In the second episode of the Blume Podcast, host Karthik B. Reddy of Blume Ventures engages in a captivating conversation with Raamdeo Agrawal, Chairman and Co-Founder of Motilal Oswal Financial Services, one of India’s leading financial services firms.
Agrawal shares his insights on various topics, including his investment philosophy, the dangers of building a startup for the wrong reasons, and his views on the growth of India.
Ramdeo: Because we started with the tailwind, then there was a crash in 92, it went up, we earned 30 crores, but there was a crash and all kinds of guys got wiped out. The guys with thousands of crores, they got wiped out. So you have to save yourself and you have to still come to the office and do your stuff.
Ramdeo: What happens is that if you're not passionate about it, you don't want to do that. You came for the good time and it turned out to be “boss, what is this? It is a bad time”. So in bad time, you don't feel like coming to the office. That is not the case with us. I come to office without, I don't care a damn where the market is down or 2% up.
Ramdeo: I'm as excited. I was excited about today's this meeting and all. So. What is important is to be super passionate in bad time.
Karthik: Welcome to the Blume podcast featuring Mr. Ramdeo Agarwal, chairman and co-founder of Motilal Oswal Financial Services, one of India's leading financial services firms. A first generation entrepreneur, Mr. Agarwal co-founded Motilal Oswal in 1987, at a time when India was still under the license raj.Since then, he has grown the company into one of the most respected names in India's financial services industry. Through the years, he's had a front row seat to the evolution of financial markets and the industry in India played a leading role in shaping the financial services industry.
Karthik: He's known for his astute investment philosophy, which has helped him identify some of India's most successful companies well before they became household names. His philosophy of investment remains long term and seeing returns compounded. And that's why we love to have him as a guest on our show.
Karthik: Welcome to the show, Mr. Agarwal.
Ramdeo: My pleasure to be here.
Karthik: So thank you again. I've loved meeting you the first time and, thanks for this opportunity. And
, we'll break this into three sections for our listeners today. We'll would love to hear parts of the Motilal story itself, because it's a startup in its own destiny from the 80s.
And then, you know, I think it's a tough time in India as much as there is optimism. There's a little bit of skepticism in the startup world today. Valuations have come to a halt, capitalists come to a pause. So would love to instill a little bit of optimism on where we think India is going over the next 25 years.
And as I might have mentioned to you, our theme for this year's storytell to our audiences is the power of compounding. And who better to ask, have those answers from than you. So shall we get started? So at Blume, we continue to think of and find these really early stage startups. And we try to figure out what is the dynamic between the co-founders and to see whether yeh shadi, yeh rishta will continue or are we simply backing two people who have come together for convenience, koi pitch karne ke liye aaye hai, right?
And you've started Motilal Oswal with Mr. Motilal Oswal, right? You decided to name the firm after him. So it'll be great to know, how did that meeting happen? It's often been told in the markets, but, how are you different from each other? How are you complementing each other? What made you be great co founder?
Ramdeo: It's really, like going back to 1986-87. So let me give my background a little bit, so that we'll connect better. So I'm a actually farmer's son from Raipur, Chhattisgarh. Okay. I mean, we still till land at home. Oh yeah. So proper farming kind of family. And so you can imagine how much stock market knowledge will be there and that too in Raipur.
I grew up in a village where there was no electricity, no pakka road. So, I mean, it was a proper Indian village. What do you see in Indian movies of the sixties or seventies. I came to Raipur for formal education after fifth grade and then I came to Nagpur to do B.Com in an English medium. Then the street journey started.
And then I barely passed B.Com in English medium. I was very good in accounts, came to Mumbai to do CA. It was again a painful journey because I failed four times in intermediate. A lot of learnings happened while doing CA. Four times I failed and the reason I failed was my handwriting was bad.
Very bad. So I was not able to read what I have written. So I changed my handwriting. I went to pre-KG kind of thing. Zero slant, full stop. Those stuff. I did that at the age of 24, and then I had beautiful handwriting. Again, I failed, because I couldn't complete the paper with this beautiful hand writing. There was no speed. So next time, for six months I did speed writing with the good handwriting, and then, no looking back, even intermediate, final, everything just went through smooth. And that gave me a lot of confidence. I became CA in 83. By that time I had fallen in love with stock market in Mumbai by doing audits of Century Textiles, Premier Automobile, and all sorts of companies listed.
Ramdeo: And I was a good reader. One thing I'll tell you is that I had a reading habit from my Raipur times. I was voracious reader of fiction. And when I came to Mumbai, a circulation library was there. So I used to read a lot of high finance fiction - high finance and fiction itself, like A Billion dollar show, Silver Bear, and Money-changers.
Ramdeo: So those kind of stuff I started reading and that started shaping my mind. I didn't know where was America, what it meant, but those large things away from my own economic reality, which is how I completed my CA and then I said, now time has come to figure out what to do next. When you are a CA, you get to see huge numbers, in the companies, which you audit or banks that you audit.
So again, you are back to pavilion and there's nothing in pocket and huge dreams - you want to make life in Mumbai, make a success. So then I said, stock market is the only way I can make it, but I didn't know from where to start.
I had no clue. And, I was doing research. I was a voracious reader of a balance sheet. One opening happened for one equity research, and was not that common as it is today. So I was the only applicant. I went with my own collection of 200 balance sheets to that job. Okay. 3000 bucks per month. I worked for two years, wrote a book and I used to work 10 to 12 hours.
