Yes. Personal finance is extremely personal. And there is no perfect formula to get your personal finance strategy right. It depends on your attitude towards money, your earning capacity, your expenses and your savings mantra. But, as a race, Indians lean largely towards savings and believe in tucking away for a rainy day. And, the financial services sector, be it wealth management, insurance services, stock market investments or mutual funds, banks on just this. As a result, you are exposed to a tantamount of information guiding you on how to manage your money. So, to make things easier, we, at The Smart CEO, decided to bring to you some simple and useful tidbits from the personal finance space.
To kick-start this series, we present to you two experts, who are leaders in the financial services sector, and who understand the stock market lingua well. They are Motilal Oswal, CMD, Motilal Oswal Financial Services Ltd (MOFSL) and Dilip Bhat, joint managing director, Prabhudas Lilladher Group (PL). Through a series of questions, they take us through their experiences, which will help you understand their investment philosophy, market scenario, entrepreneurial lessons and the sectors to watch out for.
BUY RIGHT. SIT TIGHT
MOTILAL OSWAL speaks:
Lessons learnt during the entrepreneurial journey
Investment in knowledge pays the best interest: I must say that I have tremendously benefited from reading hundreds of books and applying the learnings from those books in my life as well as in business. However, three books had a huge impact on me; ‘7 Habits’ by Stephen Covey, ‘Execution’ by Ram Charan and ‘Ultimate Sales Machine’ by Chet Holmes. With the evolution and rapid adoption of technology in the financial services sector, execution is at stake. It is knowledge that provides the value that customers are willing to pay a premium for. We have hence based our whole business model on the power of knowledge. We were one of the first brokers to propagate research based investing and have the most extensive and awarded research coverage in the industry. It is this research that helps us.
The power of relationships: In an industry such as ours, there are bull runs and there are bear phases. It is hence important to understand the customer, his investing style, his needs and so on. It is also important to a relationship that stands the test of time. And, the best way to do this is to appreciate people, remember them, be honest with them and to have an attitude of giving and utmost humility. I always make an effort to reach out to friends, colleagues, partners and customers. I wish around two thousand people every year on their special occasions, be it birthdays or anniversaries. I send thank you cards, share books, articles, emails and quotes with many of them. I derive a lot of satisfaction and pleasure from being connected.
Integrity is non-negotiable: We are in the business of handling people’s money. The one thing that is non-negotiable is integrity. The transparency of how you are handling a client’s money and the integrity of your investing approach often determines how a client views you.
Process is practice:
Broking is a business of scale, and you can only achieve scale if you have strong processes that can help you scale up.
Management style over the last 25 years
I think it has remained more or less the same: to focus on knowledge and relationships. As we’ve grown, I’ve tried to inculcate a similar value system in the leaders we have hired so that these lessons percolate down the entire organisation.
Importance of working with the right co-founder
A co-founder is a bouncing board for ideas and also someone who compliments you. In this regard, I have been blessed to have met Raamdeo Agrawal in our college hostel, 25 years ago. We hit off immediately and have been friends and business partners since then. We openly discuss all issues and ideate on the vision for the company. My strengths lie in people management, business management, sales, human resources, and pushing important initiatives by monitoring its execution. Raamdeo has an innovative bent of mind and his strengths lie in research and investing.
Future of the financial services industry and your company five years from now
The journey is very exciting. We have grown in the past at more than 20 per cent CAGR and I think the growth would be even higher in future if we get a strong political mandate.
View on the current market conditions
Markets need very cohesive and strong government and hence would take off if we get a strong and stable government.
What kind of returns are you expecting in 2014?
It is difficult to say for one year, but, over the longer term, equity would be the best asset class in terms of post tax returns.
Entry into the housing finance segment in 2013
We think the housing finance business is great for us to leverage upon our distribution. Strong balance sheet and sheer opportunity is what helped us zero-in on this segment.
You have been inducted into “The Hall of Fame for excellence” in franchising by the Franchising World Magazine. And MOFSL continues to build franchises steadily. What are the factors to bear in mind while roping in a franchisee partner?
