Wealth is the driving factor but values can't be compromised: Raamdeo Agrawal, MOFSL

In a chat with Nikunj Dalmia of ET Now, Raamdeo Agrawal, Co-Founder & Joint MD, MOFSL and Motilal Oswal, Chairman & MD, MOFSL, say even as the age of robo advisory dawns, HNIs will always look for quality advice. Excerpts:

Nikunj Dalmia: It is a fascinating story. We have always talked to you about markets and about investing. Today it is all about how and what you have achieved in a span of less than 35 years.
Raamdeo Agrawal: 28 years.

Nikunj Dalmia: 28 years now, that is a precise number. As the legend says, you actually met in hostel as students and that is how the journey began.
Motilal Oswal: Yes. Raamdeo was much senior than me, maybe about three-and-a-half, four years but he exited from the hostel and I entered. So that connect still remains and that is where we started from.

Nikunj Dalmia: So you actually met before and then you met your respective life partners after that.
Raamdeo Agrawal: Actually we did not stay in hostel at the same time. He was junior but I have seen him. So when I was saying in Lokhandwala and I was coming to Andheri Station, I had a motorcycle. A brand new Hero Honda and he was always looking for a ride because the transport system was in mess.

Motilal Oswal: A free ride.

Raamdeo Agrawal: Free ride and that is how we started meeting and he was looking for a broker. I was looking for somebody to go along to get into the market. I was doing research. So I knew everything about the stock market but I did not have money and wherewithal to start and his brothers were there in Ahmedabad and Chennai. So they were a wonderful help and became the two best clients to start with. That's how we came together and then slowly we started. When you look back, nothing was planned, nothing was designed. It was just a scarcity, broking services were scare. I mean it was very manual and capacity was limited. One person can do only 150 transactions in a day. So one broker can do only 700-800 transactions and the whole country was just rising. So it was a seller’s market and when we got in with just about two people, one telephone line and one peon, the venture was successful.

Motilal Oswal: Sometimes, I even used to do zero trade but trades were scarce and only 10 to 20 trades at that point when we began.

Nikunj Dalmia: So what really clicked? You meet several people but you just clicked with one or two people in life and especially at a partnership level. So what really clicked?
Raamdeo Agrawal: I think because we were travelling together and for at least six -eight months, we were exchanging notes and found he was also interested in markets. Fundamentally, we both were interested in making money in the stock market and making career in stock market but we did not know how to do it. So when I proposed this that let us come together, you have the clients and I have the capability to find somebody who will sponsor us as a sub-broker and that is how it started. If by chance there was a little difference of opinion or if there was a small setback at the early stage itself, the whole thing would have broken off and nobody would have even remembered the whole story. Today it has worked out, but for the first five years, it did not have the critical mass to say that we are successful. Till about 1990, I remember we earned about Rs 10-12 lakh.

Nikunj Dalmia: But that was a lot of money in those times.
Raamdeo Agrawal: No it was not a lot of money. Between the two of us, we could have earned that money otherwise also. So it is not that we did a great job. But in 1990, we took a big plunge. We borrowed Rs 10-12 lakh and bought membership in BSE and what happened was that was the start of the Harshad Mehta bull run. So for every business to take off, you need one tailwind, one bull run and that is what we got and we got mother of all the bull runs, the Harshad Mehta bull run. I will tell you, we had about 10-15 lakh in 1990 and by 1992 or 1993, when the Harshad Mehta storm passed, we had Rs 30 crore in our pocket and only out of broking and investing and returns. So we had Rs 30 crore portfolio out of absolutely nowhere and we had a thriving broking business which was making about Rs 2-3 crore on its own. Once the Rs 30 crore came, nobody could throw us out.

Nikunj Dalmia: So which is the first stock you remember buying in your firm? You always remember your first stock.
Raamdeo Agrawal: So I will tell you…

Motilal Oswal: I never used to bother about what stocks and what prices.

Nikunj Dalmia: You always looked at profits and not what buying or selling is…

Motilal Oswal: I look at profits. I look at business. He looks at the portfolio.

Nikunj Dalmia: So the dividing line was very clear from the beginning, that Raamdeo will look at the investment aspect, you would look at the business?
Motilal Oswal: All other aspects of the business.

Raamdeo Agrawal: But it was not like you sit at the table and decide okay you do this, I do this. It was taking up what came naturally in the sense that I have never bought or sold 100 shares of companies. All the shares trading or buying-selling for the client and for the portfolio is done by Motilal only. So even today, if I get an idea, I tell him boss do something about this because I am not comfortable transacting. So while the transaction part came to him, obviously the order taking and researching and advising was on my domain. So the operations and running the company went to him and all the research and talking to the people came to me. As volumes increased, the verticals started becoming much more clearer.

