Sensex may never go below 11,500 levels: Jhunjhunwala

Trader and inverstor, Rakesh Jhunjhunwala tells CNBC-TV18 in an exclusive two-part series interview that the investors are likely to see a range-bound market, and it is unlikely to see a major move either way. He sees consolidation and feels that the market may not move 10% plus or minus. 

In Part-I of CNBC-TV18's exclusive interview with trader & investor, Rakesh Jhunjhunwala, he shared his perspectives on global markets, on where the Indian markets have reached in this rally; the fact that he believes there could be a period of consolidation right now but he expects there will not be a deep correction from here on, not more than 10% as he classified.

In Part-II of the same series Jhunjhunwala told CNBC-TV18 that the investors are likely to see a range-bound market, and it is unlikely to see a major move either way. He sees consolidation and feels that the market may not move 10% plus or minus.

Regarding volatility, he feels that the market must expect corrections from time to time. However, he assured that the Sensex might never go below the 11,500 levels and the he sees the Sensex EPS at Rs 840 this year. He hopes that the US rates will come down and the domestic inflation, in India, may not go above 5%. For present, he feels that the government may have achieved its tightening target.

 Excerpts from CNBC-TV18's exclusive interview with Rakesh Jhunjhunwala:

 Q: What could be the potential risks to that kind of expectations?

A: We have earned Rs 730-740 last year. The expectation in the context of what we have done in the last 4 years is not extremely high; it’s only 15-16%; but this is on a higher base.

Risks can be many - it can be demand in the software sector it could be a depreciation of the rupee; but by and large, it should come through.

Q: Do you think either technology, which is almost a fifth of the Index or autos, which have started showing some distressed signs - they could derail these earnings?

A: Autos is a very small part of the Index, really.

There could be other sectors which would compensate; some of the banks could do very well, Reliance could surprise - refining margins are at all time highs, some of the refining companies could do better; ONGC could do better.

And we cannot look only at the Index - maybe Index is around 16 - it could be 14. But if you look at the larger context of the quality of the earnings, the general growth, the potentiality - you have taken twenty years to come to USD 30 billion of a software exports; the projection is that we are going to double that in the next three years. What kind of a kicker that means for every other industry in India, whether it is for hotels or for housing or for retailing or for real estate!

How I structure my investment; rather than looking at year-to-year growth, I  invest in the business model. And over that business model, do I feel the earnings have peaked, whatever investments I have made? I feel that the peak is far from here.

Also in terms of valuations, I do not think that we have had peaked valuations; we are going to have something like ’92, maybe in the next four-five years and that is where valuations are going to be.

Q: Have you taken any cash off the table; since you spoke about investing in a business and riding it till you believe it has peaked - in any of your significant investments, have you booked profits?

 A: I have booked profits in all my investments. But I have reinvested that in the market, except maybe, buying a house or some small other assets. All my wealth is in equity and if I get money, I would put it back into equity.

Q: Not fixed maturity plans and stuff like that?

A: I have some Rs 40 lakhs lying in the public provident fund. Apart from that, I pay interest; I do not earn any interest.

Q: But in your top five businesses that you have - investments in stocks like Titan, Praj; you don’t believe they are anywhere close to their earnings peak yet?

A: They are surely not close to their earnings peak.

Q: Valuation peak?

A: Valuation peak, may be; but I personally feel in some of the investments, I don’t know whether Titan or Praj, earnings growth are going to really surprise on the upside and if the earnings growth is going to be extremely high, then the growth in the value of the investments - even if the valuations remain what they are, surely in some of my investments, I don’t expect the valuation or the P/Es to increase.  But if the earnings growth is going to be very good and P/Es are maintained, then the appreciation can be quite good. That is at least what my hope is.

Q: You spoke about being surprised on the Budget day - the biggest nasty surprise was construction. Did you change your view at all on that sector, which you have been very bullish on after what came through on the Budget; and any of the interest rate concerns that are bounded?

A: No; effectively, you increase a dividend tax after such buoyancy in revenue - to have an increase in the dividend tax; and also the negative international factors played out a very big role just prior to the Budget day.

But those negative international cues; the expectation was that there will be a corporate tax cut. There was an effective increase in corporate taxes. I think that is what really disappointed the market.

Of course, the overall fiscal picture was very good and it has turned out to better than what he (the FM) had projected also. I was reading the Business Standard today in the morning; the growth in direct taxation in the first two months this year is 70%.

Q: What about construction as a sector, have you changed your views at all?

A: What has happened in Indian infrastructure? China added 1,10,000 megawatt of power last year, we added 8,500 megawatt.

This is the situation of the order book of our construction companies. When I think, the investment needed in infrastructure today is not 10% of what I think we will eventually have annually, after 4-5 years. I have retained my investments in Nagarjuna and in Punj Lloyd. I am bullish on this sector.

Q: You don’t think interest rates or margin concerns will derail growth or earnings visibility for this sector?

A: What has interest got to do with it? Investment in infrastructure is going to take place, it’s at a very initial stage. There are big entry barriers in this sector. Although one negative aspect of this sector is that it is very capital intensive. But there are big entry barriers in terms of qualification, project management skills and I think there is going to be very good growth.

 Q: What about oil? You said that refining margins are at an all-time high. How do you see crude panning out because the refining marketing companies are still laggards - HP, BP, IOC, all of them?

A: That is because of the subsidy policy of the Government of India. I personally, on oil price, I feel the range is between USD 50-70. I think ultimately price will be closer to USD 50 than to USD 70/bbl

Q: You have any investments in the oil sector?

A: None.

Q: What about other commodities like metals? I believe you turned quite bullish on Tata Steel after the hammering of stock post Corus?

A: Yes, if Tatas can bring the consolidated margins to 25%, then the kind of profitability they can do it on equity of 800 crore or the kind of profitability (they are) talking, is unbelievable.

In general, I feel over a period of time, commodity valuations will go up. Today, if you see, all commodity stocks they have valued at six times to seven times.But with the increase in commodity prices, the base prices of commodities - the base valuations of commodities, stocks will go up; and they have done it in Tata Tea. What I feel personally is, as an investor, I will wait because the real efficiencies are going to take three years to kick in and three years is a long period of time.

Q: So you won’t buy now or would you buy, hold and wait - what are you saying?

A: I will wait but I will be alert.

Q: Your call there is on the management or on the steel cycle as such?

A: It’s more on a management than on a cycle.

Q: Are you bullish on the steel cycle even from these levels?

A: I don’t have much of ideas; I have only one investment, which is Bhushan Steel. In general, I think oil prices are going to remain good; they are not going to go down to the levels which people talk of.

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