“India to continue at a moderate growth path”

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By Krishna Kumar Mishra

Few faces on the D-street make heads turn, not only with a powerful voice accompanied with a very handsome personality, but also with countless facts and figures about the world market on their fingertips like Shankar Sharma, Vice-Chairman and Joint MD, First Global.
Once considered the big permanent bear, the global strategist has established himself as a bright and prickly maverick not averse to give sharp new meaning to the various investing mantras. He belongs to that rare breed of intellectuals who don’t give a damn while putting his point of view across.
Here in a freewheeling conversation sitting in his plush office at Nariman Point, Mumbai, eagerly waiting for the first shower of monsoon, he shares with Krishna Kumar Mishra his take on the current market environment, investing themes, the present government and what the future holds for the country.

You said once to me that you are skeptical by nature. Is there any change in your attitude?

No change. What I mean to say is bull markets are ultimately a product of macro-economic fraud which means you keep interest rate artificially low, and you encourage people to borrow more. So you can give them loan at one percent and they think equity is going to make it 5-10 percent. That’s what is happening in the USA in the last many years. But bear markets are always based on fundamentals. No bear market has ever happened without any reason. You go back in the history of bear markets. So which is all I have said that with bull market typically you will have to be a little careful because they can be engineered, they can be manufactured. But bear markets cannot be manufactured. You see, from 2008 all markets have gone up substantially. But that does not mean that underlying economy has been doing well. So how come the market has gone up? The market is after all linked to the economy. But nowhere economy is doing well. It is only because you reduced rate to zero percent. So the market is going up. If that is not fraud, what is?

There is a perception that Mr Shankar Sharma is in fact a bull, but projects himself a bear.

I’m a bull, but I’m a skeptical bull. I’m not a blind bull. I don’t believe in anything blindly, not even in God. I have to ask questions. So when I ask questions I don’t get too many answers. If I don’t get too many answers I’m skeptical. This is very simple. Of course I’m a bull. I’m very bullish on many companies and the few sectors, but as I said I’m a careful bull and I always say that market is a dangerous place for small people. They should be very careful in putting all their money in the stock market. If that makes me look conservative and hence a bear so be it. I can take a lot of risk. I’m a professional and that is what I’ve been doing. I’ve a lot of tools available to me to help me make a better decision, but how many people can do that? I can’t advise what is right for me should be right for you – everybody who is watching the TV or reading a magazine. So for them, I will be extra cautious and extra careful while speaking. Which is what it is.

Layman should basically understand that the stock market is not a very safe place. I’m speaking what I’m doing. What I’m doing is not necessarily the best thing for you. I mean, if you start playing cricket you can’t start like somebody who is playing since last 25 years just because you watched him play on TV. There is lots of practice behind it, years and years of practice. I always advise small investors not to put more than 50 percent of their money in the market at the most at any cost. So there are some people who feel I’m not saying correctly. So it’s like you are saying you should not put 100 percent therefore you are being bearish. If that is called being bearish then it’s ok.

What is your assessment of corporate earnings?

Corporate earnings, in the last quarter, have been relatively better, but not sufficient in the context of what the market needs. Market needs 15-20 percent earnings growth. So instead of 5-6 percent if you grow at 8-9 percent it is still not good enough. Now whether we can grow up to 15-20 percent about that I have my doubts. Simply, because for 20 percent the real GDP number has to be 7.5-8 percent which is not there. However, the government keeps on publishing these higher figures which again nobody believes. And frankly it cannot be believed also. In reality we are more like at 5-5.5 percent and which is where we have been since 2012-13. With that corporate earnings cannot grow at 15-20 percent. It cannot be that bigger difference.

See, corporate earnings by and large will be growing at or around the nominal GDP growth, especially when our companies are not really tech companies. If you are a Google, or Facebook or any such company which are not linked to US or Indian economy, then you can grow from zero to 100 percent in three years. But our companies are still construction, steel, and auto companies and these are linked to the core economy. If you go back, earlier India’s nominal GDP growth used to be about 14 percent. 7-7.5 percent was GDP growth and about 5-7 percent inflation. So we were having earnings at 20 percent and the market was trending up.

What is your call on equity markets for the fiscal year ending March 2017?

See, the real underlying growth is still tepid. It’s not bad, but it is not great either. When analysts keep saying that we will grow at 15-20 percent earnings growth, then I say are you saying our nominal GDP growth will go to 14 percent? If you are not saying that then this data is not correct. In my opinion India will continue at a moderate growth path. This 5 percent will remain and neither something bad will happen, nor something better is to be expected. In that context market for large cap companies will remain more or less flat. If you see last two years market is flat. There is no real movement. But what has changed in the market is that the small cap segment has done phenomenally well. Those companies have gone up to 30-40 percent every year, even more. That is happening because those companies are not linked to the overall economy. So some companies are small companies, but are exporting companies. If you are a small infrastructure construction company and your turnover is 500 crores, then you can grow 20 percent simply because you will keep getting orders worth 500 crores every year. But if you are L&T you need to have several lakh crores of order book every year to keep growing at 20 percent. It is just because your size is so big and we don’t have that much growth available.