Nikunj Dalmia: Do you think it is a challenge to convince Raamdeo to sell something because he is good at buying but he is very bad at selling?
Motilal Oswal: I used to think so. Even today in the morning, I said Raamdeo we have this ETF in our portfolio, why don't we sell it? He said no, no. No sell. We should hold it but I said it is only 1.5 per cent. Why do not we sell it and then we decided to execute it. So I give him some idea but after that he takes a decision.

Nikunj Dalmia: You never interfere in the way he invests.
Motilal Oswal: Never. On investing side, never.

Nikunj Dalmia: And you never interfere in the way he is running operations.
Motilal Oswal: See we keep on advising each other. That is absolutely not an issue but I think we always build on complimentary skills. He would have very strong skills on market, investments, on PR, brand. I take care of technology and marketing and of clients. That is the way I think we are divided. So based on…

Raamdeo Agrawal: There is enough on the table. There is many issues on which we agree and disagree. But then finally somebody has to take the lead. I mean if he says that this is only 1.5 per cent of the portfolio why should we bother about it even if it is good. So let us sack it. So he is also prevailed, I have also prevailed on issues. That is how it goes on.

Nikunj Dalmia: So is wealth the ultimate driving factor or values the motivator?

Motilal Oswal: I think wealth. I would look at it and think how really exciting the future is going to be and how we are becoming much better on the ground level. Raamdeo always looks at it that this is the net worth, this the thing. I said that this is part of the journey but certainly I think it comes out of doing something which is exciting.

Raamdeo Agrawal: So values are never compromisable. Value comes first before wealth. Even in 1987 when we did not have a lakh rupee in our pocket, then also values were absolutely supreme. So we paid full taxes in 87 and in 90s, when things were not so good. In fact, at that time we were individuals also we are not corporates. So we were given Samman Patra for being the highest tax payer in 93-98. That time it used to be fun to meet all these heros and heroines in those ceremonies.

Nikunj Dalmia: But the only difference between that time and now is that you may be paying more tax than all the hero and heroines.
Motilal Oswal: Of course, but it is a corporate structure.

Raamdeo Agrawal: But now the corporate structure does not get attributed to us. We are much bigger tax payers, multiple times bigger than that time but we do not get those certificates. In fact, those certificates will be given to the people. The government should create a lot of categories and give certificates because then I get clappings for being highest tax payer at some point of time because that shows the character. It is not about the amount. It is about the character which is not found so often in India. So I feel always be proud that we got accreditation from the government.

Nikunj Dalmia: The firm started as a brokerage, then you moved into wealth management. Now you got other areas as well. You are planning to go global. You have got investments in the real estate sector. You are also spreading your wings and you are moving into the HFC space. So what is next for the firm now. Let us talk about vision 2020 for MOFSL.
Raamdeo Agrawal: One of the very important decisions we took just two years back is that now we will confine to whatever the portfolio is. So current portfolio of businesses include broking, investing and HFC. Broking and investing generates a lot of cash, Rs 200 crore, Rs 300 crore, Rs 400 crore. Either we give it by way of dividend which will again come back in investing., or we said let us find an investment wagon where we can put it. So we found HFC to be a good way to do that and hence we are building up one of the high quality housing finance companies with MOFSL. All the money which we earned from broking and investing will hopefully go to capitalise that particular company. We have already given Rs 300 crore anc committed another Rs 200 crore. So in the next six months, Rs 500 crores will be committed to HFC only. So that is how we will build and balance. After some time, even HFC will start giving returns. So we will have an even bigger pool of cash coming in which we will put into our funds. So it is a complete loop, equity for equity, debt for debt.

Nikunj Dalmia: It is often said on Wall Street that to be a successful businessman you have to be a successful investor and to be a successful investor you have to be a successful businessman.
Raamdeo Agrawal: This is what Buffett said. He is a successful investor because he is a successful entrepreneur because he can see the difficulties and opportunities of businesses. Businesses do not happen in a straight line. There are good times. There are bad times. Of course, markets do not appreciate that. In good times, markets will be very frolicky and in bad times market will be quite depressed. So that helps us in understanding that a good company also faces tough times. So, it definitely helps me to pick a stock and appreciate the managements.

