HomeMarket NewsWhy Manish Chokhani says, 'If I knew that, I would be Warren Buffett'

Why Manish Chokhani says, 'If I knew that, I would be Warren Buffett'

Manish Chokhani, Director of Enam Holdings, urges investors to avoid being greedy, stay away from FOMO (fear of missing out), and practice patience. "In an era of T20, I’m advising you to play like Test cricket," he says

Profile imageBy Prashant Nair  September 25, 2024, 4:43:15 PM IST (Published)
25 Min Read
The big melt-up in the Indian market is not over yet, said Manish Chokhani, Director at Enam Holdings, in an interview with CNBC-TV18. However, when asked to pinpoint where we are in this melt-up, he responded candidly, “If I knew that, I would be Warren Buffett.”

Chokhani says India is at the heart of the next big market bubble, driven by a surge in entrepreneurship, strong governance, ongoing reforms, and the willingness of younger investors to take risks in financial assets.

He also believes foreign inflows into India are still in the 'first innings,' and there's much more to come.

"US is a $65 trillion market. If India, even after the MSCI rebalancing, is reaching 3% and the global funds don't look at India, they will start looking at it now," he said.

He highlights that although around $20 billion has flowed in over the past year, the bulk of investment has come from domestic investors, contributing about $40 billion this year, compared to $7 billion from foreign investors.

He attributes this limited foreign investment to two main reasons. Firstly, US investors are making significant gains in their own markets, like with stocks such as Nvidia, making them less focused on India. Secondly, with struggling economies in Europe and Japan, investors in those regions are hesitant to invest abroad.

However, Chokhani is confident that as India's market continues to perform well, global fund managers, who are typically momentum-driven, will eventually increase their exposure to India, especially once major IPOs or government and large business houses start tapping the market.

He believes this is just the beginning of a larger inflow story into India.

This is the verbatim transcript of the interview.

Q: Mutual funds (MFs) are getting $4 billion a month. It is a flood out there. Pre-June elections, we were getting about $2 billion. Where are we headed with the flow picture first?

A: Before the flow, I just want to take one step back as an Indian, I am just so happy that the kind of wealth creation which has happened in our country is unprecedented. And as you said, comparing it to two decades ago, while the percentage returns may look similar, the absolute amounts - we are at a $5 trillion market capitalisation, and 85% of it is owned by Indians. There is only 15% foreign ownership. So the absolute amount of wealth creation, which has happened in this bull run is just unbelievable.

Hopefully, it is the start of a virtuous cycle where you make the money, you reinvest it, you create more jobs and employment, you create more profits, and the cycle continues. So fingers crossed, this continues. And like I said, the asset allocation mix of Indians, which we have been waiting for a long time, to shift towards equity, away from hard assets, is only just beginning.

We are just 6-7% of assets are in equities. The bulk of it is still real estate and gold.

Q: When this began, people could have argued that maybe this is a bull market phenomenon because people are chasing things. They are seeing other people make money. But this is now continued.

A: We see it continuing even through the drawdowns which have occurred. This year, we have had two or three major reasons for people to pull back.

This advent of systematic investment plans (SIPs), which the mutual fund, has done an outstanding job the whole industry, of getting people into the markets and not getting scared away at every downturn is great.

For context, if you remove the promoter holding, which includes the government and the 40% Indian ownership, and remove the foreigners, the value of stocks with Indian investors, per se, is still less than the value of the gold they are holding, and it is far below the value of the real estate they are holding.

So it is easy to get scared away, but over the last 20 years, we never got scared that, “Oh my god, people might start selling gold because the price is going up”. Gold itself has been in a bull market during this entire episode and almost tracked the same returns as the index.

Q: So you think this will continue, or at some point, slack off? What's your sense?

A: See on liquidity melt up, when we spoke last Diwali where I said, in every decade since we broke this Bretton Woods gold standard and went to this dollar peg. We created bubbles in every decade. So in the 70s, it went to all the Nifty50 stocks in the US. And of course, it culminated in the blowout of oil, gold and silver in that decade.

Then it went to the emerging markets, which then was Japan and Taiwan - in the 80s - and completely blew off. In the 90s, it culminated in the NASDAQ bubble. From 2000 to 2010 it came to Brazil, Russia, India, China and South Africa (BRICS) in which China was the centre of the bubble and commodities. The last decade then went to TMT and The Magnificent Seven, which have been extended due to this excess money printing through COVID and so on.

