is the fiscal deficit, where the interest rate is headed, who is losing or who is winning in the political battles. It doesn't really matter in investing and I too drift into this at times because there is so much of happening around the world and you can't really take your eyes off. And yes, you are right, I do love looking at the numbers.

One of the things I’m looking at now is the energy price. Right now energy prices are shooting through the roof across the globe. One of the books I read was Last few days of America and there the author was talking about the importance of energy. Every form or matter, other than the natural soil or God given thing, is converted with the help of energy. So energy cost is not 5-6 percent what you get to see. Every thing is related to energy. Now what is happening is energy prices have shot through from 10-12 dollars per barrel to something like $30 and that $30 price is becoming very difficult for rest of the world.

Now this is going to have an impact on our stockmarkets. In our stock market there are two segments. One segment comprises companies which are so called tech companies which are dependent on America mainly for exports and the second segment is the domestic economy. Now the world economy is completely dependent on energy prices and that energy prices is completely out of control of everybody. Unlike the previous time, this time around it is not a typical OPEC supply constraint price hike. Actually demand and supply are now almost in equilibrium and in a commodity when you reach equilibrium, if a little squeeze is put on supply, you have the entire price in control. And that's what OPEC is doing. After 15 years they have got the price on their hand. And so, if oil prices need to come down, oil consumption must come down. Which means that if consumption comes down, you don’t want growth. The only way you can reduce the consumption is that global growth comes down. And I don't see that happening. It's a contradiction in itself. And till the oil price comes down in the shorter end I don't see major global revival happening.

RAMESH DAMANI: You are right. Every time all price has gone up in 1973-74 OPEC shock 1, then again in 1979 OPEC shock 2, the stock markets have tanked globally. So are you making a bearish case then for equities globally?

RAMDEO AGRAWAL: No, see what I'm saying is as you may have read the article in the Economist ‘Buffett on Markets’ which said between 1964 to 1981 in 17-18 years the Dow Jones average remained at 757. During this 17 years block the GDP in U.S. tripled or quadrupled. And the index of Dow remained at 757. And during 1981 to 1999 the index went up from 757 to 9000. What was the difference? In the second block also of 16 years the GDP of U.S. only tripled. Nothing more than that. So what was the missing link? The inflation rate, the interest rate. The interest rate in the first block went up from 5 to 15 percent and in the second block came down from 15 to 5 percent. And what was the driving force in the inflation? If you see the history of oil, it was mainly oil driven. In 1981 you had the second only shock which peaked out the oil prices at $35 then. And you know the Fed discount rate which is now 4 1/2 -- 5 percent was 18-19 percent.

RAMESH DAMANI: Yes, but you are taking an example that suits you Raamdeo. Japan, for example, has a zero percent interest rate and also a zero percent growth in the stock market and the economy wherever. Clearly you can't keep reducing interest rates. I mean if it was so obvious everybody would do it and we would never have a recession. So obviously that's not the only explanation here.

RAAMDEO AGRAWAL: Yes that's what I said. I don’t understand every single aggregate of the global economy but now it seems are very very obvious which scares me and I mean just -- you know you have to take cognizance of it, that's about all. I mean I am not saying that...

RAMESH DAMANI: Are you also saying that maybe you think, maybe, that financial assets are peaking out in this decade, that this would be the decade for commodities rather than financial assets?

SANJOY BHATTACHARYYA: Can I just actually come in and interrupt here?

RAMESH DAMANI: Please.

SANJOY BHATTACHARYYA:... just to extend something that he said. This is again cheating because it is borrowed from Mr. Buffett's idea, but I think the simple thing to do is to relate the profitability of corporate India to GDP and that ratio doesn't vary very much and cannot by definition change dramatically over periods of time like 15-20 years. In the U.S. that ratio has typically stayed at between 3 and 6 percent and if you begin to make assumptions about how much corporate India is going to grow and relate that to how the stock markets are being valued, today profitability of corporate India (and you can argue that the PSUs has underperformed so actually this figure is wrong, it's not the appropriate measure, it has to be much higher if you slice it and dice it the right way), but the profit of corporate India to GDP is under 3 percent and if you believe that growth in an economy such as ours with our kinds of opportunities is sustainable at a level of between 5 to 8 percent (and I'm not a great one to say that you know-- I don't have any political agenda to say that you know our country has to grow at 8 percent or whatever), but even you were to take a series of numbers between 5 and 8, it's abundantly clear that over the next span of 5 to 8 years, given where we are today the outlook for equity must be reasonably bright. The markets cannot be overvalued at today's levels.

There may be short periods of aberrations and to add to what he was saying, oil prices or the impact of energy cost on inflation also needs a very supportive environment in terms of how the structure of the economy. The big difference between Japan and America, which is what you raised is that the Japanese have a huge structural problem. The banking system in Japan and the real estate system in Japan are not supportive of economic strength-- they basically help deflation, because the banking system is incredibly weak and Government consistently needs to do pump priming to bail out structural weaknesses in the economy which is not true of the United States of America. So if you have structural weaknesses as we do in our economy, very clearly we do have a pretty weak structure (it’s unfair to compare it to Japan) but clearly our banking system is nowhere nearly as robust as the United States of America's banking system. So the impact will also correspondingly be muted because a lot of energy and effort is spent in utilizing resources to do things which are infructuous but in a neo-perfect system if you have low inflation rates you can keep inflation under -- which is what Greenspan's effort is to support this decline that we have seen in asset prices and energy prices move in a direction eventually which goes down because I think at $30-35 it's unsustainable because then there will be deep problems you know the world will stop growing.

RAMESH DAMANI: New sources of energy will come

SANJOY BHATTACHARYYA: Yes, new processes will appear over time, over a much longer time horizon and then the profitability outlook of those countries would be affected positively by that.

RAMESH DAMANI: To quote Warren Buffett whom Raamdeo and you both admire so much you know he talks of a regression to a mean. That is, equity markets can't return the kinds of abnormal rate of returns that they have done in the last 5 or 7 years or since this bull market started and the regular trend line is maybe 11 percent or 12 percent S&P500 compounded historically. So are we at best looking for, you know, a regression to mean and not the speed of that...?

SANJOY BHATTACHARYYA: Okay, that argument works very well in the U.S.. In the U.S. the total market cap is about $17.3 trillion and if you break up between the old economy and what is called new economy which is just TMT, it's $10.6 trillion and $6.7 trillion. That's how you come to that $17.3 trillion market cap. And these are the numbers in that article Raamdeo quoted. Okay? What is the profit of that $6.7 trillion? Only $ 66 billion. So you got a P/E multiple of 100 there. What is the implicit growth rate in that for the next 15 years? You have to grow at 35 percent for the next 15 years for the P/E multiple to become 35 percent. So the mathematics of it are very clear in the U.S. and its stacked against you, which is why I think it's almost a 500 to 1 bet that Buffett is right.

RAMESH DAMANI: That good?

SANJOY BHATTACHARYYA: Yes, it must be. Because to survive at the scale at a growth rate of 35 percent to justify prices you have today is just completely bizarre. If something grows at 35 percent the laws of micro-economics suggest that automatically there would be something else that would come in and exploit those opportunities and drive it down.

RAMESH DAMANI: Raamdeo?

RAAMDEO AGRAWAL: Yes, this time...

RAKESH JHUNJHUNWALA: Ramesh, one minute here. I would like to point out that is the pertinent here is I think which is very important that the way the Western societies are aging and the way Japanese society is aging also, in no time in history has so much of financial assets been made available and so much -- you know a lot of money has to be provided by those societies in order to look after their citizens in their old age. Right? And I think see this is going to produce enormous capital flows and where is this capital going to get an outlet?

RAMESH DAMANI: For growth?

RAKESH JHUNJHUNWALA: Yes, it has to.

RAMESH DAMANI: Which are the countries?

RAKESH JHUNJHUNWALA: It has to come to either India or China, perhaps Indonesia, Brazil where there are the numbers. Mr. Sampat there is so much of your favourite stock P&G ‘Whisper’ that they can sell in America. If they are five crore American woman you know who can use Whisper that can't sell 5 crore 10 lacs. So it has to come to India or to China.

RAMESH DAMANI: You know this is what he is hoping for any way, but let Raamdeo finish the point.

RAAMDEO AGRAWAL: I think there is another aspect to this thing. People keep saying that the Government of India is very sick and almost 50 percent of the revenue goes into paying the interest. But look at the corporate India aggregates. I did some aggregate using the Capital Line (database, which you can also get at the back of their magazine) and you know there we found that operating margins (including banks) of entire corporate India is 23 1/2 percent. PBDIT, or EBDIT. Okay? And what is the interest cost in that? It’s12 percent! Of course that banks are included. But even if you exclude banks the things don't change very dramatically. And what is the PAT? Just about 3 -- 3 1/2 percent of the total PBDIT of the entire system. So obviously there is somewhere inefficiency in the system. As the competition rolls in, maybe slowly, but definitely more and more competition is coming into various sectors, I think the opportunity here is comparable to the opportunity in the US in 1981. The issue is whether we act the way U.S. acted since 1981. That's the challenge.

RAMESH DAMANI: The U.S. acted in 1981?

RAAMDEO AGRAWAL: Yes. In U.S. in 1981 the interest rates were around 19-20 percent. In India, today, we are also following this trend, our interest rates were similarly high and are coming down from there. Actually we have passed the half way point. Now we have come to single digit interest rates. We have a market capitalization of Rs 550,000 crores, of which one third, roughly Rs 200,000 crores available as a free float in the market. Now, with a GDP of about Rs 20,000,000 crores and a 25 percent savings rate Rs 500,000 crores is flowing every year, there is enough investible funds to boost the market, to double or triple it? The issue is there should be a trigger! Like the trigger we saw in last two years from the boom in technology stocks, and you saw the market fly. Perhaps the trigger could come from the PSU divestment, or anything else, in which case we could have a good run up.

RAMESH DAMANI:... People will be jumping at the….

SANJOY BHATTACHARYYA: In many ways it comes back to what Chandrakantbhai said that all of this is right and it can work wonderfully well provided you get the productivity right, provided the resources that we have are used properly. This is a resource short economy. This is not a capital resource rich economy. So if you can do this, if you have this huge pool of savings and you -- it's not enough to bring interest rates low -- you got to bring interest rates low and make sure that resources then don't get misallocated. So if you have a weak banking system, if you don't invest in education, if you don't invest in health, then you have serious problems going forward. It doesn't matter what the savings rate is.

RAMESH DAMANI: But given the importance that Delhi plays in all our lives, that's not what going to happen? Is it -- I mean Delhi will have its finger in every pie, in every cake.

SANJOY BHATTACHARYYA: I am actually somewhere in between. I mean I have great respect for gentlemen on both my left and on my right and my sense is that part of it is political will and one mustn't get carried away with imponderables….you know it's the art of the possible. You may wish -- all of us sitting here may wish that pigs had wings. But pigs don't have wings.

RAMESH DAMANI: But do they care in New Delhi? Do they really care?

VALLABH BHANSALI: Let me interrupt here. I think if you see how we have changed over the last 40-50 years, I think the social process, the social evolution has as much to do as the political evolution and I don't think you can always relate to the economic development -- I mean you can relate economic development to political policies. Because what happened in 1985 to 90, 1990 to 95, 1995 to 2001, you will find that in each time periods the Government had stupid laws but the country – the economy was moving in a different direction and I think the same will happen. You know (Infosys Chairman) Narain Murthy had said something very nice and this is about five years ago when he said, "Let us raise the aspirations of people." I think what brings about big change, whether it is productivity, innovation is that aspiration of people have changed. The aspirations of a large society like ours and a complex society like ours takes time. If you look at the share of the Government in the total pie, that is been shrinking. And that's what -- I think given the state of our country, if you expect a big change through divestment (of public sector companies) it is something that I don't really expect. Since you asked me a question, I answered that. But does that really matter? To me it does not matter. I think what matters is with what speed we can you know bring new entrepreneurs on the scene. They are the ones who will set this standard of -- you know one company set this standard on corporate governance, there will be another company which will set this standard on productivity, somebody will set on globalization and I think these will be the leaders over the next 10 years -- 10-20-30 of them who will show the way to the country.