Nikunj Dalmia: Broking as a business has stagnated, yields are coming down, automation, algorithm, ETF which means the human intervention the advice or the value of advice is also coming down. So is that the biggest challenge for you that the yields are contracting for your big business, your bread and butter business?
Motilal Oswal: If you look at the way we used to do broking versus what we have done today, the character has absolutely changed. I think the brokerage yields may have fallen but overall volumes have exploded and there are huge numbers of new products that have come in, like options or futures or even on commodity and currencies. So yes it is a very competitive business, the technology is absolutely the business driver for broking business but I think that broking is going to be very exciting and if you look in the last 27, 20 years, we have lost money only in two years. So yes, it is very competitive but I would be quite optimistic about the broking business. Still today also really I think it is giving us substantial amount of revenue and profits.

Nikunj Dalmia: But at a time when everything is now going online, there is talk of robo advisory where human intervention and advice is not there...
Raamdeo Agrawal: Zero brokerage.

Nikunj Dalmia: Zero brokerage and advice is free, everybody wants free advice.
Motilal Oswal: Yes but see these developments are happening because the size is exploding and it has become a very globally competitive market. We should take it as an opportunity that technology is exploding. But remember, clients want quality advice and with so much information being provided by the TV channels like you or media, there is often an explosion of information. In fact, when we started, there was no information. Now it is excessive information. So I think advice is becoming more important for high networth individuals (HNIs) as segments. There are a few clients who are self-directed clients who do not want advice but for them we have provided the best technology platforms.

Nikunj Dalmia: Before I ask my next question to Raamdeo, I actually know the answer. If I will ask him for a market view, he will say do not look at markets, look at individual companies and they will always do well irrespective of the environment. But today I want to start with your market view, what is your assessment of the economy, markets, in general where we stand?
Motilal Oswal: Economy and markets are very difficult to predict. What is actually in our control is really the stock selection. We have seen bad markets give us huge amount of opportunities for future appreciation. The thing which is in our control is very difficult to predict although you guys all ask the same questions what is the next level of the target and what is Sensex level or Nifty level but it is difficult.

Nikunj Dalmia: Quality has worked, quality will work and your experience clearly seems to be indicating that quality businesses will always do well but pricing is also very important. Quality at any price may not work and that has been the mantra over last couple of years and that is where I would argue that some would differ with you. You like quality stocks but what about the margin of safety in some of the stocks?
Raamdeo Agrawal: But I never said quality at any price, you are only saying that. You can buy quality and make money at any price. It is never like QGLP -- quality, growth, longevity at reasonable price. It has to be reasonable, you do not have to buy very cheap. When there is a quality and growth, quality will make sure even if you are to borrow, a little expensive quality will make sure you will not sink. But we are not in the market not to sink. We are in the market to make good amount of money.

We are all greedy guys who want to make lots of money very quickly. So for that, you require growth and a reasonable price. Now the reasonable price is a function of how much growth happens. The question is how do you balance this growth and the price? Quality is non-negotiable. I will never buy a junk and we do not need many stocks. We need only 15-20 stocks. We launched F35, multicaps 35 two years back. That is a perfect practice of QGLP in every minute nook and corner of the fund which has grown. Thankfully market has recognised the merits of the fund and it has grown. It is amongst the fastest growing fund.

It has now come in top 25 funds, it is almost Rs 3400 crore strategy now from zero. So of course lot of money is our own but the issue is that we practice QGLP and in last two years the market has gone up by 20 per cent. It is up 75 per cent and 100 per cent invested no cash call, no timing call. If you give me money today, I will put it today so it works but you got to buy. I agree fully with you that you have to buy growth at reasonable price but out of 18-20 companies, if you actually end up buying two-three companies a little expensive, the rest of the pack will support it.

Nikunj Dalmia: I always enjoy reading your wealth creation study and in one of the wealth creation study you had mentioned the importance of recognising value migration. The value migration which we saw from PSU banks to private banks, what we are seeing in pharma industry right now, what we saw in the telecom industry so where is the next wave of value migration according to you?
Raamdeo Agrawal: Say like world’s biggest value migration is IT okay, it is a trillion dollar value migration from Boston to Bangalore and quite a bit of journey is done. We did about $108 billion for 2015-2016, and next year we will do more like $115-117 billion. So nobody makes a headline that Indian IT industry on 1st April did another $9 billion of growth. And within that there could be a company which can start from $10 million and become a billion dollar very quickly. So that is the biggest one. Second is pharma, of course, from a global generics to Indian generics I would say…

Nikunj Dalmia: But that is getting challenged. USFDA is a real problem?
Raamdeo Agrawal: It is a temporary problem. You must not read into anything in the sense that if the importance of size and importance of Indian pharma is growing, they also need to gear up to the required standards of US. So I would think that this will only mature like we have started broking and we were retail brokers but in 1992-1993 when Morgan Stanley and all the global firms came, at that point of time the rules tightened and that made Motilal Oswal much stronger. So all this USFDA rules and all over a period of time it will only make those companies better.