That was the biggest learning point. And then I met Moti. So it so happened that, I was living in Lokhandwala complex. It was just coming up. It was a brand new thing/outfit. And roads were not proper, communication was not proper. So finding that connect between the Andheri station and that place was difficult.
So I had a bike. So I started giving him ride from there, free ride. Okay. He is very quick. So I used to be late always. So then he started coming to my home and then we started going together and then I started talking and then I realized that he's also still interested in the stock market. And he's a brilliant Chartered accountant, three - four years younger than me, but much more brilliant Chartered accountant.
So then we said, let's come together and start this Motilal Oswal. That time the name was Prudential Portfolio Services at the beginning. Okay. And. The real insight was that I was knowing everything about the stock market, but I had no money, not a penny in my pocket and how do we make a business out of it?
Because anything multiplied by zero is zero. So all the knowledge, but multiplied by zero is zero. So I said, first get hold of some money, and the only way possible was broking because broking was in acute shortage at that point of time. So we decided that it's a seller's market. So let's get in with two bosses, one peon and we started a thing.
And so no capital also. Since his brother was in the stock market in Ahmedabad, they used to buy there in a spot market and sell it in T15, T plus 15 in Mumbai. So they used to make 3-4% spread. We were not interested in their spread, we were interested in our 75 bips brokerage. And that's how the thing started.
I think our real godfather is Moti's brother, Jhaveri bhai. So that's how it started first year, maybe we must have made two- three lakhs of brokerage, then four, five, and ten. In first five years, we collected about 15 lakhs post tax money. We always paid full taxes in 1990, we bought the membership, the BSE membership at 25 lakhs.
Again, we were back to zero. We had no net worth when we opened the doors and then Harshad Mehta and the bull run started. Market went off 6x from 700 to 4200 in 19 months flat. We made 30 crores, no speculation. And that was the starting of Motilal's story.
Karthik: Fantastic story. No, it's fantastic. We can go on for hours just on the story, but thank you for sharing everything so honestly. This is the beauty of having a nice heart to heart podcast. When Motilal Oswal started in 87, I mean, you couldn't even imagine that there'd be economic liberalization, you know, or a Harshad Mehta, the kind of growth that we saw for the next 15, 20 years. Suddenly you'd land up in 2008 or 10. You couldn't have imagined, for example, the startup boom would happen.
People were very skeptical when we started Blume in 2012. Now, you've looked at this from a 35 year lens. From what little you see of founders and people you meet. Compared to, you know, when you started and what those backgrounds that you came from, what do you sense today in the younger entrepreneurs? What do you think has changed in terms of ambition? How are they wired? Are they doing all the right things or thinking about it the right way? Any impressions?
Ramdeo: It's a different world altogether. In fact, I tried to fund one or two of them. I mean, without much success. You know, one of the thing is that this culture of making losses and, you know, the loss funding of the initial four - five years, or maybe forever.
So this, this was not the game. I mean, there was nobody to fund your losses. I mean, there would be somebody to give me a 5 to 10 crores, family or friends
Karthik: Working Capital?
Ramdeo: not working capital or fixed capital, business capital, you know, business, and they would expect that right from day one - business is so strong that you may make thin money, but you make some money and there's no negative spiral. Later on once you start and then it goes into a spiral and you die out - That's a different thing. But to start with, you don't make a business model with losses. I mean, that was not the culture in 87. So there was no venture capital kind of a thing. So I think the venture capitalism was happening through can bank or SBI.
They used to give some, um, and there was no collateral, but they would give 50 lakhs, 20 lakhs. They will also try to find some data size, a collateral, some receivables as a collateral or something like that, but they would expect the companies to make money, you know, that was a culture of a startup, which was very small in eighties and nineties.
And also I think this Facebook and all these digital companies, this post in this century. I mean, this all came from US in the sense that the startup culture was always there in US, but a start up with a strong loss machine to start with, not that it's a bad thing or anything like that, but just the accounting is different. There is no balance sheet item. It's all P&L, whatever you do, customer equation and all that all gets debited in the P&L. Otherwise, if you set up a paper plant or you set up a steel plant, the whole capital cost goes in the balance sheet. Your P&L means thin and looks nice. Whereas here, everything is just stuffed into a P&L.
So I think accounting standards needs to change with this. I mean, they have not actually moved forward. They have to find some way of changing with the change of time. The accounting should have progressed, but it has not changed. And that's a confusion. We all come from the old mindset because accounting standards declare whatever they declare.
So there's a lot of confusion.
Karthik: So two quick points. I think initially when Venture was started in the US, it was to fundamentally fund commercialization of cutting edge technology, like semiconductors and personal computers, if a model didn't exist, you're taking high risk whether it'll ever get adopted.
So there's no question of making profits in the short term. And that somebody had to fund and an industry slowly got built and the confidence kept growing. What has happened is because technology becomes so pervasive, every business looks like it can be engineered faster. So if you used to make shampoo, a D2C brand can grow 10 times faster.
There's no basis for it. So what's happened is the risk taking appetite has increased and artificially has bloated those losses. Now the question is, are we accountable for eventually converting them to profitability? Yes. Even if Facebook turned profitable before going public.,
Ramdeo: I think it is a stock market which just spoiled them. What you said is right to bring this high tech into the action. They funded it with a laudable objective, you know, because the risk levels are very high. Yeah. Modality was very high. More recently, it was the greed of the stock market. You know, I mean, when Facebook and all these bigger ones, when they started flying more probably post 2008, you know, when they started recovering, Yeah.