Also Read | Bandhan AMC CIO finds risk-reward favourable in this sector

So for me, it looked like, in the context of history and market cycle that India would be the epicentre of the next bubble, and the conditions were ripe because the country is reaching a critical takeoff point, the economy is reasonably well-governed, the entrepreneurship has been unleashed, the reforms are good, infrastructure is getting built, both physical and digital. And this move that the youngsters were happier to take risk in financial assets as opposed to hard assets - the culmination of all that still looks like we are still heading for a big melt-up, and I don't think it is over yet.

Q: Where are we in that melt-up period?

A: If I knew that, I would be Warren Buffett.

Q: But halfway through, early on?

A: I have been underwhelmed to be honest by the amount of foreign inflows. This year, we have $15-16 billion over a calendar. The last 12 months, maybe it's $20 billion.

Q: This year in FY24, FIIs has put in about $7 billion to work, locals are put in almost $40 billion.

A: That is what I am saying. The foreigners, couple of reasons, and this is just post facto justification, because I would have expected a lot more to come in - number one, you are making a lot of money in your home market, in US. If the US is 65% of the world, and remember, it is a $65 trillion market. If India - even after the MSCI rebalancing is reaching 3% and the global funds don't look at India, they will start looking at it now. But let us say you get the 3% market wrong, and it goes up a lot, you drag off 1%.

But you are making a couple of percentages on Nvidia every week over there. So I think that is one reason.

The other side of the world, which is Japan, and Europe, they are basically debt. So the flip of that is happening, that when you are dying in your home market, you are not looking to invest abroad. So A] that has to happen. It is also a reason why foreign direct investment (FDI) flows have been relatively subdued on both fronts, although debt flows, which you expected with the JPMorgan index inclusion and then the others to follow, those flows have started coming.

I would still expect that it is not even like the first inning in a baseball game analogy of the foreign inflows into India and the domestic flows - if they keep lifting this market, they have profoundly lifted quadrant four. Quadrant one, two and three, which are the large caps, which is where the bulk of the money of the market is hasn't yet seen massive flows, and eventually, every fund manager in the world - hand on heart - is a momentum chaser.

So if this market keeps performing for a long, they are going to be here. Because if it were only valuations as they all claim, then everyone would have been buying China, which is the cheapest market in the world. So I think it is a story which is unfolding, and maybe they come in through primary issuances, where, again, we have not had the big companies coming with big issuances, neither from the government nor from the top 10 business houses.

That becomes then an entry point to start sucking in these flows.

Q: I was at the JPMorgan conference yesterday, and they were telling me that there are lots of investors from mainland China there. When we say melt-up - just want to finish that point - it usually we are talking about a frenzied move in the very short term. But that is not what you mean.

A: It makes a major long-term top, which is not a great thing. So it is great that we are going up on a wall of worries, in a way that every time we meet, we are worried about, is the end. Is this market going to fall? Will the investor flow stop? Will people run away? Markets don't climax at periods like that, and this seems to be more like the 90s bull market, where small caps were doing phenomenally well, and what tipped it eventually - one was the Asian crisis, which happened outside our control, and the second it just got overwhelmed with supply. And that is what capitalism should do - prevent what I call that melt-up with the entire market going up 10x in a decade, and then you don't see those prices for maybe the next 10 or 20 years.

So I am hoping we don't get a melt-up and supply response takes care of it and supply is coming, but it is still what I call a quadrant three or quadrant four level supply.

The big guys haven't yet come. And in the bigger ones, if I take the top 10 companies, no one has supplied, having said that the owners of those companies, whether it is BAT selling down ITC or SingTel selling down Bharti, that has happened. But it is not like the Reliances or the Tatas with massive issuances, which I think is around the corner. It should come.

Q: Bankers we speak to tell that over the next 12 to 18 months, about $25 billion worth of IPOs should happen.

A: $25 billion also is a small number. Now it's a $5 trillion market capitalisation. So $50 billion, is 1%.

So issuance is the government ought to be doing $25 billion. The larger groups easily can take $25-50 billion. This is a combination of primary and qualified institutional placements (QIPs) and so on.

We have seen promoter selling, we have seen PE selling, we have seen MNC, strategic selling, and it has gone from across the world. If GE of the US has sold, Whirlpool has sold, BAT has sold, Sumitomo from Japan has sold, SingTel has sold, and now Hyundai is approaching the market. So all these chaps are getting it, but we still haven't come and raised the money.

Q: That will happen according to you?

A: I think it is inevitable. That is what capitalism is. That demand for paper will create the supply.

Q: And we are a long way off from that climax?