RAMESH DAMANI: But can a country really be prosperous if it is not free? I mean do we have a sense that the government encroaches on our lives so much, our civil liberties are constantly threatened -- you know college principals in Pune are blackened in their face, people are criminalized for no wrongdoing. Can a country really be prosperous without being free? And any of you can take that answer.

VALLABH BHANSALI: See, economic justice is something very very important. And I think Chandrakantbhai talked about the legal infrastructure for economic justice to become available. There are shades of gray. Is the U.S. free? Is Japan free?

RAMESH DAMANI: Somebody has made an index of economic freedom

VALLABH BHANSALI: Is Singapore free? I think it becomes -- it can become a very convoluted debate because we don't want to get into semantics. Generally if you ask me that has the economic justice process got to move in the right direction? It indeed has to! There is no question and I think that we are going away -- we're moving from a very very draconian system where -- this is happening very slowly. And I think it will be periods of take off. I hope that period will come in the next few years. At this point of time if I were to make a linear projection, things look grim. But if I see that trend between 1985 and now I think that you know lot of our companies are free to do what they want.

RAMESH DAMANI: Rakesh, you have been one of the highest taxpayers in Bombay a few years back. You had a recent spate of friendly visits by your tax men to your office and to your house. Do have a sense that there is justice within the tax system or is this a scapegoating story?

RAKESH JHUNJHUNWALA: I feel I don't see any injustice. But I can tell you one thing. You know even President Clinton, who was the President of America, and he could blow the world off in five minute, even he had to undergo public scrutiny. Look at the way he had to answer to Congress. Everyone has a right to his personal life. But still being the President of the United States of America he had to answer to everybody. So, though we may be the taxpayers, the tax authorities have a right to question us. We have a right to answer them. Right? And surely you know they may inquire, they may prove but we live in democratic enough conditions that they cannot take -- maybe that could be some harassment, but beyond that they cannot anything to us unless and until we have done something wrong. And Ramesh, let us not blame everything on New Delhi. After all New Delhi is what we have made them. We get the Government we deserve.

SANJOY BHATTACHARYYA: That's absolutely right. I mean I think J....

RAkESH JHUNJHUNWALA:... We are part of the Government as much as...

SANJOY BHATTACHARYYA: J Krishnamurthy puts this very well. You are the world. You want to change things then you start on your little cabbage patch. Don't look around and say others are responsible for what's gone wrong. It's very simple. Everyone makes a difference. There are one billion of us I presume at current count I mean so instead of looking around and pointing fingers and seeking solutions from others, I think as a nation we have this habit of sort of saying that everyone else needs to change. But if each one of us at our level decides that this is how we are going to make our contribution to the system and make it work better, that in itself is going to do a huge amount and then a fundamentally the difference between America and most other nations.

RAMESH DAMANI: The power of one.

Chandrakantbhai, I’ll finish this part of the discussion with you, with your growing years and your wisdom are you as idealistic and optimistic as they are about the how change in society will evolve and is there fairness in the due process of law that goes on in this country?

CHANDRAKANT SAMPAT: Well, I would say yes. But it should all be preceded by the chaos. We need lots of change and this change can only come if there is lesser and lesser Government on us, if we are treated fairly, I said fairly, it’s not that we shouldn't be asked questions, but we should be treated fairly. Like you know any ordinary human being. But all this will change only with the chaos, nothing without it. For anything that we want to do in India, we need a lot of official approvals. There is still too much of officialdom.

RAMESH DAMANI: Vallabhbhai, we will just round it up with one standard question. In the same vein that the new law that they passed in India that if you have an NRI friends and if they come here and be your guests, you need to go to the police station and report their presence. I wonder if someone is thinking in New Delhi?

VALLABH BHANSALI: I think FERA, the foreign exchange regulation Act (I am a chartered accountant and I have read some law) since 1973 we had this law and that was discontinued two years ago as it had a lot of draconian provisions like this. A country which has so much illiteracy and such little education and our legislators are no different and we have already said that, we have laws like this. But as a capitalist very frankly, you know it, I know it -- the greater the darkness, the greater the inefficiency, the greater the opportunity. I think we have seen the evolution of capitalism and profitability all around the world. I think when they went to Japan, when they went to China, nobody talked about -- nobody talks about what are the laws, what is the social freedom in China? What is the justice that we talked about in China? But we're all enamored about China. So I think there is a different path to profitability and opportunity and therefore you know some of this can make excellent coffee table discussions and because you have an NRI kind of law, will our country progress? I think these are -- we are too big, too large to worry about these things. I believe that we do not have a problem. Of course I do not subscribe to the view that we can have an economy growing at between 10 -- 12 percent over the next decade. But raising it from between 6 and 7 to 8 and 9 percent, irrespective of who is in Government at Delhi, well I think our people will do it.

RAMESH DAMANI: Thanks. That's part 1 of the discussion. We will start...

CHANDRAKANT SAMPAT: I want to interrupt here…

RAMESH DAMANI: Sure, finish it up Chandrakantbhai.

CHANDRAKANT SAMPAT: My own thinking is that we are not only capable of doing 7 or 8 percent, we are capable of doing 15 per cent GDP growth. The only thing that we need is you know the resources and freedom to use the resources productively. As I give you the numbers you know that they'll be 10 billion inhabitants in this world with an average income of $18,000, most of them living in India and China. What kind of an opportunity that country has? Provided we get the capital flows and use them productively. You look at the fact that the highest number of 25 year olds will be in India by that time. Professor CK Prahlad says you know "Nobody is resource poor. We are all imagination poor". We have no courage to dream. Just dream $40 billion coming in. Just dream you know highest number of 25 year olds, all educated you know. What kind of an opportunities lie in this country? I just can't imagine. The only thing we don't have a will.

I say our economy must open up. Let the capital flows come in. Let the market decide who is efficient and who is not efficient. Let the stock exchange be quoted to look at you know what what social scientist Francis Fukuyama calls the depletion of the social capital. If those people who come with the money, if they don't share it with us then we better not have them. So just let them just that quoted here. The advantage is twofold. The foreign direct investment and the capital flows coming in. Getting $40-50 billion. And without this $40-50 dollars billion of FDI nothing is going to happen. We need resources. We need productivity. And we need to close down what does not work. We don't need to sell the PSUs. If they are not worth it, let them close down. We will pay for it. But let's close down. What happens to a person who is sitting on a computer, on a terminal and who makes a mistake? Instead of buying 50,000 say he sells 50,000. The next moment he just corrects it! If he doesn't he is finished. So let's correct ourselves.

VALLABH BHANSALI: Chandrakantbhai, I heard you on several occasions, read about you, let me ask you this one question. You have often talked about this capital inflows. Yes I agree the importance of getting the money in is beyond doubt. However, there is something called getting it at your terms and getting it at others terms. I think when we talk of getting money in an obsequies manner, in a slavish manner I think you can't get it at your terms. I think what this country needs and probably we are going towards this and maybe we are going very slowly. I hope that we go to a state where we can ask for this money and our own terms. China has got that money at its own terms. I think that's where I would be happier. We can get this money where the money can come in and destroy our national fiber, our character, our independence like some other countries in the world have or maybe we can get it at our terms. I don't know only history will tell. But somehow I would make a distinction between getting the capital and getting the capital at your own terms.

RAMESH DAMANI: We will have to round up this discussion and go to Part 2

Raamdeo, you have been fairly quiet for the first part. So I am going to get you to start the second part of the debate. The second part as we had all discussed earlier that we want some stock ideas. You are not in the panel last time with us so we can't share the insights that you might have had a year ago when the index was 5350. Some of the other panelists have left their fingerprints. We are going to discuss that how their picks fared over the last 15 months or so. So Raamdeo, what the ideas? Where do you see -- where can you put money in? Maybe after July 2nd (the day when the old carry forward ‘badla’ system is to end) maybe before -- where you see opportunity?

RAAMDEO AGRAWAL: I see opportunities -- as far as buying is concerned I mean I operate only one way that is buy and then sell. I don't know how to sell and then buy. So my opportunities are limited.

RAKESH JHUNJHUNWALA: And the markets are also going towards your model. don't worry.

RAAMDEO AGRAWAL: Thank you. So whenever it comes to buying, I draw from the various parts of the corporate wealth creation studies which I have been carrying out over the past four five years (Motilal Oswal Securities conducts these studies as an ongoing effort), few things are very clearly coming out.

One is that those companies which don't grow their earnings by at least 25 percent year on year over the next 4-5 years would not make worth-while money for their shareholders. So that is the first thing I look at whether the company has an earnings growth potential of 25 percent or not. At least in my analysis. What turns out is going to be in the future. But I should see a possibility of about 25 percent earnings growth out there.

Then next is whether it's a good business. Good business has its own dimensions and there are a whole lot of factors that go into it, including whether it is run by an honest and fair management.

The third thing I look at in stock selection process, which is the most important factor where I spend the maximum amount of time after having done sequentially the first two things-- that is what is the price at which I am buying? Because if, in the last 12 months of tremendous upside followed by a horrendous collapse, if, during that cataclysmic period there is a lesson I have learnt it is that one must never depend on a great sale price. Have your purchase price be so attractive that even a mediocre sale gives you decent profit. Because once our purchase price is wrong then nothing in going to work out. You would lose sleep even as an investor who has taken delivery, and for whom there is no carry forward position to worry about. If you are not confident about the value and if your purchase price isn’t one that is substantially at discount to its value I don't think you're going to be peaceful.

And so keeping the small background in mind I think opportunities keep coming, I think one has to keep waiting for that opportunity. I have become much more patient after the tech boom. I have burnt my fingers trying to dip in every moment because you become so confident after seeing tremendous spurts in share prices of companies like Infosys or Visualsoft or Mastek which were going up like crazy. You start getting the feeling that it is all your doing! And then you look at the next number and immediately jump into it whether it is Hyderabad or Ahmedabad or anywhere you go and buy. So I think we need to be much more patient. At least I am right now in that mood. I don't know whether two years hence when another boom comes whether I will be able to remain so patient.

I think that's what is the basic mistake -- that's what makes the difference between a Buffett and a non-Buffett. Buffett doesn't change his track because I have been going for three years to the Berkshire Hathaway AGM and he is as cool as ever. Last year a shareholder asked him why he didn't invest at least 10 percent of net worth into tech stocks, as you know everybody whether it is Bill Gates or anybody. Then this gentleman, the guy who was asking the question said that he had done very well investing in tech. Buffett offered to give him a desk at the AGM itself for investing money into tech but would not do it himself. He never changed tack! So I am in that kind of a mood right now after having got a good slap in 2000-2001 in terms of valuations.

So now going forward where do we invest? First thing I'm not invested anything in last 2-3 months. I have been so shocked after seeing the debacle, so that's the fact that I have not invested anywhere. But do I have something in portfolio? Yes. I am fully invested. Every single penny. I am not leveraged. And so where do we see the opportunity? I feel if we are able to double the money in next three years or even four years we are doing fine. Earlier I used to hope to double every two years but now looking at the scene I am saying three years (laughter). So in three years if you can double then I think we are -- I mean I have done very well. So to double in three years what are the ideas I have -- I thought that me speak about 2-3 ideas, very specifically let's start with our famous Hero Honda.

RAMESH DAMANI: Go through and give us your business case for that-- and also Ramdeo if I can just make a suggestion is that because of new SEBI requirements if you discuss any specific stock and if you own it, then please say that you own it.

RAAMDEO AGRAWAL: Sure. Hero Honda is my biggest holding in the portfolio. Hero Honda is probably the one of the most successful automobile company right now and it is a company which changed the way people used personal transport -- from scootering to motorcycling -- in last 8-10 years. And it has come from behind (it was No. 3 or No. 4 player) and beaten the market leader Bajaj Auto in every single aspect whether it is profitability, whether it is market share, in every aspect of it. To me this looks to be a very good business. Because for one billion people what kind of personal transport is the Government providing? There is absolutely no public transport system outside Bombay.