And internet actually became pervasive with it coming on the phones and it just opened up, I mean, you had 6 billion consumers within your hand and that changed a lot of things, some of the things were right things and some of them, particularly what the stock market did, that was absolutely wrong.
And everybody wants to have a startup in their portfolio, which might be mini Facebook, you know. So I think every bad thing starts with something good and that's what really happened. It started with a good idea of funding losses for aspirational technology or completely new ideas.
But now actually old ideas are also funded with losses. The kids started coming into this fold startup fold to harness evaluation rather than driven by semiconductor, or they wanted to bring new technology. We, MotiLal Oswal didn't start for valuation. We started to make few lakhs rupees so that we can justify to our parents that why I'm not doing a job.But I can earn more than that. That was the whole idea. We never thought that we'll ever get listed.
Karthik: So two related questions. Yeah. Quick answers. One is, therefore what advice to young founders? Right? There are lots listening to this. There are lots who want to start, want to do it for the right reasons.But they're swayed by the market Maya.
Ramdeo: No, but the word you use is right reasons. You know, right reason can never be for the valuations. Eventually it may lead to economic prosperity and valuation, but you have to driven by that concept, whatever be the purpose, whatever be the problem statement or whatever it is, like I was, I was mad after the stock market.
I would have been a clerk, whatever, but I would have been in stock market. So that kind of drive. Yeah. So like, if you look at even Facebook, , whatever that movies and all, they were nuts, what they were doing, I don't think they were aware that they'll hit billions and trillions. No, that was not the idea
So it can’t be the motivation. So that motivation, the drive, the passion that should the purpose that drive you.
Karthik: And so the sort of related question is, do you think after having gone through that passion - So I'm already jumping two levels ahead, but we'll go there later - But specifically with your story, you've achieved that initial objective - pehle das saal ho gaye hain. A certain baseline has been achieved, which is where I find a lot of our founders are. Aath-das saal, they did exactly what you said. They did it for the right reasons. They were super passionate about solving a problem. They've gotten to become CEOs, which they didn't know what it meant. Sau log, do-sau log, paanch-sau log ko hire kar liya.
Then is core competence the only way to create compounding of value after that, or for both yourself and for all stakeholders? And does that give you the most joy or do you start saying, nahin main yeh bhi karunga and woh bhi karunga and chase the next shiny thing out there?
Ramdeo: See, what happens is entrepreneurship is not a straight line.
Today there is tailwind and tomorrow it will be headwinded, The real thing is it is like a Chakravyuh. You can get in we started with a tailwind. Then there was a crash. In 92, it went up, we earned 30 crores, but there was a crash and all kinds of guys got wiped out. The guys with thousands of crores, they got wiped out.
You have to save yourself. And you have to still come to the office and do your stuff. What happens is that if you're not passionate about it, you don't want to do that. You came for the good time and it turned out to be a ‘Boss, what is this?’ It is a bad time. In bad time, you don't feel like coming to the office.
Ramdeo: That is not the case with us. I come to office without any care if the market is down 2% or even up, I'm as excited. I was excited about today's this meeting as well. So what is important is to be super passionate in bad time.
Karthik: That's the only way you overcome that.
Ramdeo: For Compounding continuity is important. Compounding happens only with the passage of time. 20 years, 30 years, 40 years. Buffett is 65 years. You listen to his AGM. He's 92 and his passion you see. And his details of the his own result and his own, I mean the kind of 120 billion dollars, 150 billion dollars.
My guns are loaded with, I'm looking for elephants. At the age of 92. So that is called passion. What I'm saying is that the continuity of the passion is the entrepreneurship.
Karthik: It's a nice crossover question, Mr. Agrawal, to move to, you know, what we think of the learnings from, you know, somebody you respect a lot, Mr.Buffett, and I'm glad you brought up that point. This crazy passion of a 90 plus year old person for everything, not only in investing, but everything he is invested in, you know, whether it's his coke and burger every day or whatever it may be. You talked about one crazy sort of feature of Mr.Buffett, right? Just being passionate about investing. Is there any other lessons that we can learn as, you know, Indian founders?
Ramdeo: Too many lessons. You read anything, but I would recommend, yeah, two pages of his annual report of 2007, page six and seven. Great Good Gruesome. It is a must read and not once. I know you guys are educated in English, but you must read at least 10 times every time you will be more educated.
Ramdeo: I can tell you this. He has said what he likes, what they want to buy between him and Munger. So the first line is, We buy what we understand. Now this is investing. And then next is, good economics of the business. Third is run by passionate and good management. And fourth is a reasonable price.
So point two, three, and four are known to the world, but the real key, 90% is the first one. You buy what you understand. What do you understand? If you don't understand something, how the hell you'll say that someone’s business economics for the next 20 years is going to be good. Is the management good? Is it? How do you price it? So understanding is a key. And it is not only about investing but every walk of life. You must understand. And you get confused. I mean, you're an entrepreneur and you keep scaling up. As you're successful, you start getting bigger and bigger things, more complicated things.