A: I hope I am not proven wrong next week.

Q: No real big worries to expect - pullbacks are a regular feature of a bull market. Is it that this one has been without pullbacks?

A: The fun and games this time have not been - let me step back. The Top 11 companies are 25% of India, and the average market capitalisation there is more than $100 billion and I am just taking the NSE500 at $4.8 trillion. Of that, 25% is $1.2 trillion which is 11 companies. So that is a $110 billion average. Nothing is happening there. The next quadrant, which is from $1.2 trillion to $2.4 trillion has another 31 companies, which gives you that average as well over there. Again, nothing.

Also Read | Gold prices at all-time high: Key factors driving the surge

So the top 40 companies are half of India, which is where the bulk of the foreigners were invested. And these stocks haven't done very well. When we talk financials or Reliance or whatever they have given decent returns, but it is underperforming.

Quadrant three is another 80-90 companies. So 130 companies are 75% of India – it is harder to lift these companies because these are in the categorization of large-cap, which is over a 50,000 crore market capitalization.

Q: These 130-140 companies, have about $3.5 trillion in market capitalisation.

A: 75% or $5 trillion, whatever it is - pretty much nothing has happened. And this is where the coverage universe of the brokerages used to be. This is where the FIIs used to invest. This is where the mutual funds, by definition, they are large cap - all these are over 50,000 crore.

The whole action has been happening in whatever the balance 370 companies, which is in quadrant four, but it is $1.2 trillion it is still a staggering amount. And therefore, the domestic wealth creation, like I can talk of it as if it is small, but it is 1000s of crore of profits being made by investors. And people who thought their companies are about 2000 crore are seeing them at 20,000 crore because everyone is trying to lift it up and get it into a midcap index or get it into the small-cap index and so on.

The worry to me is there - that end of the market is trading at twice the multiple of the market. Now, historically, yes, a smaller company can grow faster, and we ourselves made our money in - the first era was all the Infosys and Zee TVs and Maricos, which were compounding like crazy in the 90s. But very small percentage of those companies, will make it from their 387 list to the 30 list or to the 11 list.

So the stock picking, which you do there, is important because if you get that wrong, God help you.

I will give you the most famous example of the best company in India, I can argue, is Infosys. It made a dramatic top in March of 2000. It was a $46 billion market capitalisation back then, it basically doubled in 20-24 years, which is nothing wrong, but 20 20-year double is drastic underperformance for a fantastic company.

Today, the market is up from 6000 to close to 90,000 or 84,000 let us say so the market is 14 times up. Forget what has happened to other companies, whereas the best company probably only doubled. And of course, I am excluding dividends and buyback, but add a few percentage points there, but it is not that dramatic.

So when you get pricing wrong in a small cap, heaven help you. And why small cap even from the top of 2007 when Reliance went to sleep then for the next 1213, years, you didn't make any return. Then it quadrupled during COVID, when they did the Facebook placement and so on. And I think that is the central risk in our market, that small caps and this SMID exchange – the index is up 80 times in the last three or four years. What is going on there is far bigger than the whole worries we have on futures and options (F&O). F&O has a $4-5 billion problem, in a sense of the losses being made. It is not insubstantial, but in the context of what is going to happen, maybe in this quadrant four of the market, as I call it, and this whole SME exchange that is going to be paying for Infosys.

Q: Quadrant four includes the SME?

A: No, that is tiny, but, but - a 12 crore issue attracts 5,000 crore of investment. Something funny is going on. And I am not casting aspersions on the companies or the people, but who is putting 4,800 crore applications into a 12 crore issue? So something is going on. God knows.

Those are the things you worry about. But having said that, the broader market, when I say the top 30-40, companies, usually, if something goes wrong there, that is when the market collapses, or supply from there will overwhelm the market. But it can't be a quadrant four problem which blows up the market.

Q: You are saying that in quadrant four there is a problem?

A: The valuations are berserk over there. Great companies, and again, I usually don't talk about stocks. But just to put some sense - and again, don't get me wrong. I am not disputing valuation of anything. But just to give the Infosys example, let us say our favorite stock this year was Zomato, it is a $30 billion market capitalization. We expect the market normally to give you a 15% compounded annual growth rate (CAGR) for 10 years, which is four times. So it should be $120 billion market capitalisation in 10 years. Let us say it is a 30 P/E by then, because we are fairly large company, so it needs a $4 billion profit after tax (PAT) to get to a $4 billion PAT - just for context - today, TCS, with six lakh employees, make $6 billion.

