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Prominent Indian entrepreneur in the financial services industry shares his journey to the top

Ramdeo Agarwal
Mr. Ramdeo Agarwal is the Managing Director of Motilal Oswal Financial Services. He is a reputed stock picker and is one of the most successful Indian entrepreneurs in the financial services industry.



Mr. Ramdeo Agarwal, Co-Founder Motilal Oswal, is the man behind the strong research capabilities at Motilal Oswal Financial Services Ltd. His firm belief in “Value Investing” forms the core of the Motilal Oswal group’s investment philosophy. The investor community eagerly awaits his annual Wealth Creation studies, which he has been authoring for the last 16 years. He is an Associate of Institute of Chartered Accountants of India and also a member of the National Committee on Capital Markets of the Confederation of Indian Industry. Mr. Agrawal specializes in equity research. He has been authoring the annual Motilal Oswal Wealth Creation Study since its inception in 1996. In 1986, he wrote the book ‘Corporate Numbers Game’, along with co-author, Mr. Ram K Piparia. He has also featured on 'Wizards of Dalal Street on CNBC TV 18'. Mr. Agrawal has received the "Rashtriya Samman Patra" awarded by the Government of India.

This interview was conducted by Pallav Maheshwari, an MBA student from IIT Kharagpur.

Please tell us about your current job profile.

I am a joint Managing Director and co-founder of Motilal Oswal Financial Services. This company was formed in 1987 by Mr. Motilal Oswal and me. I was taking care of the research and Motilalji was taking care of the rest and other operational functions. That’s how the company has come up. My passion has always been equity research and investment management. I am a Chartered Accountant by profession and I don’t have a long lineage of stock market background in my family. My parents come from agricultural background, so I am absolutely a first generation from my family in stock market and also an entrepreneur. In the last 16 years, I have done a study of wealth creation. It is a study which is an annual affair and we look at how companies have created wealth in last 5 years and what are the key characteristics and how things are developing in the field of wealth creation. The 16th part of the study will be presented this year sometime in December. I keep myself busy with the financial numbers of companies by studying their balance sheet and looking at their cash flow.  This keeps me abreast with all the latest company-related developments.


What prompted you to go for the wealth creation study, because this is a unique thing in the industry?

I had read a book called “Common Stocks and Uncommon Profits” by Philip Fisher. It’s a very good book for anybody starting in the stock markets. It tells about what to look for in a company before buying its stock. The author states in the book that in a market everybody knows the price of everything but nobody knows the value. So you have to keep doing the study of value. The biggest challenge of market place is to understand the value. You have to keep yourself updated with the knowledge of movement of values in the market place. Value keeps on moving from one company to another company, one sector to another and so on. I wanted to do a study where you can see the aggregates etc of the company and that’s how the idea of wealth creation study came to study.


Being a co-founder of MOFSL, what was the vision in your mind when you had started? Do you feel you have achieved what you wanted to or there is still a long way to go?

Of course, there is a long way to go. When I had started I wasn’t a stock market expert. I had to make money and a career out of it. When we started in 1987, making a success out of it was the main aim. I was pretty confident that I can help people make money though I didn’t have much money. Thanks to my Chartered Accountancy background and deep interest in reading balance sheet.  I had this firm belief that if I can help people make money I’ll get paid by brokerage or the service fees. I had also done an equity research in ‘85-86 and wrote a book called “Corporate numbers game”. The book gave me confidence that I can help people in the stock market, which was very uncommon in ‘85-86. Helping people make money was also the vision of the company.


Given the book "Corporate Numbers Game” was published in 1986, how relevant is the book today?

Hardly few hundred copies of the book were produced and sold. That time it was a highly quantitative stuff and had 5-6 years performance of all the companies. Doing it on a first generation PC was quite a cumbersome job. The number crunching was telling us which are the good investments and they have rewarded the investors for a very long time. They were the main wealth creators for the shareholders at that point of time. So, I think the stories still remain the same, of course the situation changes. Bigger and newer companies come up. Good business when comes together with good management, there is a good backdrop set for making money.


Given the current scenario of global markets, where do you think the economy is headed to? Given the situation in Eurozone, do we have sufficient avenues for domestic driven growth? Which sector you feel will be the most resilient to global turmoil?

