'Making money is short-term, creating wealth is long-term'
Vikas Khemani, executive VP & co-head, institutional equities, Edelweiss
January 14, 2008
Making money is a short-term process, while creating wealth only
happens in the long run. Vikas Khemani, executive vice president and
co-head, institutional equities, at Edelweiss, believes this is the
only mantra for young investors to become wealthy in the long-term.
"I have seen most young people these days call up their friends
working in a stock broking house and ask them for tips. This will help
them make money in the short-term. But, on a net basis, they won't be
able to take this money out," he warns all those investors trying to
cash in on the recent bull market frenzy.
Vikas spoke with rediff.com's Prasanna D Zore about the sectors,
themes and stocks that can become help youngsters create wealth if
they have an investment horizon of five to seven years.
Which sectors do you think can help an investor create wealth, in say, 10
years?
Ten years is too long a time period. Probably by that time you will
have two cycles (ideally, any economy moves in two cycles: the up
cycle and the down cycle, with each making its presence felt for at
least five years or more) in place. So I will talk about a long-term
horizon, which could be between five to 10 years. The sectors which we
at Edelweiss like -- with a three to five year time horizon -- are the
banking and financial spaces.
One has to take a structural call on whether India's GDP growth is
going to continue at eight to 10 per cent. The answer to that is India
is likely to grow for the next three to five years at eight to 10 per
cent. In this context, the banking and financial services spaces
become the most important. This makes me bullish on this space with a
one, two, three, four, five and possibly 10-year perspective if the
growth cycle continues.
Which other sector/s do you like for the long term?
Given the fact that there is huge amount of opportunity, the other
sectors that we like are the infrastructure and capital goods and the
engineering space. As you know, India is still a hugely
infrastructure-starved country and we need to build sea ports,
airports, roads, improve electrical supply and all such infrastructure
related sectors.
Huge amounts of investments are likely to be made in building these
infrastructural facilities. In this process wealth creation is going
to happen for two set of people: people who are going to create these
assets and infrastructure and people or companies who will enable
creation of these assets. Both these sections will do very, very well
in the long-term: asset owners and asset enablers.
Can you elaborate on these two themes for our readers?
Let us first talk about infrastructure creators or asset owners. These
will be companies owning ports, airports, power plants. These
companies will own assets, run them and this will be like an annuity
(a business that generates fixed returns or steady cash flows every
year) kind of business.
For instance, somebody who will own the mines will be an asset owner;
those who are operating the mines will be asset enablers. Reliance
[Get Quote] Power (yet to be listed) and NTPC are building power
plants so they are asset owners. But other companies in the capital
goods sector like BHEL will be enabling this process of building power
plants.
GMR Infrastructure [Get Quote] will be building airports; but somebody
has to help them to build the airport. In the process, both parties
benefit a lot. However, asset enablers will yield faster results than
asset owners.
Do you see investors making money in the banking and financial space
and the asset owner, asset enabler companies?
Absolutely! Here I must also add the domestic consumption story in
India. If you are talking about a five to seven year time horizon then
I am sure India's per capita income will increase, wealth creation
will happen, poverty and illiteracy will go down. All these things
will happen structurally. When this happens, consumption in the
economy will go up and the companies that cater to the domestic
consumption sector will benefit tremendously.
FMCG companies, retail stories and any company related to consumerism
will offer a lot of wealth creating opportunities in the coming years.
Companies that would possibly benefit from the above three themes?
Banking and financial services is a fairly large space and if I have
to name a few companies than the first name that comes up is ICICI
Bank [Get Quote]. They have captured the entire gamut of financial
services and I think this bank is going to gain big time in this
space.
Another company that I like in this space is Axis Bank. It has done
well in the last seven to eight years, and if one has to look at this
bank from another five to seven year perspective, then the quality of
management that Axis Bank has will help it reap the benefits of a
booming Indian economy. Also, both these banks can scale their
operations with great ease.
Companies that attract your attention in the asset owner and asset
enabler space?
In the asset owner space, I would go for something like GMR
Infrastructure, Mundra Port -- they own large assets which are going
to yield returns over a period of time. Though there aren't many
companies in this sector that are available at reasonable valuations
now. Having said that, I would still want to go for GMR Infrastructure
and Mundra Port as they are into a space that offers new and exciting
opportunities going ahead.
Right now, we are only seeing the initial phase of what is likely to
come in these spaces of ports and airports. In the next few years, you
can see more wealth creation happening. Other asset owners that come
to mind are JP Associates.
In the asset enabler space, L&T comes immediately to mind. The company
has displayed an excellent track record over a period of time and they
are likely to continue with that. Their organisational platform is
strong and I think this company will do very, very well in the next
3-5 years. It can be a potential multi-bagger.
In this space you can also consider BHEL, BEL, BEML. All these
companies are large asset-enablers with good quality management
support and scalability. I am talking only about large caps here. You
can also find a lot of good names in the small cap space in this
theme.
However, in this space, the main concern is the scalability of their
business models. Otherwise, if I have to give a pick from the small
cap space, then Mcnally Bharat will be a strong small cap contender in
the asset nabler space.
Stock picks for the long term from the domestic consumption space?
Pantaloon [Get Quote] Retail is one name that can ride the boom in
this segment. The management understands the retail game very well.
The other story that is a part of domestic consumption story is ITC.
It is a part of the FMCG sector, in the agricultural space -- which I
believe also offers a huge opportunity for investment. Another name in
this space could be McDowells.
Your advice to young investors?
Don't think you can make quick money in stocks. Don't go by tips and
hearsay. It is a dangerous thing that people can do at your age. You
have to understand what companies you are investing in, what is the
aim of your investments is and then put your money in stocks.
If you can't follow this path, then mutual fund route is better for
this age group to create wealth. If you look at it, over a period of
time, large part of wealth is created through asset allocation rather
than stock picking. If you are able to get right your asset allocation
mix then I think you have done 90 per cent of your job.
My suggestion to young people would be if you are investing directly
in equity, do your home work thoroughly. Read research reports, read
about the company you want to invest in, gather more information about
it. Then make an informed decision.
Typically, I have seen most young people these days call up their
friends working in a stock broking house and ask them for tips. This
will help them make money in the short-term. But, on a net basis, they
won't be able to take this money out. This way, they will make money
but not create wealth. Making money is short-term, creating wealth is
a long-term process.
Will you be able to make money out of the markets using trading tips?
It never happens. Creation of wealth can only happen if an investor is
looking at it as a serious business. Look at it this way: People will
work for 8-10 hours in their jobs and make Rs 8-10 lakhs a year. And
the very same people want to make the same amount of money in a
month's time purely acting on tips from their friends. From the effort
and return point of view, there is some disconnect, right?
When you come to the stock market, you should come with a long-term
perspective. But they don't look at what kind of input they are
putting in this effort. They should ask these questions: What kind of
intellectual effort I am putting in this? What kind of research am I
doing? Most young investors don't do this. In my opinion, this is a
very dangerous sign.
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