There is no personal transport system except for two wheeler which is what a population having a $300 or 400 dollars per capita income can afford in a meaningful way. In U.S. per capita consumption of car is around 18 percent of the population and in India if we can afford ever two-wheelers it just about 4 million on a 1 billion population. So well, you can do the numbers. So the per se potential of two wheeler to go forward from here -- in last 20 years it has been growing and the rate of 10 percent compounded, now we have reached the 4 million overall two wheeler market in which 50 percent is motorcycles which is growing at about 20 percent. So I think this company growing at around 15 percent in volume terms, 16-17 percent inflation-adjusted in the value terms and something like around same 16-17 percent or 18 percent in profit terms is not difficult. Right now next two years I see growing at more than 25 to 30 percent. The valuations are ROC is more than 60 percent, actually on operating assets it is more than 100 percent and on ROE basis take is around 40 to 45 percent. The valuations are P/E right now it is the trading at around 11 times trailing and 8 time forward earnings and I feel one of the measures which has seen in the last time is that if you want to have a reasonably good multi-bagger -- I mean multi-baggar last year has been 1000 times or 100 times but I'm not referring to those kind of valuations, but if you have 3 times, 4 times in five years, six years I mean 30-35-40 percent safe return with no downside I think what you need to do is -- one of the thing you must do is after taking care of everything you must buy the stock at less than one time payback ratio. What you pay today should be recovered simply -- don't get into EV etc. and all you know trying to calculate what is a discount rate, what the going to be the inflation, what is going to be the economy? Just simply calculate if you can see that the next five years profits aggregating the current market price today, I think you're in safe hands. The issue is can you calculate, can you visualize a profit number for next five years? And then those growth rates should also be matching which is -- so I feel this particular company has a payback ratio of less than five years so I think it is worth getting into.

RAMESH DAMANI: Raamdeo, one question quick. Does it bother you that Honda Japan has set up a wholly owned subsidiary?

RAAMDEO AGRAWAL: I think the Honda subsidiary should be scared of Hero Honda rather than Hero Honda should be scared of Honda subsidiary. That's my stand.

RAAMDEO AGRAWAL: But they dominate in Asia and Honda is a big-name in every other Asian market.

RAAMDEO AGRAWAL: No, no. But out of Hero Honda, Honda is not gone. It is still holding on to its stake.

RAMESH DAMANI: Where are they going to pay attention? In a company in which it owns 100 percent or one in which it has 40 percent?

RAAMDEO AGRAWAL: Pardon?

RAMESH DAMANI: Where is Honda going to pay more attention -- in a 100 percent subsidiary or in a 40 percent...

RAAMDEO AGRAWAL: Even if -- see logically they will try to pay more attention to the subsidiary but the fact is that for the next four years they are already locked in by their agreement with Hero Honda. In terms of that agreement they cannot touch the motorcycle market. Second in 2004 Hero Honda will be having almost 1.8 to 2 million bikes under single roof which will be probably the biggest manufacture under one roof all over the world. So that kind of cost advantage you cannot have anywhere. You ask the guy who is producing 100,000 or 150,000 what is the cost structure and the person who is producing 1.8 million and 2 million and with China sitting on your back -- I mean you cannot be playing with this kind of subsidiary. And it's not that its the only two player kind of a market. The moment you try to disturb Hero Honda and if there is a dispute between Honda and the Hero group, who is going to benefit? Do think that you can transfer the turnover to Honda subsidiary? No. Bajaj is sitting there, Suzuki is there. You must have seen Yamaha's advertisement yesterday. I don't think it is going to simply come like this. So I don't think it is in the interests of Honda to disturb Hero Honda. And they have always said they are not going to disturb. So look at it this way. Had the Honda subsidiary not been there Hero Honda would be quoted 3 times the current price. So at its current price I think it is very well discounted.

RAMESH DAMANI: So it is very well discounted. Very well, Raamdeo. Give us your second idea.

RAAMDEO AGRAWAL: My second idea I think very few will like but I think TISCO looks to me a great idea. Because in TISCO the story is one of freedom. You see, this particular company or this steel industry has been regulated so much in the golden era of steel that they couldn't invest anything into the company and as recently as 1988 when they wanted to expand capacity by one million tons they needed a license which Government refused! And today they are begging to set up the new capacity. So that was the history of the TISCO and they have put up -- they spent almost Rs 8,000 crores in the 5-6 years to make it world's most modern steel plant. So, having done -- now commodity cycles are right against the so-called growth companies right now. It is much more in favor of resources stock.

RAMESH DAMANI: But steel prices are at a 20 years low, Raamdeo.

RAAMDEO AGRAWAL: Yes that's the biggest opportunity. That's what I'm saying. I'm not making a call on the steel price. I'm saying this is the lowest and probably if it goes lower than this Europe and America who are producing almost 100 million tons, each one of them, they will close down. Because their cost is almost 30-40 percent higher than that of TISCO.

SANJOY BHATTACHARYYA: May I add to TISCO? All I would say is it is not -- it doesn't fit in with the classical growth idea. That's all. I don't have any difference with Raamdeo, I think all of that is right, but the growth and corporate governance strangely from a Tata company are rather poor. They I think are very poor allocators of capital.

RAMESH DAMANI: You just looked at TELCO's results (a loss of Rs 500 crores was declared) before we came in.

SANJOY BHATTACHARYYA: No, no. It has got nothing to do with that. You look at -- this is not looking at three months or six months. This is looking at the record of TISCO for the last 20 years -- ten years -- five years and looking at how much, how they have utilized capital? And the record against TISCO on the front is absolutely brute. They are useless allocators of capital.

RAMESH DAMANI: Raamdeo? What is your response?

RAAMDEO AGRAWAL: Yes, I -- it's not that I have not seen last 10 years of TISCO in fact I visited Jamshedpur in 1995 when I made the first report when we made it and we projected Rs 1000 crores profit I think it didn't come to even 20 percent of that. So I have experience of visiting TISCO in '95 itself and let me tell you I don't know whether Sanjoy has gone and seen Jamshedpur -- if any company which is worth admiring for the kind of feeling the workers have for the company it's only in TISCO. I have visited at least 100-120 companies but I have not found that kind of dedication to the ownership feeling for a company as I found in TISCO.

RAMESH DAMANI: Does that come out in the stock price?

RAAMDEO AGRAWAL: Yes, it does work. It does work. It's not -- I know, I come from Raipur, MP which is very close to Bhilai steel plant incidentally. It is one of the biggest and the best property in SAIL's stable and there the moment the guy gets out of the gates, he never looks back to the plant. But in Jamshedpur I asked one of the supervisors "How do you manage this three shifts and things like that?" He said in the evening when he goes out for a paan or a cup of tea he simply goes into the plant and checks up whether things are all right and then he come back and sleeps.

RAMESH DAMANI: All right. Ramdeo, one more idea.

RAAMDEO AGRAWAL: Yes. Third one is a stock idea I am investigating although I have not bought the stock yet. Incidentally, I would have to disclose that I have some TISCO in my portfolio. Going back to what Sanjoy was referring to about poor capital allocation by TISCO -- I think he is probably referring to it's intention of allocating capital towards telecom. Now yes, those are concerns, shared also by global analyst -- everybody is against TISCO. In fact, I would love to see TISCO doing something in telecom. They are smart enough to understand the telecom game and are being advised by the likes of McKinzie. I don’t think that Sanjoy or anybody else would know more about telecom than the guys who are advising them. I mean they are the ones who are writing the cheques. We are only talking about it. So I think they understand...

RAMESH DAMANI: They wrote a cheque for Indica (TELCO’s losing car project) too.

RAAMDEO AGRAWAL: Yes, they wrote. But unless you write cheques you don't know, you learn from experience. I’m sure that you also must have bought so many wrong scrips. Unless you do that you don't get to buy a winner like Infosys.

RAMESH DAMANI: As Chandrakantbhai says sometimes you have to cut your losses. It's written on the wall sometimes that you're not going to be a...

RAAMDEO AGRAWAL: But there should be a buyer also when you want to cut the losses.

RAMESH DAMANI: Okay. That tells mean more about TELCO I think. All right. Next idea, Raamdeo.

RAAMDEO AGRAWAL: Next idea is for a stock which I have not bought as yet, my study is still in the embryonic stage but I think this is going to be a fairly good one -- that is BPCL (Bharat Petroleum, the public sector refinery). Over the last ten years one of the things that I have practiced is that I don't buy anything in public sector. I hate it. Whenever I have touched it I have made losses! So I don't keep anything in public sector. It's complete anti-Raamdeo. So this time around I'm liking it purely because the management is changing. If it doesn't change in that case then at any price I will sell the stock off.

RAMESH DAMANI: This is the disinvestment story you are looking at.

RAAMDEO AGRAWAL: It's not a disinvestment story because in this budget there were two things promised. Two policy reforms which were promised very categorically. One was BPCL change and the second was APM dismantling and as per the schedule.

RAMESH DAMANI: How does that change management? The management will still be PSU.

RAAMDEO AGRAWAL: No, there is a story both BP and HP are on the list of public sector companies being divested also.

RAMESH DAMANI: Okay

RAAMDEO AGRAWAL: Okay. So as far as the business changes is concerned, it's -- that's why I said my homework is not complete, I have not bought it. But still I would like to talk about it has a promising idea. In BPCL out of 45 million tons of retail products -- what is being retailed in India by way of petroleum products-- petrol and diesel -- basically the person who is the smallest in consumption typically pays the highest margin to the seller. That's basically the retailing story. Am I correct?

RAMESH DAMANI: Fair enough.

RAAMDEO AGRAWAL: And the person who is the biggest buyer would normally have the strongest negotiating power and he would be paying the thinnest possible margin. In India it is just the reverse. The person who buys the biggest volume, whether it is the PFY plant or anything they pay something like double the margins compared to what a retailer, selling to a small consumer, in the dead of the night, on the highway, just one litre of petrol. Such a petrol pump outlet would get a margin of Rs 0.30 to 0.32 per litre. And that too perhaps after a lot of haggling and you know working capital lock in and a whole lot of overheads. So I think the biggest opportunity is when the retailing of petroleum products that opens up. And here the competition is very limited, it's not like broking industry where anybody can start the terminal overnight (laughter). I mean here you have only three competitors BP, HP, IOC. IOC will remain for whole life Government of India's asset. Then you have three others, viz BP, HP and IBP. IBP is already on the block (for divestment). However, what is really exciting me is that in last 1 1/2 year of oil boom globally all the only majors who are already consolidated have money flowing through their ears. I mean they never anticipated the kind of money which is there in their pockets right now. Like what happened in Tech boom in our pockets. So you know that money is flowing in their pockets

RAKESH JHUNJHUNWALA: Their money lasts unlike ours.

RAAMDEO AGRAWAL: When they get into India it is going to happen the same way. So these people they are going to bid into any other property which opens up on the auction block. Whether it is IBP, BP or HP and they are not going to wait for the second one to come in, because once the guy who has his foot first in the door, would be enabled to assist in a policy change.

RAMESH DAMANI: Ramdeo, just a question. How do you -- if you have done some preliminary analysis, market valuation of BP in terms with Reliance Petro (RPL)

RAAMDEO AGRAWAL: Reliance Petro I have not looked at because you need a very powerful understanding of the refining margins and the cost structures and things like that. So you know I'm not comparing with RPL. I'm saying that RPL might be good or bad story I'm not commenting on that. I'm saying BP is a great story going forward because at current ROE of over 20 percent and with this kind of margin and earnings growth compounding in last 5 -6 years of around 20 percent, you're getting at 5 times, 6 times earnings. I think it's an amazing story.