So is this possible? How will they do it? Will they add more lines? Amazons of the world have done it. They started somewhere and they ended elsewhere. But if you are taking that bet, your time horizon has to be that or your return expectation has to be that much lower. That is the sort of stuff going on over here.

Q: I want to talk about leadership in this bull market as well, and we will get back to what to do and advice for investors a little later. So public sector undertakings (PSUs), capital goods, real estate, infrastructure, that has essentially been the leader of the bull market, but defence, etc, right? That part, it looks like we are starting to rotate. People suddenly rotate out of that.

A: Which is inevitable.

Q: You think that is done, or it is just like a pause and refresh again?

A: In terms of market cycles, when you see the leaders of every cycle, then they go to sleep for a decade. So the leadership of 2000 to 2007, which you were earlier alluding to was indeed commodities and infrastructure, power, real estate, and then the excesses, which happened in that period made them complete pariahs.

So four years ago, we were on a show, and Ramesh and I would talk about PSUs, and everyone was like snickering what is wrong with these chaps? But because the correction had been so steep that it is eventually an investor's job is about valuation.

Like I said - the greatest Infosys may not give you the return, and what so-called poorest PSU may give you the best return. So it was a mean reversion trade, which happened. And of course, all the right policy things happened for infrastructure and defence and railways and so on.

So you go from being terrible to bad, is a rate of change. But you went from terrible to being good. So that rate of change is so dramatic that - and now you are imagining it to be great. Some of them may make it, but most of them won't.

Also Read | Will not be surprised if Indian market gets inflows of $60-70 billion, says Manish Chokhani

So I would be very cautious in those kinds of places. And typically, these are not high return areas. By definition, if you make 25% IRR in an infrastructure business, the cost to the consumer, which is the average public, is going to be too high. So your money made is on leverage, and therefore the return on equity (RoE) comes in that business. So and people are shy of doing leverage after again, the last cycle. The flip of it, the leadership of the last cycle was all the high quality businesses in the last decade, which were all getting rerated – Asian Paints, Page Industries and including banks, because banks became 30% of the index.

You are seeing that getting corrected, that Kotak Mahindra Bank, HDFC haven't performed for The last five years. Again, great companies, but it is the excess of that which is now getting reverted back. And now they have become so hated that when will HDFC move? And their memes on HDFC doing the round the way it was for ITC and then you saw the way when ITC moved, it just doubled before anyone realized it.

So things like that tend to happen. I can't forecast what will happen.

Q: You are very bullish on the financials?

A: I have been presenting for years. I said there will be four big things which will happen in this decade in India, when you are expecting a melt-up, obviously, you get ready for it. The first, obvious thing was people will come and get excited about financialisation of India - and we were coming off the financial cycle, and not to say that you want to be in those same stocks which led the last cycle, and hence we had all these PSU and stuff, and the so called corporate banks, which have given staggering returns even now.

The second theme was that India will have to privatize a lot. And that privatization theme, whether it is airport, ports, railway, roadways, it is basically that whole Make-in-India where we are taking over what the government used to do, and we will do it better and faster and cheaper. That was theme two, which has played out well.

Three was, you knew the advent of these platform plays and digitization will come. And indeed, all the Zomatos and the Nykaas and all played exactly into that theme, which have also done remarkably well.

The fourth was that people will come to India. Why? For consumers, and the consumer discretionary will be the place to be, not the fast-moving consumer goods (FMCGs) of the past. And those also have done incredibly well.

So whether it is to buy home improvement products, consumer durables, travel and tourism and so on. So three of the four have done remarkably well and I suspect, are discounting a lot of the future. You have to be like - Marc Faber used to famously say, in the beginning of the bull market, the entrepreneur has the vision and the investor has the money. By the end of the bull market, the investor has the vision and the entrepreneur has the money, which is happening in some places already, as I mentioned.

So of those four big themes, I think financialization has still not fully played out. We have participated very happily in the capital market themes, which are fund managers and so on, and the ancillaries, the exchanges and so on, but the banks, which are looked at as if the non-performing assets (NPA) cycle has already started coming, and it will be a repeat of the previous cycle where it blew up, or margins will collapse, deposits will never come back, I think the narratives are a bit misplaced over there.

Therefore it is a question of taking an asymmetrical bet with a time horizon and a return expectation, which is not as spectacular as we already had in the last four years.

Q: So banks and financials are the comfort zone.