So the kind of growth we have is good for small cap companies, but not good enough for large cap companies. So if you see the data, then earnings growth for small cap companies has been tremendous and the stock price performances are just terrific.

Last year in 2015 or financial year 2015-16 you see the performance of Nifty and performance of small cap. That bigger difference you had never seen in the last 10 years. The magnitude can differ, but it is rarely or almost impossible that if Nifty is down 8 percent and small cap and mid cap is up 15 percent. How many times do you remember it has happened? It happened only in the last year. It is telling you that economy is just ok for small cap companies, but not good enough for large cap to do well, which is a big change from the last 10-15 years. And if you have caught that trend, then you are making money otherwise you are saying the market is not doing anything. So these are two different markets within one market. In one place it is pitch dark and at another place you find a lot of light.

So you endorse what RBI Governor Mr Raghuram Rajan said, andhon me kaana raja?

(Laughs heartily). Well, I mean the fact of the matter is what he said is right. The world is in deep trouble and I have said this before even he said it. If you look from 2008 onwards; after the big crisis in 2009 some people globally started to recover. But no country did as well from 2009 till 2014 as India. You just said we slowed down in 2011-12. Yes, we slowed down, but who did better than us?

“I’m very positive on small cap and mid cap companies. I continue to believe that area of the market will continue to do well. But I’m average on the broader market in particular.”



No chance. We were growing 5-5.5 percent in 2011-12 when China was growing 7.5-8 percent, but that additional 2 percent they were bringing with lots of debt. Now suppose there are two companies – one is growing at the rate of 50 percent and the second one at 75 percent. But the first one has not been using debt, whereas the second company has taken huge loan. In all probability, you will still prefer the first company. India did just that. India’s strategy was that we will not take debt even if growth rate comes down a bit. China decided to grow at all costs. Now China is collapsing because of the problem they created in 2009 to 2014. That was a very matured economic thinking. That no doubt, made us slow down but that did not make us go bankrupt. If we had spent that time madly like China, Europe and USA, just imagine where we would have been today? Growth would have still come down plus debt would have been there on the top of everything else. Which is what is hurting China. So no country did better than India after 2009. And that is the reason everybody’s growth rate collapsed. India too collapsed, but less. So this is what is andhon me kaana raja.  It is not that everybody is doing well and we are doing better. It is like if a cricket team scores 100 all out so someone scoring 25 is suddenly considered a great batsman because he is the top scorer. It’s that kind of a pitch. So the RBI Governor was right. We did not take it rightly.

What could create more trouble?

Oil prices will generally be higher than where it is so I have been bullish on oil prices since last 3-4 months. I think it has done well. It can easily be at $ 60. Unlikely beyond that and it will not come below $40. I think demand supply is quite well balanced at these prices. I’m a little concerned because even $55-60 is still quite high. So the rate cuts will not happen because of inflation, due to increasing oil prices. Number two, because of no rate cuts in India you are going to see markets which are cutting rates. They will attract more money because those markets have collapsed and many people will see a chance of bigger revival in those markets. For instance Brazil’s GDP growth rate went to zero. Now if that country comes from zero to even one percent, then also investors will play that. Whereas if we succeed from 5.5 to 6.5 that will not create that kind of enthusiasm. And the third factor is globally commodities are this year looking better. All economies like Russia, Brazil, Mexico, which is gaining their revenue in large part from oil will benefit. So again money will move to them.

The fourth factor is the government has not let the consumer enjoy the benefit of lower oil prices. Which was in my view very bad economic policy. They should have at least given 30-40 percent of the benefit to the people. The actual consumption increase should have happened that way. If that is the national profit, then why the government should take all the profit? The government’s balance sheet cannot be separate from my balance sheet. Now when the oil price is going up they are still not going to cut rates rather they may further increase. So that is what I’m fearful.

What is likely to be the dominating theme?

As I said earlier, I’m very positive on small cap and mid cap companies. I continue to believe that area of the market is doing very well and will continue to do well. I’m extremely positive about that, but I’m average on the broader market in particular. I feel small cap chemical companies are good because in China there are a lot of shutdowns so the production will move to India. But in the dominating theme, there are also small infrastructure companies. They will do very well because they have got good order flow relative to their balance sheet size. Small banks, small micro finance companies, again all of them look very good. Even small cement companies are looking good. As such cement, infra construction, chemicals, and micro finance – those segments have a lot of very good companies. These small companies will tomorrow become large cap and they will replace imploded large cap companies. After all, this is the order of the world and that is natural.