Nikunj Dalmia: But stick to the large guys, I mean stick to the guys who got size, who got reach, who got understanding?
Raamdeo Agrawal: I think in pharma you had to stick to the size and growth whatever but still small ambitious companies are coming up who might be $100 million-$200 million and they have ambition to start one USFDA plan, one injectable plan and make lot of money and from there... say companies like Ajanta Pharma. So we are still seeing lot of small companies emerging who will become big that is your call.

Nikunj Dalmia: I want to talk to you about the HFC (housing finance) space. You are a late entrant and you are a small entrant right now. You know you have got big sharks there, you have got banks there. So I want to understand what is it like to be a late entrant in the HFC space and are the dynamics of the HFC space changing now?
Motilal Oswal: There are a very few housing companies which have created size and when you look at the opportunities you see the mortgage ratio of the total Indian markets is very small and the business itself is growing at about 22-23 per cent in a bad kind of economic cycle. So yes, we are late but that does not mean we still not have started. There are hardly four or five big players there and the segment which we have selected is affordable segment. We see that there is a huge kind of opportunity in that segment particularly when the Government of India is pushing the housing for all or every kind of affordable cost housing. So in this business in last two years, we have done very well. Now the book size will be about Rs 2000 crore.

Raamdeo Agrawal: See when we talk about housing for all, we are talking about 225-230 million households and now what is happening is people are living in small places. Kids are getting educated and they are living in their own homes and they are building another home in some other city. So there is a requirement for multiplicity of homes in the same family. So housing needs are literally insatiable.

Even in US, housing starts are one of the lead indicators of health of the economy. In India for the next 100 years you can keep on building houses. So there will be requirement of houses and financing of that because now nobody can afford to build the entire house on their own. 99 per cent of the houses have to be mortgaged and some support has to be there. So the opportunity size is staggering and that is why even at this point of time the industry is growing at about 18-20 per cent.

Now the issue is how do we win the game? Do we have the right to win? We have good understanding of what it takes to win. Can the management team which we have put up deliver? So far, they have wonderfully delivered but delivering on Rs 1000-2000 crore is one thing and delivering on Rs 20,000-30,000 crore is yet another. So only time will tell whether we can scale up and we will do everything to guide the management team to deliver. Every business has a 90 per cent. The 90 per cent rule of mortgage is the quality of underwriting. If you underwrite well, nobody can touch you because there is a house as a strong collateral, of which prices are going up every day. So if you are underwriting well, your spread will definitely come to you. Now what is your intimidation cost, what is your operating expenses that is all within you so fundamentally there is no problem in the business. I am not saying that I am not undermining sales marketing or customer service but rest all will come.

Nikunj Dalmia: Even the AMC business ...
Raamdeo Agrawal: Yes, there are 44 AMCs and…

Nikunj Dalmia: And you have become a billion dollar already.
Raamdeo Agrawal: We are one and a half billion…

Nikunj Dalmia: One and a half billion dollars…
Raamdeo, over the years you have invested in brands, you have understood that the importance of good brands is because they cannot be challenged. But now there is a firm called Patanjali which is rewriting the story. We may call it disruptive but you know there is a small player who started late, pretty much like MOSL, and now is a Rs 10,000-crore company. So is it time to relook the expensive PE multiples which we have always ascribed to FMCG companies, especially great companies which have good brands?

Raamdeo Agrawal: See it will definitely take away some segment.They have a segment where they will thrive. So it is a marketing challenge for the rest of the pack whether it is Hindustan Lever or Colgate or Emami or whosoever is hurt most by the product. In that product, they have a new entrant so they have to find their way and for good entrepreneurs, good companies, initially it will be unsettling for a year or two, when they are growing up from Re 0 to Rs 10000 crore. They will have some challenge coming in later on product superiority because right now is it a product superiority or is it just blind faith in Baba Ramdev’s brand equity?

Nikunj Dalmia: So you will not be in a hurry to say that HUL and the Nestle’s and Dabur’s of the world will underperform. You still think that these are great companies?
Raamdeo Agrawal: Yes, they will underperform because sales might have grown, profit might have slowed down. So obviously in one or two years, there will be a challenge. But I do not think it is something which will just change or rewrite the rules of successful FMCGs in India.

Nikunj Dalmia: One thing you can be reasonably sure of is you know Patanjali will never enter the liquor market. So does that explain why you have invested in USL?
Raamdeo Agrawal: No, no they have. I have seen they are being noticed everywhere. They have to find a strategy to counter that. May be if they cannot fight, then they will join. Whether it is the Atta market, whether it is some hair oil, they are there. I have seen very serious fallout of that as far as the companies are concerned. They need to find some effective strategy to counter that challenge.