After writing a letter to investors on how to evaluate the damage to stocks, Raamdeo Agrawal, co-founder, Motilal Oswal Financial Services, said there is a need to chase value and not the price in the current market.

In an exclusive interview to CNBC-TV18, Agrawal said the losses in the market lie in the price not in the value.

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Popularity of stock no guarantee of its investment performance, says Raamdeo Agrawal

Speaking on Tata Motors, he said the company has become very aggressive in the recent past to gain market share.

Edited Excerpts:

Midcaps have fallen quite a bit over the last one year or so. What should investors do in such a situation?

This is a permanent problem of the stock market. It's not only in 2018 this has happened. We have seen so many times and that is the fun of the market. So, markets are volatile. Every investor is a value investor, so you have to chase the value and not the price; price will keep moving up and down. The loss is in the price, not in value. So, when the price moves down from 100 to 50, the value might have gone up from 50 to 60. So, what we are looking at is the loss is in the price. If something has gone from 10 to 100 and 100 comes to 50, the person who has bought at 100, for him it's a 50 percent loss, but the person who has bought at 10 its 5x. So, this game of when you bought, when you sold would mean permanent gain or permanent loss in the same stock. If you bought at 10, it's a permanent gain for you for 5x, but if you have bought at 100 the same stock, it’s a loss for you at 50 percent. So, that nature it could be a permanent loss or it could be a quotational loss.

But making the distinction is where the trouble is, right? How do you know when it's a fall in value and when it's a fall in price?

When the loss is followed by the loss in the value and the loss in value is permanent. Loss in value also could be temporary in a cyclical company. For example, you are one of the lowest cost producer of steel and the price of HR falls from 800 to 400, but that is a cycle, they will live by the cycle. So, the current profitability of the company has come down. Hence, stock prices will also react and that is how the cycles are build, but it's not a permanent loss. In fact, at the lower end, they will increase the capacity and lower the cost of production and the value of the company might go up. So, it is a quotational loss and then, the second round of steel cycle comes, the company is double in size, lower in cost and then it makes even bigger profit. So, that move from 1,000 to 400 or so is 60 percent down – that is also quotational loss, but good example of quotational loss is like a company we have given here - DSQ Software and Infosys. So Infosys went through from almost a lakh crore. I still remember in 2000 peak, it was Rs 110,000 crore kind of thing and then it came down to Rs 20,000 crore. So that 80 percent drop was a quotational loss. To come back in next two-three years, it crossed that and not only crossed Rs 110,000 crore, then it went to Rs 250,000 crore. So that was quotational, but at that point of time, lot of companies like DSQ, Pentafour Solec Technology and whole lot of companies were. They were also at huge heights and from there they fell 99 percent in one year and then they just evaporated. So, in the same industry at same point of time, there are two types of losses. One, which could never come back, value was never created back in the company and hence if you have that kind of company. Unfortunately, you should not have that fundamentally, but for some reason, it has come into your portfolio. You have to cut your loss and run whenever you realise that this company doesn’t have value, it’s only a price game.

The difference between Infosys and DSQ is a stark difference, but often you may not be able to make that difference for instance take another industry like non-banking financial companies (NBFCs). 2017 was the year of NBFCs with so many of them giving multifold return. How would you distinguish one from the other? Which one might have got in to loan against property (LAP) lending or wrong asset lending or aggressive lending? How will you distinguish? How will you reduce permanent loss?

You have to know the company. It's not about NBFC or steel company or telecom company or information technology company. In cyclicals, these examples become very severe as good companies have cyclical downturn. So there will be quotational loss in the cyclical companies, so there is no problem in the company per say, but the nature of the product itself is such that there will be quotational loss and you should be ready to write that quotational loss.

One more example, just looking at this year, Tata Motors has been the biggest loser this year, down 40 percent. Is this a quotational loss or a permanent loss?

I do not know enough about Tata Motors to say that it's a quotational or prima facie. I would say it's quotational, because these are huge franchises, they will come back. You see their aggression in their strategy to bring back car, bring back truck and gain the market share in trucks, so they are very aggressive now. So, I would say 99 percent. I am not an investor in the stock but it looks to me quotational, they will come back. But people who actually know the strength of the companies those have invested, they have made money or they have studied the company. They would be able to say whether it's a quotational or permanent. Right now, it looks to be quotational loss.

What would be the features you would look at? Would you look at longevity, would you look at corporate governance?

Everything. Ultimately companies are profit machines, they are making Rs 100 crore profit, Rs 1,000 crore profit and there is a promise of 10x or 5x growth in the profit. So leave growth side, whether the current franchise, the current profit whether it's broken down permanently for some reason like regulatory changes, something is banned, you are in a business and government says, this cannot be done, so your franchise is broken permanently.

What would you do with more like technology changes for instance Dish TV India. They have reported excellent average revenue per user (ARPU) and yet there is a fear out there that if fiber to home happens. How do you read this?

Fiber to home is a 100 percent reality. Obviously, Dish TV has to find some other business model to be relevant. Maybe, they themselves become fiber to home, something like that. I do not know what they will do. When you talk about specific company, the intricacy of the businesses are too many and the entrepreneur is a guy who is sitting there. What you and I can see, he is able to see ten years before. So he is strategising continuously that if fiber to home happens, then what do I do? Do I join them? Do I fight them? So, I do not know enough about what is the strategy.

One sector that you may know a lot about because you have a high holding in many of your funds is the oil marketing companies – HPCL, BPCL. They are all down 40 percent this year. It’s a quotational loss you think?

It's quotational loss. It went from Rs 6,000-7,000 crore to Rs 70,000 crore and from Rs 70,000 it has come to Rs 40,000. In different circumstances, when it got deregulated, it went 10x. When the headwind started coming with higher oil prices, the investors became jittery, whether government can continue with deregulated policy. Then, there is a kind of a correction with five-six percent dividend yield, five-six private equity multiple and franchise is very sturdy in the sense. My understanding is that the government can influence only at best about 1/3rd of the profit through petrol and diesel. As a commodity, petrol and diesel you buy – that marketing margin is only 30-35 percent of the total profit and rest of the profit is their refining profit or their pipeline profit or some other branded stuff they do. So, there is whole lot of profit but markets do not -- in the mood of pessimism of fear they become very irrational. What fear can do to the stock prices or the market, even third World War cannot do. So fear is something where people run and particularly when there is a profit, then they run double the speed to lock the profit.

Disclosure: Motilal Oswal is is one of the four launch partners of CNBCTV18.com.

First Published:Jul 10, 2018 9:03 PM IST