Your take on IT sector and also what about consumption and the metal pack?

IT is facing big challenge from the cloud. A lot of services are moving to the cloud. The cloud represents a complete new dimension. So we have to be very careful unless our companies do something in this regard. It’s disruptive to our IT models so it is a big challenge for them. The complete sector will feel the impact, and not only certain companies. On the other hand consumption is so so. Metal packs like steel I like and they have had a good run. I think this year again will be good for them, but easy money in that trade is over.

What is your take on this new sector – defence?

Defence and power sector I don’t recommend. Only there is big talks happening. I won’t touch any business if their major customer is the government. I feel the government will never let you make money. If you bid for government contract and make 20 percent margin, then soon that person who gave you the contract will be behind bars and there will be CBI inquiry. It has to be. How so much profit this company is making? That means there was something wrong in the bidding.

“I always say that market is a dangerous place for small people. If that makes me look conservative and hence a bear so be it. I can’t advise what is right for me should be right for them.”


Have you changed your view on banks after the huge clean up?

I don’t think public sector banks are a good buy. The private sector is ok, but micro finance is better. I think people have been too optimistic when they say that NPA problem is over. I don’t think it’s over. Number two, talking to companies I don’t see anybody in a mood to set up plants, set up capacities or even if they have a plan they will only set up what they can fund from their own resources. People are so scared. Look, if I set up a project and it goes wrong, it does not mean I’m a criminal. Businesses can fail, but if you chase people like this that they have to run abroad, their passports impounded and revoked and all that. With this, what message are you sending to society? Society can thrive only when risk taking happens. Now in the process of risk some wrong thing can happen. I mean globally there has been a huge downturn since 2008. Lot of projections that were made just went out of the window. Suppose if I put up capacity and that capacity is not being utilized because globally there is a downturn and loan that I have taken is going bad but I’m not a thief. So this setting up of a precedent by chasing Vijay Mallya to London again is a very wrong thing. This has made people even more scared. So I don’t think there will be any credit demand in next one or two years.

What you suggest the government should have done?

You proceed at a certain level, but don’t start calling people a thief or a criminal. At least Vijay Mallya was willing to pay. Media reports say in his case 4000 crore is the principal amount and 5000 crore is the penal interest, etc. I’m telling even if you are getting 4000 crore, at least your principal amount is coming back. Everybody knows that he has genuinely lost money in Kingfisher. It’s not that all the airlines made money and he was the only guy losing money in that period. Then you could say that there is something wrong and he has siphoned off money. The man has lost everything. His companies are sold, his prestige is at stake and you put that man as a criminal. With this mishandling you are in fact sending a very bad message to the other businessmen. I think you should take whatever money is available and write off the rest.

But people will start taking advantage of this practice, if you start like this?

Let people take advantage. In cases like this you wait for two years and you will get zero. If you are getting what you gave them you should be happy. Be practical. Everywhere you cannot hope to make money.

Fed is giving signals to raise interest rate. And where do you see rupee in the next 12 months?

I doubt if Fed would be able to hike. Even if they do, they will not hike one percent. I think 0.25 and then another 0.25 at the most but they will not hike one percent. Even if it happens, it will have no impact because it is already factored in. And I think rupee will remain in the 60-70 range. I don’t think we will fall much more in most cases for at least 12 months.

Your advice for the small investors.

They should understand that market is a place to make money, but it is not easy. If you lose you will go bankrupt. Most people make that mistake. In general, as I said earlier, my advice is that don’t put more than 30 percent of your money in the market. I advise small investors to keep buying small cap and mid cap stocks. I feel they have very good opportunities to grow multifold. There are some very good mutual funds also for that segment. I believe timing is everything in the stock market and one should not have emotional attachment to any company or management.

“People want miracles. But to expect so much from one person I think it’s been very stupid. If you raise someone to that dizzying height or make him God, even then he will remain a man just like you and me. That reality cannot go away.”


How you see these two years of this government?

I don’t think anything major has happened. People had every right to expect, but I was not expecting much. So it’s ok. I think the government is not really doing anything which is dramatic. Small improvements here and there. Largely it is doing what the previous government did. It is continuing the same thing. There has been no big new idea and no new thinking. So I don’t think there is going to be anything major from here on. Now we are in the middle over of this government. UP elections are going to come up so I don’t think it will take too much risk before that. This government is in permanent election mode.

The government has announced huge spending in infrastructure sector, power and railways. Don’t you think that will have a big impact in the next three years?