A: Look, eventually, where is wealth going to be parked? Even today, the issue in financials, which everyone tries to justify for fundamental reasons, is a lot more technical. The financials as a category must be, to my mind, 25% of India, which is a trillion dollars. And to take a trillion-dollar market cap up, it takes a lot of money and demand. So if and when this money and demand comes from overseas and when the locals wake up we don't necessarily think that 20% return is so easy, and you can make very safe go-to-sleep kind of 15% returns in financials, that may be the time for their moment in the sun.

Having said it, they led the last bull market. So it is not like the bull market ought to come and trigger it off immediately. So it is a question of what your time horizon is and what your return expectations are.

Q: Advice for investors? Because in many ways, you are saying that a lot has happened. So one must be cognizant of that when you make fresh purchases.

A: So what happens and again, it is something I have experienced in the past. So maybe that would be of benefit to investors that the market tends to be a 75% large cap, 20% mid-cap, 5% small cap type market, and that is the distribution. Few of these will graduate to box two, and few of these will graduate to box one.

So your normal portfolio allocation tended to be an 80:20 mix we would keep 80% large-cap for safety, and 20% to give you the alpha to give you much better given that we built a lot of our wealth on the small and mid-caps only. But when you start doing that, you realize your portfolio mix tilts because those companies become reverse.

The small and mid become 80% of the portfolio, and the large becomes 20%. And whenever something goes wrong, like you had crises in 2008, or 2018 even for no fathomable reason, they can tend to fall 60-80% and that is very damaging for the portfolio, and that is what scares you out of the market. Like, again, the same famous example of Infosys. It went from 16,000 to 2,700, which is more than 80% fall in a high-quality company.

Because when that happens, liquidity – you will be surprised - just vanishes in the stock and you just can't get out. And what you think my portfolio value is whatever 100 - it looks like it is less than 50 suddenly.

So if you can just keep tilting your portfolio, that A] if your asset allocation is okay, that you may have maybe 50-70% of your money in equities, it is very easy right now to feel you are making so much money, get out of banks, liquidity or whatever, put it all in the market. If you are not prepared for a downturn in the market, then you will get scared out.

So asset allocation to equities is number one. Within that, what is your mix in your portfolio? Be very cognizant, of too much concentration in a small or mid category, or too much concentration in one sector. Again, for example, the parallel of TMT in the 2000s - if TMT became 50-60% of your allocation, and that fell by 50-60% - where were you? So just be cognizant of portfolio balances.

I am not suggesting this is better or that is better, but just do what is right for you and what stage of life you are in. So I am finding people who are 60-70 and say I have a cousin who is 74 years old in another city, and she is calling up and she wants to buy small caps. She wants to buy, like the three most powerful high-volume stocks in India nowadays - Yes Bank, Vodafone Idea and Suzlon. Maybe it is a great company, and they have a view on it. But, is it the right stock for you? First, you think about that.

People will call up, and they will ask me, should I buy a bank? And if I end up saying ICICI Bank or HDFC Bank, they are like but Yes Bank goes up every week. Again, nothing wrong with it. But is that right for you? So just think of allocation in your portfolio and what you are doing.

Also Read | Bank treasuries can’t be lazy anymore: Former SBI chief Arundhati Bhattacharya

When you are in the middle of a cycle, most horses are going to run. Don't be impatient - for example, let's say financials haven't run, and you feel, oh my god, defence and railway is running, and you leave this and you come to this horse and this house is already run, and it is ready for a down drift or a sideways move, and you have jumped here, and you know less about this than you knew about that – it is going to be damaging again if something wrong happens over there.

So just stay away from fear of missing out (FOMO). This is not a FOMO moment in life. Don't get greedy. Returns have been extraordinary. I still think 90% of our wealth lies ahead of us in the next 20 years. If we do four times in 10 years, and we again repeat the four times in the next 10, it is 16 times.

Even if we don't do 16, we go 10x from here. You have to have patience over here. That's all. You get the right companies if they are around 20 years from now, believe me, you will be wealthy.

In an era of T20, I am advising play like a Test cricket.

Just be a bit relaxed. I think the country's future is bright. The entrepreneurship is still very much there. The potential for growth over here is still very much there. When I look around the world, they are all ex-growth, highly indebted, waiting to blow up. So the opportunity is here, but just don't blow yourself up in the process. Just stay around, like Warren Buffett used to say - two rules of investing. Rule number one, don't lose money. Rule number two is, don't forget rule number one.

That is all you can do.

For more, watch the accompanying video

Live TV

CNBC TV18CNBC TV18 AwaazCNBC TV18 Bajar
Loading...
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!