RAMESH DAMANI: Three bets from Raamdeo, Hero Honda, TISCO and BPCL. We move onto Vallabhbhai and he was the most reluctant last time to give those stock ideas. We had to badger him and then badger him some more and then finely Rakesh said he won't let you get up unless you give us some stock ideas, so he shared some ideas with us. I will do you are sense of what Vallabhbhai said last time. Three stocks he named, a basket of PSU stocks. They include by the way BPCL., he very specifically said that. In terms of price performance cement major Gujarat Ambuja was around Rs 235 then, it's about Rs 185 now; BPCL is pretty unchanged, it's flat for the year. It was about Rs 190 then, it is about Rs 190 now. And he mentioned a FMCG stock called Nirma. It's down from say Rs 950 to say Rs 400 today. So that's been the one that the most serious erosion in value. What new ideas you are bringing to a table this evening Vallabhbhai?

VALLABH BHANSALI: I like two companies. One of them is Essel Packaging, which has just completed a merger with Propack. Since that merger it has become a very powerful player in the laminated tube business. Essel itself had established itself as the world leader in the laminated tube, the web technology and it was a dominant player controlling 85 percent of the market in India and it has enlarged as the largest player in China. With the acquisition of Propack it has now also acquired a very powerful and knowledgeable tube maker. Both together will have production capacities around the world and the ability to tap into every major market in the world. And it is poised therefore to acquire anywhere from 40 to 60 percent of world market over the next three to four years. There is still lot of penetration to be done in the total aggregate tube market from aluminum and other kind of tubes to laminated tubes. This is available at six times or seven times 2002 earnings and I like this stock very much because this will be amongst the first few truly Indian multinational company.

RAMESH DAMANI: Vallabhbhai, Raamdeo has talked about the quality of management. Does it bother you that some sister companies have been loaning out money for stock market transactions?

VALLABH BHANSALI: They share the same parentage.

RAMESH DAMANI: So does that worry you that by accumulating a cash hoard rather than giving it back to the shareholders the company might go into useless diversifications?

VALLABH BHANSALI: They haven't done useless diversifications. Yes there have been diversions, but I also seen this management over the last 15-20 years and I have also seen this management bring a lot of private capital to the company or take on any difficulties on personal account rather than company's account. So indeed it doesn't have a very shiny track record in terms of corporate governance but probably I think the discounting still keeps it very attractive and probably discounts the corporate governance issues more than necessary.

RAMESH DAMANI: Okay. Next idea?

VALLABH BHANSALI: Is a company called Moser Baer. Moser Baer is into storage products. It started manufacturing floppy diskettes and then into CDs and now CD writers. It's already ready with the next line of storage products. It's a huge market and the manufacturing shift took place in a classical manner from America, to Japan, to Taiwan, to South Korea and other markets -- it's come to India. One doesn't associate excellence in hardware manufacturing with India. But Moser Baer has been a very dogged and good player in this market. It has established itself as probably the lowest cost manufacturer at what we believe to be the cost of the lower cost manufacturer in Taiwan; it already makes a handsome profit. CD-R is a relatively new product and we find that most new computers or a large part of new computers are now fitted with you know CD-R or CD writers. And with that kind of growth and the PC growth is here to stay they are already getting into branded markets. So they are already into Europe, they want to be in America and the moves that they have made really indicate that they have the management depth and the market has I think a lot of growth potential. So they just went through a large expansion last year, they showed their ability to take on a large project, finance it, complete it and get into commercial production and market it. So in terms of their working capital cycle, capital efficiency, their ability to raise this money etc. one gets indications that this could be among the first Taiwanese clone, so to say, emerging out of India.

RAMESH DAMANI: In hardware?

VALLABH BHANSALI: In hardware. Clearly you know when I was doing the financing for Reliance Petroleum or even before of the Reliance Industries cracker and when Reliance said that our cracker will have the lowest cost in the world I couldn't believe it. But this I think is now common knowledge that you can build factories and now you realize that you can operate many of those factories at probably the lowest cost in the world. If Indian brains can write the best software in the world, I think given the economic freedoms in terms of import tariffs etc. we have lot of potential. I must also add that in the last couple of years this company has been able to make a lot of innovations in the technology which they initially brought in to manufacture these products and I think they can take some technology back to the collaborators now.

RAMESH DAMANI: Do you own positions in these stocks?

VALLABH BHANSALI: Sorry?

RAMESH DAMANI: In terms of disclosure, do you own positions in these stocks?

VALLABH BHANSALI: I think our group has been recommending these stocks. We have investment banking interests in these companies. Our group has holdings in it. I think I personally have a small holding in Essel Packaging. It's not a major interest.

RAMESH DAMANI: Sanjoy, your turn. You are now on the hot seat.

SANJOY BHATTACHARYYA: Let me preface my comments so that it’s easily understood when I come from. I have an almost an identical approach to investing as Raamdeo except that I don't have as much of a sort of need to have high levels of growth. Clearly growth does provide the value and we are paying one rupee today to earn more than one rupee discounted back to present value terms that's the reason we do it, so there has to be some value in what we are doing. But growth is not the only element of value and for me one of the more important determinants of profitable investing is the competitive position of the company. Quite apart from the fact that I'd like the company to be in a good business, I'd pay a fair amount to have predictable cash flows with very high levels of certainty and since I find it difficult to anticipate change I typically don't like very much change. I lay more emphasis on the fact that the companies must be run by people who are both competent and honest. And that's very important and unfortunately unusual in this country. So I'm limited in the set that I have. I'm also a bit of a quibbler as far as how I define integrity, which makes life even more difficult for me.

RAMESH DAMANI: How do you define integrity? Define it for us.

SANJOY BHATTACHARYYA: At the end of the day, if there is any divergence in the economic interests of the guy who holds 100 shares and the guy holds one million shares then there is a lack of integrity. Its as simple as that.

RAMESH DAMANI: It's a pretty stiff bar isn't it?

SANJOY BHATTACHARYYA: Yes, I will try and get over that bar. Now, not all of them will meet this test in spades but they come pretty close to it.

RAMESH DAMANI: Okay, let's start.

SANJOY BHATTACHARYYA: Yes. Four picks. Asian Paints, SmithKline Consumer, Container Corporation and Hoechst. And HDFC Mutual Funds – (Sanjoy is the CIO of HDFC mutual funds) the growth fund owns all four of these.

RAMESH DAMANI: Let me just repeat them for the audience so they get it clearly -- Asian Paints, SmithKline Consumer, Container Corporation and Hoechst. Okay? Is this an order of some sort?

SANJOY BHATTACHARYYA: No, no. This has got no order to it, it is completely random, but essentially the ideas all have the same thing going for them. These are all businesses which historically have had a good record. I know that rear view driving is not the best way to invest but nevertheless it is one. You know the past in some way to the prologue to the future. So those of us who don't study history are bound to repeat its mistakes which is why I talk a little bit about the past.

RAMESH DAMANI: Okay.

SANJOY BHATTACHARYYA: In the last 10 years or longer if you look at the record of any of the companies barring Hoechst, it's a fairly decent record. Not a record you stand up on your chair and jump about, but moderately good. They haven't been guilty of really wasting capital or misallocating capital. They all in their businesses have reasonably strong competitive positions. They are all -- in the way they look at their businesses -- I should emphasize this, they are all No. 1 in their businesses or aiming to be No. 1, if they are not already No. 1. Now clearly Bournvita was No. 1 in the brown malted food business but today SmithKline Consumer has got to that position. They have overtaken Bournvita. They are now No. 1 there. All these companies have been run over time by people who definitely are competent, because that's reflected in the long term earnings power of these companies. They haven't behaved irrationally.

Hoechst I think had certain problems because they needed to go through fundamental changes in their business, which is why actually I could exclude Hoechst from some of the criteria that I spelled out, but I think going forward Hoechst will meet these criteria. So it won't meet this looking backwards and to me most importantly these businesses will react quickly. It's much easier to anticipate what change can hit you in these businesses. Once again Hoechst is the most vulnerable on this count. Probably the company where it will be more difficult to anticipate the kind of change and to react to it and the sustainability or predictability of cash flows -- they all generate free cash flows by the grace of God, which is very important to me. The predictability, the level of certainty that one has when one leaves the office in a evening vis-a-vis you know how much they will generate in terms of cash flow on a monthly basis, quarterly basis, annual basis, three yearly basis, gives a comfort level.

That's the only way you can actually apply Raamdeo's formula because if you cannot understand and predict cash flows for the next five years then the formula dosen't work. It's a very elegant formula. I think it's a perfect way to invest. But what level of faith do you have in the numbers for the next five years. And if you invest in businesses with high-levels of change then that formula breaks down.

RAMESH DAMANI: Let's talk about some of the individual selections. Container Corporation, your token PSU or is there some...?

SANJOY BHATTACHARYYA: To me it doesn't matter whether it is PSU or non-PSU. This is a distinction, which is not that relevant. It's relevant if they are inefficient allocators of capital. Most public sector companies have been damned because they do not allocate capital efficiently. Container Corporation is not in that category. Container Corporation has a return on capital employed for the last five years an average in excess of 35 percent and return on equity in excess of 23 percent.

RAMESH DAMANI: Small workforce helps, perhaps a very small labor force?

SANJOY BHATTACHARYA: Yes, clearly that helps. But the most important thing is that Container Corporation is a monopoly.

RAMESH DAMANI: Natural monopoly?

SANJOY BHATTACHARYYA: Yes. And all of these are in some senses monopoly. As Mr. Buffett calls -- it’s a lovely word, I can't do better -- they have moats around them. Its not easy to invade these moats. The moats are different. Distribution for Asian Paints is one such moat...

RAMESH DAMANI: Is Asian Paints a call on the feeling that infrastructure is going to boom in this country?

SANJOY BHATTACHARYYA: No, no. I don't have any of these grand ideas. I think in fact you make investing harder if you go for grand ideas. It's just micro -- it's a very well-managed company with a strong dominant competitive position, which does the little things right, reaps the harvest, consolidates and move forward. Asian Paints has had the loss of a promoter and many people at that time were skeptical as to whether this company would continue to maintain its run of success when Ashwin Choksey left. And fine -- that was a distraction that they could have done without, but they have come out of it pretty damn well. I find this quite amusing actually. When I go and meet some one who is actually very senior in the company, he keeps on saying ‘house paints’. He has this incredibly lovely Gujarati way of describing his business. He keeps on saying "Aapre house paint maan No. 1 che" (we are No. 1 in house paints), which is great. I think he doesn't understand sometimes the most subtle differences between different types of paints as classified by analysts and what they're saying architectural paints, exterior paints, but his focus is unerringly clear. He knows where he wants to get and he gets there. He delivers. And he has delivered ever since the day he went public. Sept. 27 1983. For the last 18 years, with clockwork precision he has delivered superior results. He has not had one down year in the last 18 years.

RAMESH DAMANI: If this stock is to be selected as the basket Sanjoy, what would be a warning signal to you? Are there warning signals that come when you read a balance sheet? What are the points that you look for? Can you share those with us?

SANJOY BHATTACHARYYA: Yes. Sure. I think the warning signal again relates back to what I'm trying to buy into. So if I find signs of dishonesty which is reflected in many ways in balance sheets -- one is loans and advances, you look at intercompany transactions, that's one very good indicator usually in India. You look at how free cash flow is being deployed in investments. You look at the efficiency of working capital, what is happening to the operating cycles that is inventory plus debtors minus creditors. And in this business actually that's a bellwether indicator of the strength of the brand. If you have a strong brand it must get reflected in low levels of receivables. That is really the power of the brand. Do they have pricing power? So what is happening to average realization over time? Asian Paints, along with ITC are the only company in the last 12 months, which have taken more than one price increase. And it hasn't seriously affected their volumes. Their volume declines that we have seen in the short run is actually partly extraneous. Adjusted for that extraneous factor of the earthquake in Kutch area, Asian Paints would still have had rising volumes or so one believes. I believe what they say. And one another very important thing in India which I think doesn't always get the attention perhaps that it deserves is what is the quality of that earning? Where is that earning coming from? How much of it is driven by operations and how much of it is driven by treasury income. Because large numbers of companies now have significant treasuries and financially the use of surplus cash which is earning cash is vulnerable to changes in the economic environment. That can be contrasted to how much of the earnings is coming from the operating environment. And that can actually make a big difference for companies with large trading. Hindustan Lever is a classic example. It masks underlying weakness in the operations. And you are paying the same multiple for financial earnings as you are paying for operating earnings though I must say that we own Hindustan Lever as well.