Only they are announcing different projects. Has something really happened? If that much spending was happening, then corporate numbers would have been different. Unfortunately, they are not different. The basic question is from where they will get money? Announcing big projects are good, but it will require huge fund. So let us hear the generation of the money before the deployment of the money. You will say PPP but how PPP will work in India? Which private sector has any money to spend? Neither the government has the money nor the private sector, then how PPP will work out? Last government also tried PPP but it didn’t work.

So you find no change? 

Since now I don’t live here I can’t say with complete hundred percent proof and I also can’t say for others. All I can say will fully depend upon corporate earnings and corporate earnings are showing no life. Now, whether people openly say or don’t say that is a different issue. People are generally more scared of this government than they were of the previous government so they keep quiet. Now when people keep quiet you don’t know whether they are liking or not liking you.

You feel again there is a crisis of confidence creeping in the market and corporate world?

No, I don’t find that right now. There is no crisis, but I think there is disappointment. Expectations were high which has always been the case with a new government. People always over expect. They want miracles. But we are dealing with human beings and I have been always of the opinion that to expect so much from one person I think it’s been very stupid. If you raise someone to that dizzying height or make him God, even then he will remain a man just like you and me. And if that man also said that he is God and you believed him for whatsoever reason still the truth is he is a human being. That reality cannot go away. The kind of momentum we have seen in 2014 that was once in a lifetime momentum. The pitch that you had was an easy wicket. On that pitch you should make 500 runs. People expect minimum 475 or at least 350. That is the way.

So the dream world will burst out?

I don’t think so. People will reconcile. Indians are very good at reconciling. Corporate too will reconcile. They will realize their fault that their expectations were indeed very high. It is very simple. You will have to look at the data, the facts. You have to say that this person too is a human being like us. We have every right to dream big and expect much from the government of the day. All over the world, people go through such a phase. It’s natural. I also wish and hope and expect that whatever we want should happen. But I have my doubts because ultimately data do not show that it could happen. And at this point in time I don’t see any such big plan. Just announcing that this much job will be created is not enough. Let us know what will create that particular number of jobs. From where the money is going to come? So first talk about that source. Signing MOUs is not a big deal. That has been happening. Nothing new in that.

As I said we are growing at 5 percent, which is again not bad. I think we will continue at this rate very easily and very leisurely. I don’t think anything great will happen. People were expecting miracles, but you cannot fault people also because when I go and get vote based on saying that there will be miracle so people also say, ok I am giving you my vote and you give me a miracle. Now I’m saying, now you have to wait. But today’s youth are impatient. If I am 18 or 22 years I don’t want to wait till 27 to get my reward. I want it now.

Anything that you find good in these two years?          

In my view the biggest change is the direct benefit transfer (DBT) which was again started by the previous government. Now this government has taken it to great heights. I’m sure India will be able to save 50-60 thousand crore rupees for sure, without any doubt. About Jan Dhan and Mudra Bank my view is different. First the dhan factor is missing and the numbers that the banks are putting are also unbelievable. Since this account comes with insurance benefit so people have closed their saving account and opened this new account. It’s like the much publicized number of mobile phone subscribers. A large number of people use duel Sim card. Even if we are a little liberal then also we have to reduce at least 30 percent. Just saying we have 100 crore is ridiculous. And about Mudra, what will happen by distributing rupees 20,000? These are good on the social parameters, but here we are talking economy.

“I don’t think there will be any credit demand in next one or two years. Look, if I set up a project and it goes wrong, it does not mean I’m a criminal. But if you chase people like this that they have to run abroad, their passports impounded and revoked. With this, what message are you sending to society? Society can thrive only when risk taking happens.”


The market is buzzing with very outrageous Sensex and Nifty figures – three times and five times from the present level. What do you feel?

Everyone has a right to make projections and do their own arithmetic. Rather, it’s a good thing to be optimistic. But I believe in hard facts and I don’t see such kind of growth will happen. If you are just having projections, then keep talking because in the next 20 years that might happen. I speak just for one year or two years. So next year market may be a little bit better, but I have no such ridiculous hope. I firmly believe that India is a great country and irrespective of the government we will do well.

Now the last question. These days Shankar Sharma tastes wine and visits restaurants more often and of course sings Rafi saab….seems to have been taking life more coolly.

No, not these days. In fact, I don’t drink any spirit. So I have been a wine lover since long. I consider it not bad for my health and the best thing about it is you can’t drink too much. So I drink some wine almost every 10 days or so. Which is ok and I enjoy this and this is not something new. It has been since last 20 years. And about restaurants…. I’m, rather me and my wife Devina, are fond of good food so we keep visiting good restaurants. It doesn’t have to be a big place, but it should be a good place. So we try to find new places so it is again a big passion. Aur gaana… Yeh sab to shouk hain, shouk thode hi chhod denge.

About the author: IE&M Team
IE&M Team
Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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