Capital Markets Mark The Health Of An Economy

The post liberalisation era has seen a lot of positive changes with respect to licensing norms, Foreign Direct Investments (FDIs), and interest rates, says Jisang Yoo, CEO, Mirae Asset Global Investments (India), in a conversation with Saikat Mitra, while also speaking of the Indian markets and the healthy trend of development in the country.

• India, with the world’s second highest growth rate, has always been an attractive market for foreign investors. Since the onset of liberalisation, FII flows into India have steadily grown in volume and importance.
• The advantage that multinational companies have over Indian promoters is that their asset allocation is disciplined. However, the disadvantage is that their hands are tied and generally cannot diversity across product lines/geographies.
• Unfortunately, retail Indian investors have a misconception that IPO means safety and better valuation which is not always true.

Jisang Yoo,
CEO,
Mirae Asset Global Investments (India)

There are more than 5000 companies listed on the Indian bourses. But there are only a handful of companies that have created value. Why do you think this is the case?

Value creation is a function of the quality of business, sustainable growth and management quality. However, not many companies sail through this over a long period of time. For example, if we put a filter of 15 per cent earnings on a CAGR basis, 20 per cent return on investment (ROI) and a decent payout over a period of 10 to 20 years, only a handful of names would emerge. We believe that the focus of the management to create a shareholder value and grow at consistent growth rates without too many equity dilutions are very important aspects of creating shareholder wealth.

Investors also need to take a long-term perspective while investing and hold on to quality stocks through the up and down cycle to get the complete benefit of the wealth creation cycle.

Out of dividend and capital appreciation, which one would you put more emphasis on and why?

We don’t subscribe to the view of investing for dividend versus growth as we think they are two sides of the same coin. Because, while selecting a company for the long term, we look at the following attributes

• A company earning high returns on capital with good cash flows
• Reasonable valuations.
• A good capital allocation policy by the management

If a company is able to attain the above three criteria, then investors can be assured of reasonable returns either through capital appreciation or dividends (and often both).

Talking from the shareholders viewpoint, one should look and sum up the two to get total returns. Only dividend yields with limited capital appreciation is a value trap, and generally does not create wealth. High dividend payout ratio (not necessarily yield) is important as it reflects the quality of business.
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Have FIIs have played an active role in creating value in India?

Companies create value not investors. However, Foreign Institutional Investors (FIIs) do bring an international perspective of global practices like disclosure, corporate governance etc. to the Indian markets. In addition, they are also better positioned to understand and invest in newer businesses, which are new for developing economies like India.

FIIs have gained a significant role in the Indian capital markets. India, with the world’s second highest growth rate, has always been an attractive market for foreign investors. Since the onset of liberalisation, FII flows into India have steadily grown in volume and importance. FII flows have been highly correlated with equity returns in India. They hold over 25 per cent of the total free-float market capital of all listed companies in India and are an important and integral part of our markets now.

It is seen that value creators in India were mostly MNCs, why have Indian companies failed in this respect?

We feel that the Indian companies have equally created wealth for investors like MNCs. In fact, if we conduct a survey of companies that have created wealth by 50-100 times in the last two decades, an array of Indian names would prop up. The number might be dismal in the context of the total 5000 listed companies. However, the absolute wealth these companies have created is significantly higher. For example, on the Information Technology front, we have conglomerates like Infosys, Wipro and Tata Consultancy Services; on the Pharma front, we have Sun Pharma, Dr Reddy’s and Lupin, while financial institutions like HDFC have created huge amounts of wealth.

The only advantage multinational companies have over Indian promoters is that their asset allocation is disciplined. However, the disadvantage is that their hands are tied and generally cannot diversity across product lines/geographies.

We feel that companies which can deliver a 15 per cent earnings growth on a CAGR basis, 20 per cent Return on Investments (ROI) and a decent payout over a period of 10 to 20 years, will create wealth for investors, be it Indian companies or MNCs.

Do you feel that the IPOs have created value for investors? How has the scenario changed over the post and pre CCI era?

We partially agree with your thoughts on this. Few initial public offerings (IPOs) have created wealth, although there are not many examples in the recent times. However, since 2008 we have seen very few success stories, which is a function of pricing of these issues. We feel that the IPO pricing needs to be attractive and leave something on the table for retail investors.

Also, according to us, an IPO is just one way of participating in a company. Unfortunately, retail Indian investors have a misconception that IPO means safety and better valuation which is not always true.
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What change do you see in the approach of the markets in the pre and post liberalisation period?

As we all know, the capital market is the barometer to gauge the health of any country’s economy. Since independence, India had only been able to maintain a growth rate of 3-3.5 per cent and our capital growth rate was even worse. However, the Indian capital markets experienced a paradigm shift post 1992. From the economy’s perspective, the post liberalisation era has seen the primary markets finding exponential growth. A rising significance of the financial assets, increased savings rate and monetisation of the economy were the key drivers. As a result, the paid up capital as well as the number of listed companies grew. There have also been a lot of positive changes with respect to licensing norms, Foreign Direct Investments (FDI), interest rates, etc. From the market’s perspective, we now have international levels of disclosure, and FII participation has helped the markets mature, thereby showcasing a healthy trend of development in India.

Do you feel that the inclusions of new products like derivatives have helped in creating wealth?

Derivatives have had a positive rub-off on improving liquidity which is very important. The erstwhile ‘badla’ system was similar – however, we now have a more refined globally followed Futures and Options segment. The Indian markets still need to improve liquidity significantly (as compared to other regional markets) and hence, derivatives is one of the most important tools to achieve the same. Derivatives play a very important tool in portfolio risk management and help hedge risks of the portfolio. However many investors have used derivatives for view based trading, taking advantage of the leverage possible through derivatives and have lost wealth.

We believe derivatives are good products to improve the liquidity of the markets and reduce market risks through hedging.