RAMESH DAMANI: You know it’s a big part of the index, so you have to own...

SANJOY BHATTACHARYYA: Whatever. I'm not offering that as an excuse but yes that's important to figure out. The last thing which I think is very important is also to see what is happening to the tax outflow. I can see it's a bit amateurish, but it helps nevertheless it to see whether you're comparing apples with oranges or not. What is the tax rate? And if you are paying a high tax rate, that a good proxy for integrity.

RAKESH JHUNJHUNWALA: There I think you know my observation is that the market is essentially discounting profits on a pre-tax basis. When we feel that Lever’s P/E is high I mean it's my feeling that personally all companies who pay taxes on consistent basis get higher P/Es. So from that analogy can be drawn that actually the market is considering pre-tax profits.

SANJOY BHATTACHARYYA: Yes it would appear that Rakesh is right if you look at the way the markets discounted the IT companies. Because you were comparing apples with oranges. These are companies, which were not paying taxes. In fact you were comparing pretax profits for the Indian IT companies with post tax profits any number of other companies. And I think that actually exaggerated how expensive some of these companies were. But to come back to it I think one of the reverse checks of integrity apart from loans and advances, investment, what is happening on working capital is also to look at the taxes and to look at the quality of earnings. That usually gives you a hint. Finally and most importantly I think you have got to kick the tyres, you have got to go and meet the people. In our country, it's very difficult to sit, close yourself in a room and be a great analyst of financial statements and manage to invest well. I think there is a lot that happens when you look a person in the white of his eyes and ask him a couple of tough questions. It usually sends you a very good message of whether the guy has something to hide or he doesn't have something to hide.

RAMESH DAMANI: Fair enough. Rakesh, there is no hiding for you. We're going to come right next to you. Let me see some of the picks Rakesh gave us in the first round table conference. His favorite at that time, MTNL, and the statement he made was that it would be privatized in the next 12 months hasn't happened. Price has collapsed from Rs 275 to Rs 125. Shipping Corporation when recommended was around Rs. 80, it’s hit a high of Rs 45 recently, it's currently around Rs 35 unchanged. Tata Tea because of the Tetley deal price has fallen from Rs 500 to about Rs 225 and then ouch!, ouch! private equity that really must have hurt his portfolio. So that was his picks last time around. Rakesh, what are your fresh ideas this time?

SANJOY BHATTACHARYYA: Sorry, before Rakesh starts can I make one more comment?

RAMESH DAMANI: Sure.

SANJOY BHATTACHARYYA: There is an unlisted company, which is very unlike most unlisted companies, which corresponds exactly to what I said about the other four companies which I own personally, which I think is an outstanding...

RAMESH DAMANI: Do you recommend on listing?

SANJOY BHATTACHARYA: I would recommend buying it unlisted.

VALLABH BHANSALI: How?

SANJOY BHATTACHARYA: Go out. There are trades taking place in it. You can buy it. It's called i-Flex Solutions and the beauty is here. I'm not buying it simply because it is IT. It meets the characteristics of exactly what the other companies meet and it’s priced in a way that is attractive enough to own it at the current juncture.

RAMESH DAMANI: What should be the unlisted price?

SANJOY BHATTACHARYA: It's ten times. It's roughly 10 times earning. If you buy it around the...

CHANDRAKANT SAMPAT: 10 times?

SANJOY BHATTACHARYYA: Sorry, it's not 10 times it's about 13-14 times this year's earnings, March 2002 earnings.

RAMESH DAMANI: It's about Rs 1400 – Rs 1500?

SANJOY BHATTACHARYA: Rs 1400, yes it should be available around that price.

RAMESH DAMANI: Unlisted stock.

SANJOY BHATTACHARYYA: Yes. But it gets traded and it can be bought.

RAMESH DAMANI: All right. Next.

RAAMDEO AGRAWAL: Ramesh, he is the most successful -- I mean amongst -- apart from Vallabhbhai, one of the successful investors in Infosys.

SANJOY BHATTACHARYYA: No, wrong. Lucky.

RAAMDEO AGRAWAL: What are his views on Infosys?

SANJOY BHATTACHARYA: I think they're still expensive. The fact that it has fallen from Rs 14,000 to Rs 3400 today doesn't make it cheap. And people have had unrealistic return expectations. It's definitely a very good business and I think as mutual fund managers we have this Pavlovian response you know, electric shocks we move away, you get food you move to it, so we tend to behave in that dog like fashion. But having said that I don't think that if you bought it at 3400, that you should have bizarre expectations of the kind of returns you would make over 3 years. I think you will be lucky if you saw it at Rs 7000, Rs 7500, Rs 8000 in three years time.

RAMESH DAMANI: It could go down to Rs 2000, that’s what I'm more worried about.

SANJOY BHATTACHARYYA: That, on a rainy day. It could. On a rainy day it could, but at Rs 2000 bucks...

RAMESH DAMANI: It's raining right now outside...(laughter)

SANJOY BHATTACHARYYA: It could, absolutely. But that’s what provides the opportunity. You know you can't buy these stocks unless you have a rainy day. You can buy high quality businesses at low prices.

RAMESH DAMANI: Vallabhbhai?

VALLABH BHANSALI: Since you know he said that lot of his philosophy is similar to Raamdeo’s. So, what are your expectations of the stocks that you have recommended?

SANJOY BHATTACHARYYA: I think if you can...

VALLABH BHANSALI: Rs 3400 going to Rs.7000 or Rs.8000 means doubling.

SANJOY BHATTACHARYYA: But I wouldn't recommend Infosys for that reason. Infosys didn't fit into the list for that reason. Infosys also doesn't have the same level of you know, predictability of earnings; it's very difficult to predict change. This is not a business, where there is predictability of earnings. Yes, it's not easy. It is pretty difficult. Which is why I think it's very nice of Raamdeo to say I made a lot of money in Infosys. But the fact remains that I think very often many of us make money because we get lucky and attribute it to skill and that's the biggest mistake you can make in your life in investing.

RAMESH DAMANI: Everyone is a genius in a bull market.

SANJOY BHATTACHARYYA: I am certainly not.

CHANDRAKANT SAMPAT: I agree with you.

RAAMDEO AGRAWAL: When you mistake the Bull Run with brains then there's a problem.

RAMESH DAMANI: Rakesh brings luck and skill. We have gone through his portfolio. Rakesh, your fresh ideas.

RAKESH JHUNJHUNWALA: See, first I would like to make 4-5 observations. Last time we met I think the one emotion all of us had was greed. And I think the markets topped out say two months from that time and I think one emotion which is overriding all of us today is fear. So I think that brings hope. All of us were very greedy at that time, all of us were very hopeful and exhilarated and I think at this moment all of us are subdued, at least I am and very fearful, so -- and I think most of us share this qualities. I think we are somewhere near a bottom.

Second, I would like to say is you know that not only last time and this time, worldwide if you see the one thing which had you know exhilarated everybody in the market is that people had lost all fear. And they were just absolutely guided by greed. I think that's what the Bull Run has done. I think that stage has come to an end.

Ramesh, I think what is important also is we must note that India's interest rates were 17-18 percent say five years, six years ago. If you saw the P/E of the BSE Sensex, it used to be double of what it is today. So interest rates today have come down substantially reduced and interest rates surely are a factor in valuation and I think the P/E of the BSE has also halved. Or the BSE Sensex has also halved. So I think this is some kind of a paradox, which will have to end. And I personally think that this reduction in interest rates is surely going to play a very big role in better valuations.

Then as far as you know I think except for MTNL and VSNL buy anything in the public sector, you will make money. That's my opinion. Buy anything in the public sector, which is listed. You know you may have your opinion of BPCL, I may say, he may say CMC, if you look at all their valuations -- you see I was wrong, it was not disinvested in 12 months, but I think a time will come when the disinvestment process is complete. I can't say what the time period will be. It could be 12, 24, 36 months. Suppose BPCL is there, HPCL is there, let us suppose that the time phase for that disinvestment of BPCL instead of 12 months is 36 months. Is BPCL in a business that its quality of earnings deteriorate during that period? See today BPCL is in a monopolist situation. Right? And if the disinvestment is delayed BPCL is going to keep earning. Right? So whenever the disinvestment takes place, when you expect the big upside in the price, until that moment there is going to be no disorientation in BPCL’s earnings. If you look at the valuations all of them are today four times, five times cash flows. And I think businesswise specially Container Corporation, are in such dominant situations that people believe that CMC will be disinvested at Rs 600. So that they are an opportunity from Rs 300 to Rs 600. I believe the upside will start at 600. Because I think that kind of cash flows they have and the skills of the people is not only with the private sector. I am absolutely bullish on the public sector. If you wake me up at 5 o'clock in the night, give me three slaps, I will say public sector, public sector, public sector. Any you know now we have got Mr. Buffett's great fan also looking at the public sector. So there is hope.

RAMESH DAMANI: Fair enough. Non-PSU sector ideas?

RAKESH JHUNJHUNWALA: See I like...

RAMESH DAMANI: We will put down BPCL and CMC to you and you can make...

RAKESH JHUNJHUNWALA: No, no. I don't know anything about BPCL. In the public sector I most bullish in CMC, Bharat Electronics and Engineers India.

RAMESH DAMANI: Those we will put down for you.

RAKESH JHUNJHUNWALA: And Container Corporation. All four.

RAMESH DAMANI: CMC, Bharat Electronics...?

RAKESH JHUNJHUNWALA: Engineers India and Container Corporation.

RAMESH DAMANI: Engineers India and -- and you have positions in all of them, Rakesh?

RAKESH JHUNJHUNWALA: No, I don't have. I have positions in some of them. In CMC and Container Corporation.

RAMESH DAMANI: Bharat Electronics you have...

RAKESH JHUNJHUNWALA: And Bharat Electronics also.

RAMESH DAMANI: All right. I know that. All right. Non-PSU ideas, Rakesh.

RAKESH JHUNJHUNWALA: I am bullish on the company called Tata Infomedia.

RAMESH DAMANI: They had their analysts’ meet yesterday. What did you learn there?

RAKESH JHUNJHUNWALA: Well I have -- there's not much to learn at any analyst meet, (laughter) but I think they are...

RAMESH DAMANI: I hope you don't say that about the roundtable.

RAKESH JHUNJHUNWALA: No, but I mean they are in the best businesses, they run the Yellow Pages in India, they have Special Interest Publications, right? They have an -- today their valuation is say about four times pretax earnings, right? I mean they are in businesses where the cash flow generation of the businesses are high, they are dominant in the businesses in which they are, especially in Yellow Pages and Special Interest Publications. Those businesses are in a very evolutionary stage in India. I think the valuation is great, the company has grown constantly, their profits have grown about 20 percent pretax in the last 7-8 years. So I think at this valuation the price will sustain.

RAMESH DAMANI: It's around Rs 140?

SANJOY BHATTACHARYYA: I'd like to ask Rakesh a question. Not that I'm trying to challenge him but curious about this because I have seen this and I agree with almost everything that he said but this is a company which uses its free cash flow to invest in Readers Digest India and Titan Industries. And these are not insignificant sums of money in relation to total capital employed. To me that's a red herring.

RAKESH JHUNJHUNWALA: This question has been raised by a lot of people. See the Titan Industries’ investment was made ten years ago. Right? And I personally don't see anything wrong. That company has got Rs 60 crores of cash flow and it gets an 8 percent yield on the Readers Digest (RDI) investment. What's wrong? The company is generating Rs 10-15 crores every year. Specifically yesterday they have said they are not going to make any inter-corporate investment.

SANJOY BHATTACHARYYA: No, no. Rakesh my question is that if you want to invest your surplus free cash flow what would your first choice? If you were the person responsible for allocating capital at Tata Infomedia would you own Titan? I think the answer is no.

