Monday 14 January 2008

'Making money is short-term, creating wealth is long-term'

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 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.