And you are in a situation where nobody can help. You know, decide whether you want to hire this guy, don't hire, do you want to branch out here, do you want to write a thousand crore check, do you want a ten thousand crore check, do you want to take this leverage risk? So whenever this kind of situation comes. In entrepreneurship, every day such a situation comes, small or big.
Karthik: That's what you are the founder for
Ramdeo: My thing is always, I'll keep asking till I understand or if Moti understands, let Modi take the decision. Or somebody else understands, let him take the responsibility and take the decision. Because everybody's competence is different. But don't move till you understand. That is most important. So this is what I found in Buffett's sayings
Karthik: Interestingly, did this become, I had a question on this and so right time to ask this. Did this become the foundation for your QGLP framework, which you talk about?
Ramdeo: Yeah, QGLP is nothing but this only, this four times.
Karthik: Seems like exactly. Quality, growth, longevity.
Ramdeo:G is part of their quality, which we have kind of a split. Yeah. So Q is quality of business, quality of management, G is for growth, and L for longevity. So G and L, I think it's more silent in there, but they practice it. And then there is price.
Karthik: Is there, just for, given that not everyone is an investor, like, I think we apply, as you said, any good investor should apply a variant of this.
You can't be driven by FOMO and new hot trend and fads and et cetera. And that's a challenge in venture capital too. Everything looks very interesting because it's new and novel. But as you said, you have to, unless you get depth of understanding, how do you know this is going to be a 10 year, 20 year business?
But to simplify this, do you have a simplistic way of giving an example of. What fit this framework very well when you picked it as a investing opportunity? Like any company, any founder,
Ramdeo: so one other thing I learned from Buffet, I mean, if you see his those, , the guidelines they have? There's some norms. They have some 20 norms or something. So in that, one of the thing is the kind of companies they look at it. Is that the companies making at least 10 million dollar profit. Delivered. See, because he says that I don't know if I go to Harvard in this class of 100 or 200, I can't figure out who's going to make it.
Yeah. I mean, who should I bet? Who is going to be the best? Yeah. So like that in businesses, there are multiple businesses. Mortality rate in the first 10 years is almost like 90-95%. Okay. So, yeah, yeah. You don't know. I mean, every kid looks very smart. Every business model looks fantastic, but which will scale, which will be successful, you don't know.
But when you look at 10 million profit means this guy has already made that profit. So mortality rate beyond that is going to be much lower, maybe 10%, 20%, but not 50, 60, 70%. His standard understanding starts happening after that. Otherwise he doesn't want to apply his mind only. He doesn't want to buy into promotional companies.
You know, one other thing about, startups, which I learned, I was doing one of the wealth creation studies, is that it is investing in unknown and unknowable. There's a paper written by Harvard professor Hmm. Investing in unknown and unknowable. . Neither the seller knows what is gonna the future, nor the buyer knows what is the future.
And yet you are putting a value, you know, I mean, when you say that, this venture is today kalie at a hundred million dollars, yes. I'm buying by putting $10 million, I'm buying 10%. So a hundred million dollars is capital. But the buyer and seller both have no clue.
Karthik: That's right. It's most of our life is that.
Ramdeo: Yeah. So the way you win in that game is that by knowing his business better than him.
Karthik: It's a very valid point. Because we emphasize to each one of our colleagues. Do you have a market view that is stronger than that of the founder? For you to be making this bet in the first place. What is a first time young founder know of the end state of this business?
They don't know.
Ramdeo: If you see the venture companies in us, they're typically very specialized in a very thin genre. They'll say, we are in semiconductors, we are in medical field. We are in this field. We are BFSIs.
Karthik: It's beginning to happen finally here, sir. But you're right.
Ramdeo: No, that is what is happening.
They're very specialized. You have to be in that sense so that because they're meeting hundreds and thousands of business models. And they're still a lot of success and failures. They are gray haired, they have connects here and there, they can call up in lab, they can call up, God knows their network very well, the kid is coming from the school, he has one thin knowledge and a lot of excitement and you know, so passion, so I mean, looking into his eyes, but then if by chance he's sitting actually in the gold mine, yeah.
The other side should be able to get a sense of it
Karthik: Which is true. I think great story is being built on that intuition and that market knowledge. And that's what the VC keeps honing in his own head.
Ramdeo: And that's why they keep doing meetings after meetings.
Karthik: That's right. We tell, we have to do the meetings four or five a week. Otherwise, you can't educate yourself.
Ramdeo: And then after sitting, okay, liberally, because they have a lot of money. So they can give say five million dollars. You start, show me the prototype.. And then you go to the market. Let's see whether the customers like it. Then they'll buy the option. I'll put second down, you know, if this happens, then I'll put the more money.
He'll keep increasing his bet.
Karthik: So one interesting question which founders are faced with all the time is vision of how do you build a long term sustainable company and face short term pressures? We're also guilty as VCs. We want quicker results, hyper growth, as you said, we'll fund the losses, but it grow fast.
Have you ever faced that as an entrepreneur at Motilal? And how do you contend with it?
Ramdeo: We were not funded by anybody. We were self funded. So we had no pressure.
Karthik: Even when you went public that you didn't care about, there was always balanced is what you're saying.
Ramdeo: We never bothered. We never bothered with stock price.
Even today, I don't know what is the stock price. Because I know I have nothing to do with the stock price. I have to, I have to deliver what, what we are good at. Not the stock price, but the net worth or earnings and earnings growth and ROE and those kind of stuff. Our business we have to deliver.