In the last few years, the Indian economy has become much more integrated with rest of the world. So, if there is a major chaos in the world, we clearly will be impacted through our capital flows, export routes, ECB lending/borrowing etc. But, I think India is a very large country and it has got a strong domestic demand base, good technology base and good savings base. Unless the world comes to a complete standstill (the doomsday kind of situation), Indian economy will do well. There is no solution to eliminate the fear. Economic performance and stock market performance are two different things. This is because economy’s performance doesn’t fluctuate because of greed and fear, whereas stock markets can go up 50% because of greed and go down 50% because of fear. It is a very invisible kind of sentiment in the stock markets, so one should not mix both of them. Right now globally, there is a lot more fear in the stock markets than the strain on the global economy. Greece is a very small issue. $300 billion is very small figure in $63 trillion global economy. So, it’s not that big, but it is driving the sentiments of the investors globally. It is really a very complex subject. I really don’t say that I understand global and local economy subject that deeply. But I feel a lot depends on the company. So a very good company with good management will not be stretched much unless they are too much dependent on exports.


With enough competition in the Financial Services space, what is the differentiating factor which MOFSL has that will help maintain its position of being amongst the top?

I would like to say that we are a focussed company. We are not leveraging the balance sheet at all. We are taking care of our operations in all spheres whether it is retail, HNIs, or institutional. Anything we do in the market our one foot is always in the stock market. Whether you do IB, you are related to the stock market. Asset management is also related to the stock market. So, our strength is the research and wherever we can leverage that research, whether it is retail broking, institutional broking, investment banking, private equity, public equity, we are just doing things around stock markets.

We are differentiating ourselves with the research. We sincerely think that we can do a good job in research. Focus on the other areas is also very important. It’s a cyclical industry and we are going through the lower end of the cycle right now. We are building distribution across the country. We are present in 1500+ outlets across the country. We are optimizing the existing outlets, opening new ones and phasing out the old ones which are unviable. So we are continually building up the distribution. Whenever an uptrend comes, we should be there with a better distribution, cleaner balance sheet, better people and better research. Our belief is that in spite of good competition, we can succeed with better brand equity, better distribution, better research and focused balance sheet. I don’t know how many firms are there at our level, our size with these attributes and with completely unlevered balance sheet. Once you hit the downturn you should not have stress of leverage. We hope that in 2020, when the big day comes for the Indian economy, when it is a 5 trillion dollar economy and market goes from 1.3 trillion to 4-5 trillion we should be there to do the broking for our customers.



Being conferred one of the wizards of Dalal Street (by CNBC TV 18), do you feel comfortable with the markets? Or the markets still give enough surprises? Can you share some incidents?

Let me tell you this. I bought my first stock in 1980. One of the biggest problems was that you were not getting enough books to read till about 1990. Business stories were very thin and partially covered in the newspapers. In 90’s we started getting the books and it became a little better place for us. Then there were so called ‘market indices’. People didn’t know what “market” means in terms of indices. At the turn of the century after the dot com burst, people started looking at the NASDAQ index and Dow Jones, thanks to our tech listing here. So, suddenly people started talking about the market indices along with individual stocks. We have seen very challenging years in 90’s after the Harshad Mehta boom in 1992.

If you do research, you will find some good ideas, go ahead and buy it and get handsome returns. It takes time to recommend to the people and you can still buy it at a little lower price. Now it can be a terrific investing market and if the stage prolongs for some more time, I think the person who has an investing mindset, he will do wonderfully well. Because there are stories of good businesses happening. It’s not that the market is down, so there are no stories happening. If you go and check out some stocks, then you will find that there are some stocks which have given 30-40% year-on-year growth. So, I think there are enough ideas. And for the people who are confident of picking up ideas I think it’s a good place.


On an average how does the response to your services change in a bear phase compared to a bull phase?

This greed and fear thing prevails across the business and unfortunately, our business is impacted lot more by the prevailing sentiment in the market. So, when markets are in bullish phase, there is a lot more demand for the services. Everybody wants to get into the market to get that speculative profit. I generally feel there is a 7 year cycle. 1985 was the first boom, 1992 witnessed the second boom. 2000 was the third boom and 2007 was the fourth boom. So, depending on how big the boom time was, about 2-2.5 year period is required by the markets to correct itself. In these 2-2.5 year period the investors get fed up and leave the market. After that period once the boom time starts, investors start pouring in money again and bullish trend starts. In nominal terms we are growing pretty large, say 14-15% every year and therefore we see the economy doubling in every 5 years in terms of value. We keep talking about real growth of the economy, and that is most important. In 10 years time it will be a 4 times bigger economy.