RAKESH JHUNJHUNWALA: That's been done ten years ago.

SANJOY BHATTACHARYYA: No, no. So why is it not been paid back?

RAKESH JHUNJHUNWALA: In 1945 Tisco invested in Telco. You can't hold it for that.

SANJOY BHATTACHARYYA: That's still a problem. The fact that Tisco invested in Telco…

CHANDRAKANT SAMPAT: It can disinvest you know

RAKESH JHUNJHUNWALA: No, no. But Tisco's investment in Telco is a very profitable investment. It has fared better than its main business let me tell you. If you look at Tata Infomedia , Rs 110 crores is the revenue, Rs 40 crores is printing, the nonprinting revenue is Rs 70 crores and operational profitability is Rs 28 crores. And they are dominant in all the businesses that they are.

SANJOY BHATTACHARYYA: What about RDI, Rakesh?

RAKESH JHUNJHUNWALA: Why, it's a profitable investment.

SANJOY BHATTACHARYYA: At the price at which they bought it?

RAKESH JHUNJHUNWALA: Yes, it is profitable. They're getting 8 percent yield, they can sell it at four times the price they bought it.

CHANDRAKANT SAMPAT: Give it back to us by way of dividend.

RAKESH JHUNJHUNWALA: They are giving you -- they give 70 percent dividend.

CHANDRAKANT SAMPAT: No, no. They ought to perhaps sell the stake and distribute the proceeds.

RAKESH JHUNJHUNWALA: See they have not made any of this kind of investment in the last four to five years. Sir, it's not all black and white, there is a lot of gray.

SANJOY BHATTACHARYYA: Okay, fine. That’s absolutely okay.

RAKESH JHUNJHUNWALA: Right, If I were to think of some of the multinational companies which invest, after what they have done to shareholders, in my lifetime I won't do it. Some have treated minority shareholders very poorly indeed!

RAMESH DAMANI: Have multinationals been a bit under the board, Sanjoy?

SANJOY BHATTACHARYYA: Rakesh's defenses I mean...

RAKESH JHUNJHUNWALA: What has Gillette India done? What has SmithKline done?

SANJOY BHATTACHARYYA:... I didn't get him. Though a few multinationals have not been above board, there is some amount of hyperbole in what he is saying. I wouldn’t go to the extent that he does...

RAKESH JHUNJHUNWALA:... What has Kodak done...?

SANJOY BHATTACHARYYA:... there have been I think multinationals which have certainly not gone down the path of what I would say is sensible corporate governance. That is absolutely right. I have no difference with Rakesh there. But to brand everyone as one of them in that same fashion I think is an exaggeration.

RAKESH JHUNJHUNWALA: I think except Lever and maybe Glaxo and Colgate I can't think of fourth multinational...

CHANDRAKANT SAMPAT: Look at Nestle.

RAKESH JHUNJHUNWALA: Look at Otis. What have they done now?

CHANDRAKANT SAMPAT: Bad business.

RAMESH DAMANI: Otis bought of course the management's stake at -- the Mahindra's stake at -- maybe Rs 385 and they are giving us an offer at Rs, 275.

SANJOY BHATTACHARYYA: There's a difference of a period of one year or so. So that is really questionable.

RAKESH JHUNJHUNWALA: No and one thing is you know, we may feel that -- we maybe patriotic enough and feel that we can influence Government policies so that those multinationals give 26 percent of their equity to the market. But they deal with the Governments of the world. And they're not -- it's my personal opinion, I can be wrong, I have very low regard for corporate governance of multinationals.

RAMESH DAMANI: Sanjoy, this Otis thing -- does that bother you?

SANJOY BHATTACHARYYA: Yes, it does. There is no question that it raises all sorts of doubts about the way minority shareholders have been treated and the fact they, the transnationals, have been opportunistic. But I think it's a bit harsh to make the comment that they should never do anything like this if the Government changes the rules in their favor or environment in their favor that they should they behave like Jesus Christ and turn the other cheek. Everyone is opportunistic. Every one of us is opportunistic.

RAKESH JHUNJHUNWALA: And in a capitalistic society let us realize the realities rather than...

SANJOY BHATTACHARYYA: No, I think there was some element of people who misread what was happening in Otis in terms of understanding its business, lost money because they didn't monitor that investment well enough. Now turning around and saying "oh! Christ we have been shortchanged by a bunch of crooks". So the truth is actually somewhere in between.

VALLABH BHANSALI: I think, Sanjoy, I would like to interrupt here. If you look at the window dressing in the last balance sheet and we see clear deferral of profits to announce this in this quarter and I think if you see the results of the coming quarters you will see that it's not...

SANJOY BHATTACHARYA: No, No. absolutely the VRS. The VRS...

VALLABH BHANSALI: It is not only a question of going to do a buyback. Lot of Indian companies are doing that. But they are not window dressing their balance sheets.

SANJOY BHATTACHARYA: No, Vallabh but for the analysts...

VALLABH BHANSALI: I think this question is being directed to you also because you said that one of the criterion of you know picking stocks was where you see unity of purpose and unity of interest between the minority shareholder and management. So I think MNC's collectively have shown that there's been massive divergence there.

SANJOY BHATTACHARYA: It's true that there have been such cases. On the flip side there have been a number of MNCs, there are not that many, but there are some who have actually demonstrated outstanding principles of corporate governance in this country and they actually standout as role models.

VALLABH BHANSALI: I think ten years back until the reforms began...

SANJOY BHATTACHARYA: It's become much worse now.

VALLABH BHANSALI: ..so the moment they got opportunities I think lot of them have shown their true colors and there are only a few exceptions now.

RAMESH DAMANI: We need to get to Chandrakantbhai and then throw it open to the audience. We started a bit late, so let's make up. Chandrakantbhai's performance over the last time. He gave us 7 sweet picks that he had and I think most of us who know him could have predicted those stocks: Colgate, Nestle, P&G, Birla 3M, Cadbury, ISP and Lever. In that portfolio amongst the scrips that appreciated, Nestle's gone from Rs 400 to Rs 530; the one that has fallen the most drastically is of course Indian Shaving Products, now called Gillette, an old-time favorite of his. Of course he bought it in the low teens, it went up to Rs 2100, which is what it was quoting at that time, today it's closer to Rs 400. So that has been the most serious underperformer in his portfolio. As a basket of course his stocks have gone down with the index going from 6000 to 3000. Chandrakantbhai, the floor is yours.

CHANDRAKANT SAMPAT: Well, I don't know what exactly is the question, but if there is a question that how would I be investing, I would answer it in this way. The first thing I would try to imagine is what is the competitive advantage period? How long is my company going to be dominant in what it is doing? Is it five years, is it three years, is it ten years or is it going to be 20 years? Because the power of compounding can only come if there is a competitive advantage to be had without which nothing works. That's No. 1.

The second criteria that I meticulously follow is the asset turnover ratio. Anything...

RAMESH DAMANI: Explain that. Explain that to us.

CHANDRAKANT SAMPAT: The total turnover compared to the assets employed. If you are having an asset of 1 the turnover should not be less than 2.5. That is the second criterion I love to adhere to and most of the time I do.

The third one is that I would not like to pay more than 2 1/2 times the sales as a market cap. I don't believe in PEs. I don't believe in book. Because -- well, I am known as a health addict, what happens to a person who keeps on having butter, ghee and ultimately puts on weight? So my financial health also goes away when I pay say 100 times the sales as a market cap.

SANJOY BHATTACHARYYA: Just to ask to Chandrakantbhai I think also partly for my own knowledge, partly for the audience, do you have a bias towards companies with very low leverage? Are you really saying 2 1/2 times what the company is worth or 2 1/2 times market cap?

CHANDRAKANT SAMPAT: 2 1/2 times market cap.

SANJOY BHATTACHARYA: So if a company is highly indebted but has a market cap 2 1/2 times to sales you would still buy it?

RAAMDEO AGRAWAL:... because of the sales turnover ratio

CHANDRAKANT SAMPAT: Sales turnover

SANJOY BHATTACHARYA: Oh, for that reason.

CHANDRAKANT SAMPAT: For sales to market cap.

SANJOY BHATTACHARYA: Okay. So you are not saying you have a bias against companies those are highly indebted.

CHANDRAKANT SAMPAT: No, no. Sales to market cap. is the ratio I look at

SANJOY BHATTACHARYA: Okay. Fine.

CHANDRAKANT SAMPAT: Now that's where I stop. Anything over 2 1/2 times I would not like to touch. Then I would like to have a look at dividends. Any company that is distributing less than 30 percent of its net profits, I would not like to touch. The reason is very clear. I would like some of my friends to look at one book which is Managing in Turbulent Times. That's by Peter Drucker's. Please go to page No. 26. He has defined profits. What you call profits are not really the profits. It's the cost of staying in business tomorrow. These costs have been incurred but are not on the profit and loss account and the balance sheet. Therefore what is profit is really the free cash flow which is being distributed to the shareholders. So that's my next criteria. For instance I do own Colgate but let me tell you this. Last year the capital employed was Rs 306 crores. In the next five years I see this capital growing -- capital means there is no debt you know it's all capital employed going to about Rs 410 crores. Whereas the profits which were last year Rs 52 crores will move to around Rs 200 crores. Now this whole migration is taking place. P/E has no meaning. Book has no meaning and 85 percent of the profits would be distributed to the shareholders in terms of the dividends. So the real profits are what you get as a dividend and not what you transfer to the reserve.

A better way of putting it is how well the company is compressing its capital in relation to the profits. Is the capital employed growing faster? Are you throwing it to the reserves, which are the future costs? Or you know you are really distributing the profits.

And lastly. I was going through a January 2001 Red Herring. And again it happened to be Peter Drucker there. He says in the next 10 or 15 years manufacturing companies would not survive. This I am just quoting. You have to have only the companies with a strong distribution system. Now this is a question of survival. The assets because of the change in technology would become redundant very fast and are subjected to a very big risk. I am a risk averse person. So I look at the companies, which have only branding and selling; No. 2, special skills to do that; No. 3, negative working capital; No. 4, least capital expenditure. Outsource everything. Now do we have that kind of a company?

RAKESH JHUNJHUNWALA: Tata Infomedia meets all those criteria, Mr. Sampat.

CHANDRAKANT SAMPAT: Ah?

RAKESH JHUNJHUNWALA: Tata Infomedia meets all those criteria.

CHANDRAKANT SAMPAT: Yes, but cross holdings. And yes, If it does, good luck. I am not saying that I know about it. I don't say that I don't know about it. If it is, good luck. That's where you make profits. So therefore the question comes in as to where do I invest? I want to invest in a company -- let me give you an anology -- I like to travel by a taxi which has no meter, which will keep on distributing, which doesn't need capital from me, which doesn't need reserves -- transfers from the reserves.

RAMESH DAMANI: I can't handle the suspense Chandrakantbhai. Give us your stock ideas.

CHANDRAKANT SAMPAT: That's it.

RAMESH DAMANI: Give us the names of the companies that have negative working capital, have no meters...

CHANDRAKANT SAMPAT: Well, you look at Colgate. Negative working capital. No capital expenditure as a matter of fact...

RAMESH DAMANI: No growth either.

CHANDRAKANT SAMPAT: Okay, do this. Do it at 12 percent compounded, please do it on your spreadsheet, this Rs 1023 crores turnover would move to about Rs 2025 crores at 12 percent compounded. If you look at the last 13 years the profits before interest, tax and ad spent is 27 percent which in this year going to 29 percent. The parent is cutting down the cost every year by 1/2 a percent and that is what has started happening here. Put it at 28 percent, do 28 percent of it, keep the ad spent you know same at Rs 200 crores because the ad spent today is 20 percent of the turnover. The industry average is 10. Let them come to 10. They will. And that again forms an entry barrier. Can anyone come in into that market after spending Rs 200 crores and acquire some market share?

SANJOY BHATTACHARYA: Chandrakantbhai, here I with full respect to you and what you are saying, Hindustan Lever has actually rocked their apple cart. In fact they are spending Rs 200 crores on advertising because Hindustan Lever has pushed them to the wall.