Karthik: Is there another company that you respect who's done this very well, balanced, like this good growth, not crazy growth, but also thought about how do I build a 30 year organization?
So there are many in the market, but as you grew up from your generation, have you seen companies like that?
Ramdeo: We have seen the entire Indian story. There was nothing in the sense that in 87 and all. Like one of the reason I am, I got into the stock market is that I wanted to be a banker actually, because in my, during my CA stint, I worked with a lot of banks in the sense that I was a banking audit expert.
So I had an ambition to actually become a banker, just blue suit and tie it out, go there and have fun. But then there was no banking, it was all public sector and I didn't want to work in public sector and that's how I landed up in setting up this. So this journey has been very exciting and, it's a funny thing.I mean, there were 500 brokers when I started and we were sub brokers, today none of them are there. None. They're all there, but they're completely marginalized.
Karthik: What do you think is the big reason for that?
Ramdeo: Just the, the pace of change and, they were very respected, very good guys and they knew their job very well, but they just, they couldn't build the organization.
They couldn't make changes in the way they approach the clients. They were actually in seller's market. And the market became buyer's market. So that twist, you had to do build organization, consolidation, technology, compliances. So they just couldn't create that corporate. And we will, I don't know what got into our head.
We said, we want to build corporate, you know, I'm until 95-97. It was a, like a mom-pop shops here, two guys were running. So a few crores we're making, and we're very happy. We justified our parents that yes, we're making more money than anybody else is making. But then it got into our head in 97-98. We want to create a corporate.
Karthik: Do you remember what led to that crazy decision? Because that I think is where, as you rightly said, most entrepreneurs are fearful. Yeah. Of like, what does it take to build another 20 years of journey?
Ramdeo: Maybe it is a reading or there was one gentleman called Mr. Mathias. He's no more. He was a good friend.He was in HR. HR coming from, I think, HUL, Brooke bond, then I think he was in East India Hotel or something. So this guy, I used to meet and I used to enjoy talking to him and he would say, he would give exams. I mean, ultimate corporate is HUL and all. Yeah. So I used to say, how the hell you do this?
That the guy is not there and yet the machine works very efficiently. Yeah. And that's what was a funny thing. And we were reading Fortune and Business Week. And so the readings came to help. And our formal education in Chartered Accountancy.
Karthik: We're looking at case studies and poster children that you can emulate.
Ramdeo: Yeah. So the, we, the ambition grew and we said, I mean, why don't we have large company which outlasts us? We'll be there for 30, 35 years, but can we create something which will be good for 100, 200, 500 years back?
Karthik: Fantastic to hear. I'm glad, of course, that part played out for you and we have Motilal Oswal as a result. And when you talk to your children or youngsters today, how do you talk about investing? Is there a new outlook or are the fundamentals identical to where it was 35 years ago?
Ramdeo: Identical, but it's very competitive.. I mean, I have seen much cheaper markets. Almost half the price, for me my age is disadvantage.
Ramdeo: My experience is a plus, but my past experiences of seeing the markets much cheaper is an disadvantage because I'm not willing to pay those current prices as for a brilliant company also. That that's how it is. But I think there's so much of information, so it has become very competitive. Earlier getting balance sheet was difficult, so I am telling you in 85-87 our job was to read balance sheet. And tell the guys who are sitting in the broking office, buy this, this is good. You see this, this is good like that. Today, my God, I mean, you have PPT, you have,audited con call script, you have the quarterlies and you have so much of stuff about the company. And then you have CNBC, you have social media. So I think, , it has become very competitive and, even managements have become very open, like corporate access is very good. So I think, now the frameworks are very important. What do we play out is not the information age. You don't have information advantage.
Earlier, we had clear information advantage. There was institutional, maybe 5-10%, rest all was all retail. Today, they are majority. And they are very well fed by the management. That's right. And they have the power of analysis, fund managers, analysts. It's now two things, framework and hard work. So the guys who have framework, they only should do hard work.
If you do only hard work, I don't think it's going to work. So if you are lucky to have a good framework of investing, so that's 1%. 99% still is hard work, but the journey starts with that 1%. That's what I think.
Karthik: To a young investor, you would say pick an area that you really have a advantage on framework.
Ramdeo: See, investing is very simple in a way that you have to understand price is what you pay, value is what you get. This is one of the most famous quote of Buffett. In fact, he sells it at 25 dollars. I have one up, up there. Basically the game is that - price everybody knows, value nobody knows.
Karthik: That's a gem of a quote.
Ramdeo: And understanding value, the data is same. Data is available to everybody, but the framework to figure out the value of the company, it is approximately, nobody wants to go through that. And once you have that framework of understanding the value of any company, then the game is easy.
Karthik: And on India, to wrap this section up. The two things, , the positive side, you've talked about, we can look forward to another 25 years of compounded future and of course, there's all sorts of macroeconomic data pointing towards that specifically, what do you think are like two, three insights that have convinced you that this is not public data?
We all have public data
Ramdeo:. See the power of compounding is like huge, is the whole machine is like compounding machine. Yeah, there are very few countries, like a very few enterprises, they scale up like that. Very few countries also scale up, you know, I'm mean large countries, there are failures. I mean, you look at your neighbours, someone, we started the same day where they are and where we have reached.