There is a saying – ‘Attitude builds Altitude’. When we look at a prospective franchisee, the most important factor we look out for is whether he/she has a ‘Think Big’ attitude. Broking is a business of scale. And, it is only when you think of scale and have big dreams that you will be able to achieve them. We had many small franchisees with big dreams. Today, they are some of our largest partners. In addition to this, we look for people who have an orientation towards knowledge-based investing, passion, integrity, process orientation and a customer focused approach.
Five things an investor has to watch out for in this market
Actually its only four words – BUY RIGHT. SIT TIGHT.
Investing needs fundamentals-based approach, realistic return expectations, research and not getting carried away by tips. It’s all about buying quality stocks at a reasonable price and having patience to hold onto them and see them grow. You need focus, discipline, patience and a strong control over your emotions. If you adopt this approach, you are bound to make money in the stock markets.
About MOFSL: Incorporated by two college mates, Motilal Oswal and Raamdeo Agrawal, in 1987, MOFSL has emerged as a prominent financial services company with a net worth of over Rs.1,100 crore and a market capitalisation of Rs. 1,248 crore. A zero debt company, its focus is on wealth creation for all its customers, such as institutional, corporate, HNI and retail. Its services include wealth management, retail broking and distribution, institutional broking, asset management, investment banking, private equity, commodity broking and principal strategies. The company offers these services through 1,484 business locations spread across 527 cities.
INVESTMENT IS ALWAYS A NEVER ENDING LEARNING PROCESS
DILIP BHAT speaks:
The pre-election phase has led to a strong rally in the stock indices. Is there any further uptick in the horizon?
The market, in anticipation of a decisive mandate, has rallied to new highs. So, it appears that as we run up to May 16th, the counting date for the approaching election, the stock market may remain at elevated levels. And, should the event pan out as anticipated, Nifty can touch around 7000. Needless to say, the way markets have positioned, there’s little room for disappointment, in which case markets may correct by 800 to 1000 points on Nifty. Of course, if you have a five-year vision, which is a must, then markets have a much greater scope, notwithstanding short term volatility .
What is keeping FIIs interested in the Indian market?
FIIs, over the last four years, have invested over Rs. 4 lakh crore and almost 50 per cent of that has happened in the last two years. These were arguably one of the worst times for India, both politically and economically. When GDP plummeted to its lowest in a decade, resulting in collapsing growth in equity market, inflation, CAD, fiscal deficit, global weaknesses and falling rupee, most of us turned cynical and pessimistic about India. Only FIIs demonstrated faith in India’s growth story. Even as our politicians did their best to embarrass India by their behaviour, FIIs continued to invest in India. It is noteworthy that Indian investors too pulled out almost Rs 1.5 lakh crore in the three and a half years or so from MFs and Insurance schemes.
Obviously, there is confidence about the fact that India is a good growth story, irrespective of what is happening here. Hopefully, broadly, that trend may continue.
What is keeping FIIs interested in the Indian market?
FIIs, over the last four years, have invested over Rs. 4 lakh crore and almost 50 per cent of that has happened in the last two years. These were arguably one of the worst times for India, both politically and economically. When GDP plummeted to its lowest in a decade, resulting in collapsing growth in equity market, inflation, CAD, fiscal deficit, global weaknesses and falling rupee, most of us turned cynical and pessimistic about India. Only FIIs demonstrated faith in India’s growth story. Even as our politicians did their best to embarrass India by their behaviour, FIIs continued to invest in India. It is noteworthy that Indian investors too pulled out almost Rs 1.5 lakh crore in the three and a half years or so from MFs and Insurance schemes.
Obviously, there is confidence about the fact that India is a good growth story, irrespective of what is happening here. Hopefully, broadly, that trend may continue.
With so much movement in the market, what should be one’s approach towards investment? What kind of stocks should one look at now?
A strange phenomenon in the markets have been that while a few stocks have moved in a different orbit in terms of their valuations and prices, the broader markets may still be a little higher than the levels witnessed in Lehman Brothers crisis in 2009. So, we still feel the focus will be on existing good stocks, despite its exorbitant valuations. Capital goods and the engineering sector will be a good place to invest in despite its recent run up, and recovery cycle may be a little elongated. Auto sector and auto ancillaries will be another sector to benefit in the up cycle. Frontline and select midcaps within the IT, banks and pharmaceuticals will continue to look good because of strong cash flows and good ROEs.