CHANDRAKANT SAMPAT: Yes, yes

SANJOY BHATTACHARYA: And they have a very strong competitor who is making life difficult for them.

CHANDRAKANT SAMPAT: I will answer that question. This company was so prosperous that it was sleeping. Now they're paying for that sleep. The company has made it very clear that the ad spend as a percentage of the sales will not expand. And it was ultimately go to 10 percent. Another 30 new dental products are coming like Floss, this, that you know. So if you look at it and as I said equity is a risk. Where do you take the risk? You imagine where you can get the maximum returns and I that these are the kind of companies where you can. Look at Nestle for instance. In the last three years the company has contracted its capital employed by 27 percent and the profits have grown by 27 percent. The exact figure is Rs 550 crores as the capital employed, this year’s capital employed is Rs 350 crores. And if you make the adjustments for impairments and what not the real earnings are Rs 140 crores. And it's not enough. As I said you have to have some imagination. Say look at this. Today the milk market in India is Rs 1,05,000 crores. The organized one is Rs 125 crores. Ultimately for the health reasons, ultimately from the demographic changes that are coming, ultimately where the urban incomes are moving, what can be this market in the next 10 years? Or there is the possibility that in the next few years most of us would be moving around with a bottle of water rather than taking the water outside. These are the new growth markets, enormous growth markets around, that's where the growth lies. That's where I look.

SANJOY BHATTACHARYA: Chandrakantbhai, Nestle doesn't meet your cut, market cap to sales.

CHANDRAKANT SAMPAT: No, I won't buy it now. But whenever it meets.

SANJOY BHATTACHARYA: Okay. Right.

CHANDRAKANT SAMPAT: Whenever it meets. That is a discipline.

SANJOY BHATTACHARYA: Yes, okay. But right now it's clearly not something you would recommend.

CHANDRAKANT SAMPAT: No, no. I won't do it.

RAAMDEO AGRAWAL: It's just about reverse

SANJOY BHATTACHARYA: Market cap to sales is...

[crosstalk]

CHANDRAKANT SAMPAT: No, it is not currently five times.

RAAMDEO AGRAWAL: What I'm saying is it’s three times.

SANJOY BHATTACHARYA: Three to four times.

CHANDRAKANT SAMPAT: No, Today if you look...

RAKESH JHUNJHUNWALA: Give him a right to his opinion.

CHANDRAKANT SAMPAT: I mean, I will just tell you. No, no please let me answer the question.

SANJOY BHATTACHARYA: It's three times.

CHANDRAKANT SAMPAT: It is little less than that. It’s 2.70.

SANJOY BHATTACHARYA: Okay.

CHANDRAKANT SAMPAT: Around Rs 2100 crores this year.

SANJOY BHATTACHARYA: Okay, fine.

RAKESH JHUNJHUNWALA: Investing is a science, it is not an art.

SANJOY BHATTACHARYA: No, no. I was just curious. He laid out certain things and...

CHANDRAKANT SAMPAT:... 2001. It's a good thing you know. We are having a debate. We're not talking about the certainties. When we talk about equities we talk about the uncertainties.

SANJOY BHATTACHARYA: Correct.

CHANDRAKANT SAMPAT: Okay? Rs 2100 crores and if you take today's market cap on say Rs 96 crores, it’s somewhere near. But I adhere to my valuations. I only go near them when they are less than 2 1/2. That's a discipline that has to be maintained because that's the only way you can survive this market.

RAMESH DAMANI: Colgate and Nestle, Sir, were in your last year’s picks. What new ideas have you thought about?

CHANDRAKANT SAMPAT: My ideas are fixed on the criteria that I have laid down.

VALLABH BHANSALI: Ramesh is trying very hard.

RAMESH DAMANI: What about Indian Shaving, Sir?

CHANDRAKANT SAMPAT: Well, I think the most unfortunate thing has happened. They have virtually cheated the Indian shareholders. The other thing is that we all learn by making mistakes. Last year it was quoted at 12 times the market cap to sales. We forgot that there are risks. We all make mistakes. I realized it late and then I made my exit late. But the moment you think you have made a mistake there is nothing like a favorite here. If you think you're making a mistake, please quit. Don't stand there. You are like an operator on a terminal as I said -- you make a mistake there, rather than buying, sell, then you correct it rather than wait. Unless we make mistakes we'll never learn.

RAMESH DAMANI: So, of the seven that you recommended last year for reference Colgate, Nestle, P&G, Birla 3M, Cadbury, ISP and Lever, you would buy all of them back except ISP?

CHANDRAKANT SAMPAT: Well, you know I have some reservations on P&G. And my reservations are I will tell you and they meet the criteria my friend Sanjoyji was just speaking about and that’s about transparency. But let me talk about this. During this year when you get annual report, you will have Rs 121 crores cash lying on the balance sheet on a company with a paid up capital of Rs 21 crores. So unless they become transparent and tell us what they're going to do about this Rs 121 crores, what is the use of this Rs 121 crores? Either they are given to us by the way of dividends or they are going to misuse it as has been misused by Indian Shaving Products. Now that's the only reservation that I have but I think for all this the responsibility is that of SEBI. We don't have any requirement like the 10K and 10Q statements in the US. We don't have any statutory forward-looking statements. I asked the question to Procter & Gamble. What are you going to do with this Rs 121 crores lying on your balance sheet? Reluctantly they told me "We know that the money is lying on the balance sheet, but we will only tell you when we want to." I mean I'm just making it very clear. "We will only tell you when we want to". Now what do you want to do with this Rs 121 crores with no debts, with negative working capital. You can just see Rs 80 crores will be the profit this year, Rs 27 crores would be the depreciation there. There is Rs 24 crores of net working capital, not the negative one lying just minus the dividends. So what are you going to do with the Rs 121 crores. In two years time you will have Rs 250 crores, so are you going to buy us back? Please make it very clear.

RAMESH DAMANI: Non-transparent MNC managements. Thank you Chandrakantbhai. We have a few minutes left and I want to open it up to the floor. There's been some great stock ideas. One observation I have. I think other than the last-minute recommendations made by Sanjoy on i-Flex, there is no tech stock, one year from the greatest boom that India has ever had in any secular boom we have had in any sector there is a distinguished trend …

RAKESH JHUNJHUNWALA: But I disagree Ramesh …

RAMESH DAMANI: … there is not one tech stock …

RAKESH JHUNJHUNWALA: … there is CMC, I consider Bharat Electronics to be a tech stock, Engineers India is a tech stock -- I disagree. The tech stock is not only in the private sector. You're forgetting that.

RAMESH DAMANI: Point well taken. So...

RAKESH JHUNJHUNWALA: And they are not only software stocks.

VALLABH BHANSALI: And Moser Baer is again a play on technology.

RAMESH DAMANI: Naaaa, hardware.

VALLABH BHANSALI: Is there software without hardware and vice versa?

RAKESH JHUNJHUNWALA: I would like to have Ramesh's pick, for a change I would like to have his pick, Ramesh what do you think?

RAMESH DAMANI: I am a moderator. – Questions now from the audience. Yes, please.

QUESTION: What sort of returns could one expect from well regarded companies?

SANJOY BHATTACHARYYA: I think Ramdeo was very clear about it.

RAKESH JHUNJHUNWALA: Jab ladki sunder hai to shadi kar leten hain, kitni achi shadi hogi baad mein malum padega. (When you marry a beautiful girl, how successful the marriage is will only be known afterwards.)

CHANDRAKANT SAMPAT: Well, do I answer that question? Again as I said that we are not resource poor, we are imagination poor. We are in the game of buying equity or holding equity. Let's look at it this way. What happens to Colgate if it compounds at 25 percent for next 20 years? Just do it your compounding...

RAKESH JHUNJHUNWALA: I will also give you another answer that see today we...

CHANDRAKANT SAMPAT:... See Re. 1 will become Rs 86 after 20 years. Are you prepared to wait for 20 years and look at it that way?

VALLABH BHANSALI: Let me answer his question.

CHANDRAKANT SAMPAT: Please do.

VALLABH BHANSALI: Directly and in percentage terms. 30 to 40 percent returns per annum.

RAKESH JHUNJHUNWALA: I will also answer it in another way. You look at the risks. Today the risk-free rate of return which for an average person in terms of fixed deposits is about 9 percent which is subject to tax. Now I think you're getting good businesses with good cash flows and good dominant positions at 4 to 5 percent yields. Right? So if you look at the alternative uses of capital, I think it will be reasonable to expect that these businesses and specially especially when you consider how much India is going to grow. If India is going to grow at a higher rate, then obviously the Colgate toothpaste will also grow. When I first came to the stock markets, a 15 percent growth of a company was not considered good. 30-40 percent volume growth was considered in 88-89-90 to be a standard. Today your 10 percent, 7 to 10 percent volume growth for an industry is considered to be a standard. So one consideration, which we must have, is how much is India going to grow.

CHANDRAKANT SAMPAT: May I intervene on this? Look at Marico. It is quoted around Rs 220. At that price the market capitalization of the company is Rs 292 crores. On Rs 292 crores this year's profits are Rs 45 crores. So on the market cap you're having a yield of 14 1/2 percent. Nobody is looking at it. Yes, of course, we know that the stock is in the rolling settlement list, what can we do about it?

SANJOY BHATTACHARYYA: We own it. We own 1,80,000 shares of Marico.

RAKESH JHUNJHUNWALA: I think one thing that we must observe are the metrics of valuations, right? And by the measures of interest rates and where the economy is, right? And I think external growth will pick up at any time. I have not only invested my money, I have invited people's money also. I am in debt. So I have no capacity to invest. Today is a time when fear is overriding us and thus by all historical parameters of valuation, we're getting good businesses with good yields at reasonable valuations. I think anybody who buys is going to make to make a lot of money. My mother-in-law used to call me one year back and ask what should I buy? Now when I tell her what to buy she puts down the phone.

VALLABH BHANSALI: Rakesh, I think we should give him a direct answer. What is the growth that we expect?

SANJOY BHATTACHARYA: I share the same reasoning as everyone here except that I think in absolute terms I'd be a bit lower. I think if you made 18-20 percent over the next 12 months you would actually do reasonably well.

RAMESH DAMANI: Next question.

CHANDRAKANT SAMPAT: If there is anyone who is prepared to manage my assets at 14 percent, I am prepared to hand it over to him. I'm game.

RAKESH JHUNJHUNWALA: With what kind of security?

CHANDRAKANT SAMPAT: No, that is a question of trust.

RAKESH JHUNJHUNWALA: Post tax or pretax? Let us be clear, you know when you're considering the proposal…

SANJOY BHATTACHARYYA: 14 percent net of inflation or gross?

CHANDRAKANT SAMPAT: 14 percent gross. I am ready.

SANJOY BHATTACHARYYA: 14 percent gross.

CHANDRAKANT SAMPAT: I am ready.

VALLABH BHANSALI: We run a small AMC …

CHANDRAKANT SAMPAT: I will love to do that.

RAMESH DAMANI: Let's go on.

Question: We have seen the year of buyback happening where the multinationals have been buying back their stocks. Are they taking advantage of the fact that the Indian market are at a fairly abysmal lows or are they actually giving the shareholders value for money?

RAKESH JHUNJHUNWALA: The answer is very clear. You look at the businesses, which have been bought. Right? You look at Hitech Drilling. Hitech Drilling was Rs 35 on the budget day. Right? Somebody has bought 100 percent of the company for Rs 92. Look at VST. VST was Rs 75 ten days before the budget. And today the shares are trading at Rs 150. I would say that my observation would be that valuations in the stock market are far lower than their valuations as businesses. As businesses where they could be bought and sold. I think that's why all these buybacks are coming.

RAMESH DAMANI: Okay, from the center of the audience. You have been listening very attentively.

CHANDRAKANT SAMPAT: May I add something to this?

RAMESH DAMANI: Of course.