And despite all the handicaps, fighting this, that India is one country, which has in last 75 years survived and grown to become now 10% below poverty line. You know, so now say you're done, say three and a half trillion dollar GDP. It took 75 years to come to three and a half trillion, it will take just, I would think about eight years to reach seven trillion - double from here.
I mean, all our startups and everybody are going to play in this next from three and a half to seven journey. Now, what happens is that when you are at per capita GDP of say 1, 000 of that 900 is essentials and then discretionaries. When you go from 1000 to 2000, your essentials remain at 1000 and your discretion is go to 1000.
So what is the doubling of GDP is 10X for the discretionaries. So where do you play in that discretion?
Karthik: It could be a bigger house. It could be a car. It could be anything. And we can see it around. I mean, what has happened in China, Indonesia, Thailand, like emerging markets. So the business connect with that, is going to be staggering and it is, it is bound to happen. If not 7 years, 8 years. One advice is that, like Buffett's one of the thing is always is that whenever bad time is there, they said, don't bet against America. I'm telling you, don't bet against India. India is too is compounded in the past and it is going to remain even more excitingly compounded in the future.
I mean, we are all say 20, 30, 40, 50 years. So India is too is good for next 75 years. And I think in that everybody today, who is anything will be engulfed. So I think it's an amazing story and, bring your best of the entrepreneurship and, take out whatever you can.
Karthik: Well put, sir. And on specifically either at an India level or at what you've built such a large business, is there anything on the negative side that keeps you awake once in a while?
Karthik: Like, what do you worry about if at all, or is it? What should we look out for? And what should we be cautious of?
Ramdeo: Those kind of geopolitical things. Something happens like we are going to Ukraine. It is going to create more problems than actually solving problem in India. Unfortunately, not only your future is uncertain, your past is also uncertain.
So you get some tax notice or something. Which is, if it is small, then it's fine, but if by chance, it is such a big bomb because we are running one of the largest network of retail broking with some 5-6000 points, all over the country, 96% of pin code is being touched by us. So what they're doing, I don't know.
I mean, so what happens is that, I'm most worried about my reputation because it's a financial, sector, and trust is very important. We are handling people's hard-earned savings day in, day out. So they should not lose trust. They should not doubt my integrity. I mean, they doubt my competence. That's fine.
Ramdeo: When we commit mistake, obviously we're not competent to do that, take that decision. And we took that decision with good faith. So, you know, that, worries me, you know, the reputational part of it.
Karthik: So, , now we can move to the, the theme that I wanted to touch on compounding and maybe there, it would be wonderful to hear any stories that come to your mind to be able to sort of communicate what it means to simply talk about it versus actually seeing it. Can people relate to. Brands and entrepreneurs that they've seen out there who've actually survived that. So one, the first part of the question is you talked about price value. I get that, but can you actually pick a great entrepreneur or a great stock when you actually looking at it for the first time?
Thinking this is a compounder in the sense that it is a 20-25 years bet and no matter how the first 5-7 years, I know this is going to be an immense wealth creator. And the other way around. Like, so, I would love to hear a positive story and a false positive story. So, why do they go wrong? And has that happened in your case?
Ramdeo: Investing one is always looking for a moonshot, you know, but I always try to do double my money, you know, whenever I appraise anything and I get excited about it, I know I'm very excited about it, but I know I might be wrong, but so long as my framework QGLP gives me points to a doubler in next three years and beyond that, also doubling continues.Double in three years, 3x in five years and 10x in 10 years. That kind of 25% compounded possibility is visible to me, that longevity growth trajectory and things like that. Then I want to buy. Understood. But what happens if the real life is not like that?
Karthik: It's also choppy. Even the best stories are choppy.
Ramdeo: What happens is that, see, in investing, how much ahead you are to the crowd? What story you are telling me? Whether it's stories known to everybody and that's where the understanding part comes. When I work for three days, day in - day out, all the data runs, forget it. But the interpreter is sitting in front of me or the company sitting in front of me, I don't like to do it at my office.
Ramdeo: I want to sit in their office because I want to just feel the air, the buzz, the you know, at what pace they want to do it. I have a good feel of what the business could do. It has happened in other parts of the world, so we have the large opportunity, but business is still small. See, this is a market where you can buy 10 bucks thing for one and you can sell one for 10.
You got to know the value, whether 10 is above of one or not, otherwise you'll always keep getting one rupee stuff for 10 bucks. First, I think that was, in 96 - 97 in us, I was there first or second time I had gone to us and I went to visit one of the friends in one broking office. I was waiting and when our guys not come and somebody came and he flipped that, phone with that antenna at that time, you know, and he called somebody and one beautiful girl came in.
He went away. I said, what is this damn thing? I mean, I never heard about this. So he said, this is called cellular phone. That was in 90s, maybe early nineties or 94. Early nineties. Yeah. And then I read a paper on network businesses. That was in 97-98 or something. So I read about that and I said, this is one business, telecom is one business, but we had only B S N L & M T N L.
Then in 2002, so I had the framework in my head and then Bharti Airtel came out with public issue at 45 bucks. Promptly, they were making losses. So, people got it issued and then they hammered it down to 18 bucks. So, some of the guys were telling us, you guys don't understand. I mean, to us, they were saying, you guys don't know what this sale offering can do.