Do you feel "One up on wall street" is an excellent book and simple observations/common sense about the stock are enough to identify good stocks in the market?

I would say, "One up on wall street" was a great book to encourage me to get into the stock markets because it is a common sense approach to stock investing. So, the issue with common sense is that do people use common sense? It is not common to use common sense. That is the fact of the market. There is no dearth of IQ, there is no dearth of understanding, and there is no dearth of analytical skills, intellectual capabilities, research reports, balance sheets, conference calls. So literally there is an information overload about any business or a company. But just because of little lack of common sense people are not able to make it. The guys who are good at using common sense and are not hyper in terms of their activities will be successful.


Do you feel DCF, market multiple etc. are a good valuation method? Most academic books talk about these approaches, but in practise are these approaches reliable?

See, DCF is a perfect theoretical model to value the stock, but you have to fix those numbers.  You have to decide whether you want to do a 15 year DCF, or 10 year DCF. You have to know what are you discounting and that is all imaginary. So, the accuracy depends upon the quality of number you fix. You are not going to know those numbers. So, it’s absolutely hypothetical. As a framework it’s perfect, but on the back of your mind you are doing your own DCF. If you give me a story of a particular company I will do my own DCF, in the sense that how much will the company make and how much should I pay for it. You will have a different estimate because you might not be as bullish and you might have a difference of opinion on cost of production or competition etc. So, as a structure it is right, but DCF doesn’t give a set method of getting the right number and therefore it’s all imaginary. You may use the P/E model, P/B value model or the replacement model, whatever ratio you use, you are trying to understand only one thing, which is the intrinsic value of the business. Price is given every second, so you have to find the difference between price and value.


What do you think is the the next best value migration in India?

I think internet will hold the key to a lot of value migration from the traditional industries. Talking about the banking sector, if you remain the old type banker, you are not going to survive in the industry. Like in stock markets, our traditional execution modes are now more online driven. Public sector to private sector value migration is going to happen in a lot of businesses. In banking, 70% banking is done by public sector banks. That is definitely going to shift to high quality private sector banks. The erosion of the market share of public sector banks will be very fast. This migration seems to be a big one today. These value migrations keep on happening. Like lot of commodities will give way to branded products. Suddenly you will find that cheap garments are not selling, but branded ones which are 3-4 times more expensive are selling. People move from commoditized stocks to branded stocks. There the opportunity is going to be fairly large.


Would you like to comment on the evolving role of SEBI in the Indian capital markets?

I think they have done a wonderful job, because I have seen markets without SEBI before 1992, this was before the Harshad Mehta scam. The kind of orderliness, transparency and discipline in the market has increased with SEBI coming up. I think the most wonderful thing to have happened to Indian stock markets is the emergence of SEBI. That is one era from completely no-regulation to proper regulation along with the emergence of NSE.  I think SEBI has done a wonderful job so far, but at this point of time when the markets are down and we need to ask ourselves that has SEBI gone overboard in regulating mutual funds and other instruments ahead of time. Because every industry has an evolutionary process and if you regulate too much before it has completely evolved, there may be problems. The question which needs to be asked is whether there has been excessive regulation on the mutual funds. But broadly, SEBI has done a good job of keeping the markets free and fair for everybody.


What advice do you have for fresh finance graduates who are looking to make it big in the financial advisory services? What does MOFSL look for in such candidates?

I sincerely believe that the guy should have passion for stock market investing.  Lot of people come here because this job offers a lot of money. But there is a lot of hard work involved. For the money they have to actually slog here. But slogging becomes very light and enjoyable once you love the entire game. Everybody is not cut for everything. Somewhere there is a natural inclination to do things. For example, I became a Chartered Accountant but filing a tax return was not interesting to me. The issue is not that they were not paying me. But I was really not interested in that kind of a work. I always tried to read balance sheet, trying to find out what was happening in the stock markets. Even when I didn’t have money and didn’t know much about stocks, I was really curious about the markets. It was very exciting to me. You need to have that passion and curiosity to learn and make it happen because everybody starts from the same level when you are young, but one has to read to get to the next level because these things are not taught in classrooms. So, you need natural passion to read also. You read 25-40 books in as less time as possible and then you become better. Keep practising, you will make mistakes, but I am sure one day you will be better in stock investing. The most important skill is that you need to be passionate about stock markets to enter this industry.


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