CHANDRAKANT SAMPAT: I think buyback in this country in sin. It's a sin. The reason buybacks take place in other countries like the U.S. where the dividends are taxed and the buybacks are used for neutralizing the impact of ESOPs. In this country the dividend is tax-free. If the dividend is tax-free, better give me my dividend so that I will choose what I should buy rather than you buying me over.

The third thing is as Drucker points out very clearly, that ESOPs are bribes. Any organization that depends on bribes will ultimately degenerate.

VALLABH BHANSALI: That's the bigger sin in the U.S. where they do ESOPs and then they support it (the share through buy backs).

CHANDRAKANT SAMPAT: Yes. So the first thing if I was in Delhi, if I had any say in the Government, I would say please stop these buybacks.

RAKESH JHUNJHUNWALA: I disagree with Mr. Sampat. I will tell you, its my opinion that it is not only the purpose of an organization to build the business, it is also the purpose of an organization to contribute to the valuation of that business. Right? And if any legitimate method is to be used which is regulated by law in order to improve the valuation of that business then there is nothing wrong in it. Look at Great Eastern. They generate Rs 14 crores cash flow with a market valuations of Rs 600 crores … . .

CHANDRAKANT SAMPAT: That is a greater sin …

RAKESH JHUNJHUNWALA: Why is it a sin?

CHANDRAKANT SAMPAT: You are borrowing again for what...

RAKESH JHUNJHUNWALA: But the borrowings that you are doing is getting a rate of return which is higher than the cost of borrowing. What's wrong in that?

CHANDRAKANT SAMPAT: Please look at the past ten years history of Great Eastern and you will never cumulatively come out as positive.

RAKESH JHUNJHUNWALA: No, but history can change.

CHANDRAKANT SAMPAT: I hope so.

RAKESH JHUNJHUNWALA: This year everybody thought Gillette in India would be like Gillette in America. History doesn't repeat itself all the time Mr. Sampat.

CHANDRAKANT SAMPAT: I do agree, if you make a mistake, correct it.

RAKESH JHUNJHUNWALA: So if you accept the fact that a company must contribute to the valuation of its business it must do everything which is legitimate.

CHANDRAKANT SAMPAT: What I'm simply saying is distribute it, I will decide. Why should the company decide? It can either return the money through buy back or through higher dividends. As a shareholder I prefer the latter route.

RAKESH JHUNJHUNWALA: And it's not tax-free in India. We are paying 10 percent tax.

VALLABH BHANSALI: I agree with you to a certain extent because I think Rakesh we know that a lot of times buybacks are done more to increase promoter holdings...

CHANDRAKANT SAMPAT: Exactly

VALLABH BHANSALI:... then to give cash back to the shareholders and at least so far we haven't seen valuations improve with buybacks the way we all thought they would. Maybe over time it happens, but I don't want to comment on the future.

RAKESH JHUNJHUNWALA: No, Vallabhbhai the effect will come in the Bull Run. When the buybacks were done in the Bear phase in America between 1980 and 1982, it laid the foundation of the Bull Run.

CHANDRAKANT SAMPAT: There it is tax paid. Here it is tax-free. That's the difference.

RAKESH JHUNJHUNWALA: What is taxed?

CHANDRAKANT SAMPAT: Dividends are taxed in U.S..

RAKESH JHUNJHUNWALA: We pay 10 percent tax. Whether I pay or the company pays...

CHANDRAKANT SAMPAT: Even on the capital gains we pay 10 percent. There is no distinction left.

VALLABH BHANSALI: I don't know I think it's a straightforward argument...

CHANDRAKANT SAMPAT: Absolutely straightforward

VALLABH BHANSALI:... as to what are they doing the buyback for.

RAMESH DAMANI: Please

Question: There was no discussion on technology in the Roundtable today.

VALLABH BHANSALI: Actually that was a question I thought Ramesh would ask me.

RAMESH DAMANI: Actually I must say it was a question I planned to put to Bharat Shah and he was on the panel but couldn't come. He is the fund manager for Birlas who rode the bull market in tech stocks and I think he has also had some stunning drawbacks as the prices of software stocks collapsed. So that was the loophole in the system so as to speak, but now go ahead Vallabhbhai.

VALLABH BHANSALI: I think the technology business is here to stay. It will be largely driven by what happens in the U.S. I think only few of the big ones who have the management depth and the marketing presence and resourcefulness will be able to benefit in a major way as and when the boom comes and as and when U.S. revives. Personally I think the U.S. revival is a few quarters away. But in the meantime if the valuations dip further I think TMT stocks will present a fantastic opportunity.

Question: Do you feel the same way about the other stocks in the TMT space?

VALLABH BHANSALI: You didn't ask me about other stocks but I feel similarly about the whole sector.

RAMESH DAMANI: If you look at the price patterns of IBM and EDS which are in the software sector in America, their stock prices are trading at 52-week high, their stock price. There is a fundamental disconnect here. How can Infosys be trading at 52 weeks lows and these guys be trading at 52 weeks high.

VALLABH BHANSALI: I think there is a good explanation there.

RAMESH DAMANI: Please.

VALLABH BHANSALI: When I say that only some of the companies will be able to benefit from the next round of boom in the U.S. it's because their business models will be in tune with what the market requires for the longer-term. There were two large sectors of businesses. One was what was called the enterprise business and the second was the dotcom business or a lot of loose business if I were to say, where the investment was happening in IT more out of peer pressure, without really understanding the ROIs of those investments and those investments have now been discovered and they have been killed. Going forward enterprises will understand the benefits of the Internet. I think some of the greatest managers of our times like Lou Gerstner, Jack Welch and others have gone on record explaining how the e-commerce revolution is yet to happen. It all happened in ideas. Now it is going to happen in the real world. And that will be a big boom. So only those companies who will be able to create organizations, particularly marketing organizations onshore, onsite, offshore mixes, will be able to benefit. There are at least half a dozen companies, which you should look at. Some of them are already at unbelievably attractive prices.

SANJOY BHATTACHARYYA: I'd like to add if I may.

RAMESH DAMANI: Please.

SANJOY BHATTACHARYYA: I think the other two interesting thing are, one, the kind of margins we have seen at the operating level going forward are less likely to be intact. I think you know three years from now if you saw a company like Infosys with an operating profit margin in excess of 40 percent it would come as some kind of a surprise to me. Second thing is I think the point Vallabh made is absolutely correct and I accept it and go along with it entirely, but I think that there will be a large number of opportunities hitherto unnoticed in the products area. We are seeing more and more of very risky and very small companies. And they are question marks about their abilities to market these products. Product companies which have a clear-cut plan in terms of how to get their products to the end customer and which provide value in terms of solutions which are highly cost-effective and repeatable, will actually do very well. And we have seen one or two of these companies come here and I think they will be valued differently as well, as opposed to service companies.

VALLABH BHANSALI: One must be cautious about these companies until they gain critical mass. …

SANJOY BHATTACHARYYA: Critical mass, yes, absolutely. So they are very risky for that reason. Yes, absolutely. No question about that. I agree entirely with Vallabh. But the opportunity, the size of the opportunity in terms of returns going forward I think will be the largest over there in the IT sector.

VALLABH BHANSALI: I did not preface my ideas with the kind of market outlook as such and I think that my investment cycle has become a lot shorter. While I do see businesses that will last for 5 or 10 years, I do not hope to make investments which I’ll continue to keep in my portfolio for that period of time. So I clearly look at ideas, which I can exit in two to three years’ time.

CHANDRAKANT SAMPAT: May I intervene on what my friend Sanjoybhai said. I have got you know something on this table you know, where there is a narration. Michal Mauboussin of CSFB stated that in the steam power the billing rates declined at 50 percent and it took 60 years to do that. The rail fares took a dip of 40 percent on the billing rates, it took 43 years. The three minutes call, the billing rates went down by 99.93 percent, it took 70 years. The selling rates computers took a dip of 99.99 percent and it only took 30 years. And as I was going through Red Herring – and reading an interview with Andy Grove, he believes you know that these billing rates in the software sector are very difficult to sustain. That's all that I would want to say.

RAMESH DAMANI: Trouble in tech line. Last question please, ladies and gentlemen. Who is going to have the honors? Please.

Question: How important is liquidity in stock market valuations?

RAKESH JHUNJHUNWALA: Liquidity also depends upon your feelings. Some people are comfortable with liquidity and some are not. but I don't think that should be an important criteria if valuations are low enough.

SANJOY BHATTACHARYYA: I would like to answer this. I think that's not investing. I think you don't buy a stock to sell it tomorrow. You own a part of the business if you are playing the greater fool theory, good luck to you.

CHANDRAKANT SAMPAT: It's all momentum.

SANJOY BHATTACHARYA: If you are buying a piece of paper to stick it on another sucker at a higher price day after tomorrow you might as well go to a casino, put a gun to your head and play Russian roulette, and I hope you survive.

RAMESH DAMANI: But the odds aren't very high.

SANJOY BHATTACHARYYA: Yes, the odds are one in six usually.

Question: At this very place where you're sitting, Wipro was traded and at that time the quote was Rs 225 to Rs 275. Today it is trading at a huge premium to that price. This was way back in '94 of course.

VALLABH BHANSALI: So, if the illiquidity is supported by a good business, it will give you value someday.

RAAMDEO AGRAWAL: In fact if the business is very good, like Cipla or Wipro, my experience shows if you accurately forecast the business growth, you get it at an attractive price, although the liquidity can be very low.

SANJOY BHATTACHARYYA: I would also like to point out another thing so that I make the point here and I know this firsthand from personal experience. In 1995, not that long-ago, what do you think was the daily trading volume of Infosys? Any guesses?

RAAMDEO AGRAWAL: Just about...

SANJOY BHATTACHARYA: One second. Any guesses? Would you like to take a guess? Daily trading volume, both exchanges put together?

UNIDENTIFIED AUDIENCE PARTICIPANT: 1000 shares

SANJOY BHATTACHARYA: You are a genius. Absolutely. Spot on.

RAMESH DAMANI: In 1995?

SANJOY BHATTACHARYA: Yes.

RAAMDEO AGRAWAL: Absolutely right.

SANJOY BHATTACHARYYA: My trading used to be two-thirds of the volume on some days.

VALLABH BHANSALI: I will share one experience. The liquidity argument in a high-quality business is not really a meaningful argument. I think clearly illiquidity shows you that it is undervalued.

SANJOY BHATTACHARYA: It has no friends at that moment...

VALLABH BHANSALI: It's only when it is properly valued you know that it will...

SANJOY BHATTACHARYYA: That's a very important point, the smart guys will want to buy.

RAAMDEO AGRAWAL: The smart guys they don't want to sell.

VALLABH BHANSALI: The smart guys don't want to sell. So it is a great sign.

SANJOY BHATTACHARYYA: Yes, that's right. Absolutely right. The story is misunderstood and you make money of the stock being misunderstood.

VALLABH BHANSALI: Absolutely.

CHANDRAKANT SAMPAT: Look at Marico. Ten shares a day. How many? Ten shares a day.

RAMESH DAMANI: We have to bring this Roundtable to a close. You can talk afterwards. I would, on behalf of www.capitalideasonline.com and on behalf of our sponsors Home Trade, request you to join me in applauding our panelists for spending their time with us and sharing their insights.

JAWAHIR MULRAJ: On behalf of Home Trade and capitalideasonline I'd like to thank all the panelists. I think we in the audience have had a marvelous time with a plethora of ideas thrown up. I hope all the panelists have had an equally happy time. I want to thank Chandrakantbhai for the wisdom that he brings to the table, Vallabh for the experience and his inimitable soft spoken way in which he presents his thoughts, Rakesh for his irrepressible honesty, the brutal honesty with which he comes to the table, Sanjoy for his vision and clear headedness and the passion with which he presents his ideas and Raamdeo for the meticulous homework, the study and the honesty which he has portrayed himself. Thanks also to the Bombay Stock Exchange for giving us the opportunity to have this meeting here and last but not the least I think as any survivor of the Titanic would tell you, no matter how good the crew, it is the captain who guides it that matters. And I would like to thank Ramesh Damani for piloting this discussion brilliantly. Thank you.

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