Ramdeo: I said, you guys don't understand how the stock market works. I was so primitive to us in 2002-3, if you're not making profit, no valuation. It came down to as low as, so 20 bucks means 4,000 crores. You could buy entire Bharati Airtel for 4,000 crores, entire or a hundred percent. So then in 23rd March, I had done my numbers, 23rd January, 2003, there was a company call and they said, we have broken even, I did my numbers in next five years.
As for me, this company wants to make 28, 000 crores. And stock was around 4000 crores, what do you do? So what happened, I boughtat 23.75. By the time it was 30 bucks, I was made to sell about, 80% of my position. Everybody said that this is not like your type of stock, it's very risky. I sold. Then at 33, I said, you guys don't understand what the hell is this.
I bought 10x. Stock went to 90. My analyst went to the Reliance and from there he called up as a good wisher. Sir, they'll crush this company. I sold half. Stock went to 140. I again went 5X from there. Stock went to 1180. This is just three years journey. You go and see the chart. Then happened the scam happened and whole lot of it and then kind of then we sold
Karthik: I was in fact going to ask you when you, when there's a false negative, which is what happened here, then do you buy back, do you correct that mistake and you have in the public markets that advantage you have, you can keep correcting this mistake, that
Ramdeo: But now it is 3. 5 trillion dollar economy. When we started it was maybe 100 billion dollar economy. In 2003 it might have been 200-300 billion dollar economy. Now you are talking, your playground is 3.5 going to 7. I mean, any good startup will just explode. I'm telling you, because in us why it explodes we're said 25 trillion economy, and they don't cater only 25 trillion. They cater do a hundred trillion global economy.
Karthik: They gonna sell elsewhere.They built phenomenal global brands.
Ramdeo: So you need only a successful idea in US and it'll be just multiplier. Now that kind of phenomenal happen in India because we'll not only build for India, which is gonna be 7 trillion, but we'll also be building some global companies.
[00:40:49] Karthik: Well said, sir. That's kind of been a thesis. First examples are playing out, and we're going to see a lot more. We saw IT services, but we'll see it in a lot more segments. And ulta like one mistake, example of what you might have read wrong
Ramdeo:. Magic happens in the businesses because of two things. Management tailwind, sorry, business tailwind and management tailwind.
So business we can analyze, because it's all number and seeing example here- there, talking to people, buyer, seller, trade terms, there, we are good in that. We can. But at times you feel in understanding the guys, you know, of whose particularly there is not much known to the public, or you're very excited about the concept, despite somebody saying, in fact, the real sad thing is that despite people cautioning me, I went against their advice.
I said business so good, even if this guy, they will compromise, you know, we'll go through and then it hits you.
Karthik: It happens
Ramdeo: Yeah. So never go with the crooks. I mean, if you don't know, that's fine, but if you know that this guy is a crook, you'll go to the hell and they will take everybody else also.
Karthik: the other, the other thing about compounding, and I know you've touched upon it, but it's easier said than done. You make a decision in your mind as an entrepreneur, long term institution banana hai and it should outlast me. It's a very noble thought. It's not easy. The business has to be sustainable. It has to actually continue to grow, as you said, into the new economy.
But that's the appeal of compounding, right? That growing from three and a half trillion to seven trillion, you can build 10x the company. How do you get an organization to think that way? Because it's a very different organization from the one you might've built before. You were saying he was a running mom and pop at that point.
Ramdeo: Good thing is that when you are very small, you're on the ground floor, the scene is very different when you become a billion dollar company. Then the view is very different. I can tell you this. You have your net worth, you have networks, you have, you have a lot of, senior employees, talented employees, there's a pool of talent.
You have a lot of help. It's not that you are as helpless as when you started. And so don't bother about how to build when you are at a 10 million. Don't bother about how do I go from a billion to 2 billion. Don't bother. That's not your subject. That's for the 10th guys. You are in the first standard. So I know, , running those, you know, billion dollar trillion dollar company, it will be far more complicated, but those, it is much easier to manage those companies than the small ones.
So we have to create competencies to manage what we have in hand. And our competency to create competencies is limited, and that's why we are where we are and the guys who are, who are these, wherever they are, their competencies to create huge competencies are unlimited competencies is very high. But I think if your ambition is right, your value system is right, you're determined to walk the path.I think it will happen.
Karthik: Any contrarian advice, like all well laid out principles, but is there something unique that. You or Motilal ji have come up where you don't necessarily find consensus in the market. Ki aisa karna chahiye, bada company ya accha company banane ke liye. And then you actually have said, no, I've built it this way.
And I'm just curious if there are any traits of a Motilal Oswal that are unique to you?
Ramdeo: Nahi, jo samajh mein aata karte hain hum. Hum, matlab bahutout of books bhi kaam ka Jaise, 97-98 mein bhi nothing. Matlab, ka revenue raahoga, ek aadh crore ka profit raahoga. Hamaare dimaag mai satka, ki kaheen bhi jao koi jaanta nahi Motilal Oswal ko.
Karthik: Oh, the brand wasn't very well known.
Ramdeo: Not at all. Nobody was aware. So we hired a, you know, a marketing manager, you know, and he started giving us lessons. And myself and Moti used to sit half day with him. Once or twice in a week. You have to learn this. you have to learn. We didn't know marketing.
Whole lot of books we read, but we didn't know how to do it ourself. Yeah. This guy, Jagdip Kapur, he helped me. Yeah. He was very popular in public back. Yeah. So we were one of the early clients, very early clients of his,
Karthik: He must have used you as a case study for decades.