Which are the sectors that you would bet on over the next five years?
Apart from those mentioned above one should look at select power ancillaries. A few of them have size though they are currently cash strapped
Fundamentally, when an investor wants to pick a stock, what are the five things he must look for?
Management is always the prime focus for any investments. So, you can see how the company has performed over the last seven years, which will tell you a lot about the quality of management and about how they’ve fared during economic fluctuations. To be more specific, EBITDA / free cash, ROEs/ ROCEs, capital intensity of the business, dividend distribution policy of the company (which confirms the cash flow and shareholder friendly approach), the business cycle in which the company is operating, and valuations, are a few parameters which you should focus on while investing. A company will score rarely on all these parameters. But, by taking all these parameters if you get a score of 70 per cent, then it will become an investment case.
What is the future of the financial services industry and where would you like to see your organisation five years from now. Share your strategies to reach there.
We remain very bullish and focused about the financial services industry. We have seen a lot of consolidation in this industry which may possibly continue as yields continue to move Southwards. Growth remains elusive and managing costs and investing in the business remains a challenge in this down cycle.
In Retail business, we are actively looking to expand through a series of innovative acquisitions. While there is a lot of pessimism currently in this space, we feel if handled properly, it can give us a good leverage for future growth.
High net worth individuals remain an area with tremendous possibilities. We are focusing on them and we feel a differentiated approach can help us tap this potential. Just a case in point, we advised all our clients and a lot of HNIs to stay away from the returns offered by schemes on NSEL, as we (after a good debate within our team), remained unconvinced on how this would pan out. Despite a lot of sacrifice of income (so important to resist in tough times) as well as pressure from clients, we did not relent. Looking at the subsequent turn of events, we feel we were lucky to not have gotten involved in this. We have an NBFC business, which complements our main business. We are actively pursuing a strategy for our online business. Institutional business dealing with MFs and FIIs remain a focus area. We feel this business has potential to multiply several times in next five years
So, to achieve this we have been partnering with the right franchisees, recruiting the required talent, empowering them and investing in technology. Our goal is to be among the top five players in our industry in next five years.
Can you take us through some important milestones of your organisation’s growth?
We started in 1944 and have been through a long journey. From a standalone broking firm, PL has evolved in to a one-stop-shop for all financial services. Our emphasis has always been on being professional in our approach. So, from being the first to corporatise, the first to computerise, to taking professional directors with equal shareholding, we have charted a very different course from others. When we (my colleague of over 25 years) were taken as equal shareholder directors, we helped the company post a rapid growth
Tell us about your personal investment philosophy? What was the first stock you owned?
Investment is always a never ending learning process. The mistakes we make, though, sometimes costly, help you evolve, and that always keeps you on the toes. I do place a lot of emphasis on free cash generated by companies and ROEs along with management strengths.
Tata Chemicals is one of the first companies I owned.
As a leader, how has your management style evolved over the years?
I adopt a hands-on approach. I trust people who are with me and give them more power. At the same time, I try to keep an ear to the ground. I also believe in listening to people and have an open door policy. I encourage employees who are always brimming with new ideas. In fact, you will be surprised how much you learn from people around you.
Gut Vs. Data. When you are in a dilemma, which one do you rely on and why?
When I decided to take this as a career in 1988, this industry was an uncharted territory for Chartered Accountants like us. So, to gain conviction, I relied more on guts than on any data. But, eventually, it is always a mix of both and it is very difficult to say which will dominate more and when. Only when you don’t have any data should you go by your guts.
About PL: Prabhudas Lilladher offers the entire range of financial products and services to its customers. With a nationwide presence, on-panel financial experts, Research Lab, global standard modules and seamless technology interface, the group is on a good growth track. Built on the core values of Integrity, Enterprise, Responsiveness, Expertise and Ambition, the group is driving financial growth for a diverse set of clientele including FIIs, HNIs, Institutions, Corporates, NRIs and retail investors.