Ramdeo: he is a lovely guy. So we started writing, wealth creation thoughts of Buffets in Economic times. And how big? One inch by one column or two inch by one column, something like that. So you have to fix. So he said, you've got to have positioning. I said, what is positioning? He said, you've got to be, somebody should call you what?
I said, we are stockbrokers. So I said, we are research based stockbroker. So he said, world class research broker.
Karthik: Lovely, lovely to hear this.
Ramdeo: You know, so we used to write world class research broker Motilal Oswal and the wealth creation thought, and I used to fit the entire quote of Buffett in 13 words, you know, I used to do pressing and so every Monday morning, the front page one, in fact, that column was started by us.
Just below that index and all, you will buy two or three inches and put that. So that's how you have to build. Now we, you see all over airports and CNBC. But that's the magnified version of what we started that time.
Karthik: Great stories. So one, parting sort of question. I think we're at a cusp of trying to educate the startup ecosystem on how to build these compounded long term stories.
And we are trying to, at least at Blume's level, and now I think most of the industry is following suit. It's not like a Bazar mai jaake you can exit matlab Literally you go to a window and there's a counter open for quote unquote exit. Everybody's invested time & money with the idea of getting returns back, and therefore, if you don't go to the public markets or think of that as the most obvious exit.
And if you don't build compounded stories beyond that, because nobody wants a public company which gets sold the next morning. So they want the promise of a 10-15 years, 20 years, why will this company last? So everyone's asking those tough questions. And did your life change post going public? You've seen hundreds of public companies.
Why are young entrepreneurs so scared of going public and what's your advice to them? What changes and why should they be worried or not?
Ramdeo: They must understand what is stock market. Stock market is compounding and discounting machine or whatever you do. So it's a very simple place. And so you get liquidity to your stocks.But the very fact that you're an entrepreneur and the purpose of entrepreneurship should not be getting listed and getting valuation and those quotes and that I'm very clear about it. Okay, so now you're successful and you have done some journey, so you create 100 crore company, 100 crore turnover and 10-15 crores profit.
Wonderful with ROE of only 30%. The good thing is that today there are enough buyers and they are willing to pay premium for these companies in unlisted space. So they should not unnecessarily harp on going public if they're very tiny. Iff your patience is over or your investor's patience is over, let them sell it to another investor.
Yeah, when the companies have matured, I'm in the sense that, I mean, they're gone from say a hundred crores, a thousand crores, or today, two thousand and crores crores profit, now you're ready for a facing the market because once you become a micro cap, then no institutional money is going to chase you.
Karthik: That's also true.
Ramdeo:Then you say, sir, mera company cover kar do, why do all this hassle you're in successful entrepreneur, you're already making 50 crores - 10 crores, whatever you're not slave of anybody, you have fun, you just keep building your company in five years time, you'll be through with that. So I would think that stock market is just an incidental to anybody's successful journey in the corporate world.
You don't have to prepone that. No, no,
Karthik: Thanks for compounding my advice. So we give this advice to our founders. Good number of them take it. Now I'm waiting for this decade to play out all that hard work. So that's why I'm using, you know, the words of wisdom from Mr. Agarwal today to sort of, as I said, compound the message.
Once again, , this is fantastic as always, I enjoyed that first conversation we had many months ago and I would love for you to be talking to more of our audiences and our stakeholders and hopefully hundreds or thousands of entrepreneurs are going to listen to this. And understand that even a Motilal Oswal was a startup and it went through the same journey.
It went from a mom and pop to a large corporate and became a national brand. And you're still excited about compounding this for a startup,
Ramdeo: We are still a start-up I am telling you
Karthik: That's fantastic to hear. Thank you for a wonderful and inspirational chat today. And I hope our listeners enjoy this episode and we thoroughly enjoyed it.
So thank you once again.
Part of Blume Podcast
Welcome to The Blume Podcast, where we explore “The Power of Compounding” through insightful conversations with industry leaders. In this season, we bring you four captivating episodes featuring Peyush Bansal, Raamdeo Agrawal, Nithin Kamath, and Dinesh Agarwal.
In the first episode, Peyush Bansal, founder and CEO of Lenskart, shares his journey of building a successful eyewear company and the importance of hiring the right people. Discover how his clarity of purpose and long-term thinking shaped Lenskart’s success.
Next, Raamdeo Agrawal, Chairman and Co-Founder of Motilal Oswal Financial Services, shares his investment philosophy and insights on India’s growth. Gain valuable advice on building a strong brand identity and the dangers of building a startup for the wrong reasons.
In the third episode, Nithin Kamath, founder and CEO of Zerodha, reveals the secrets behind building and scaling an online brokerage firm without external capital. Learn about the power of compounding and the importance of trust in the financial industry.
Lastly, Dinesh Agarwal takes us on a journey of starting a business in India during the internet boom. Discover his thoughts on business growth, profit margins, and the significance of small and medium-sized enterprises in creating employment.
Tune in to The Blume Podcast and unlock the power of compounding with these inspiring stories and valuable insights. Stay tuned for new episodes coming soon!
Karthik ReddyKarthik Reddy founded Blume with Sanjay Nath in 2011. Karthik has shaped Blume’s investment approach and philosophy over the years, and in turn has overseen investments in some of Blume’s leading portfolio companies such as…
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