The market is gradually revving up for a bull run that could take off in about 14-15 months time, feels Big Bull Rakesh Jhunjhunwala. He is betting on inflation, and commodity and interest rates to ease hereon. And contrary to popular opinion, Jhunjhunwala expects the 2014 general elections to throw up a strong reformist government.
"We will get a far better government in 2014 or whenever the elections are held, than what people are anticipating," he said in an interview with CNBC-TV18.
"Whichever government comes in, will have to take right decisions even if it is fragmented. I feel we will get BJP-led government and if Mr Modi is made the Prime Minister, I am told he is going to be BJP's prime ministerial candidate, we can have some good work very soon," he said.
On the stocks in his portfolio, Jhunjhunwala is bullish on the long term prospects of Lupin, Praj Industries and Nagarjuna Constructions. And while there have a few disappointments like A2Z and Hindustan Oil Exploration, Jhunjhunwala says he has no regrets since the outperformers have more than made up for the laggards.
Below is an edited transcript of Jhunjhunwala’s exclusive interview on CNBC-TV18.
Q: Are you feeling more relaxed and bullish than you were on Diwali last year?
The uncertainty has not gone away, I do not know why. Looking at the screen, price movements of stocks; they are gaining, correcting and again going up. The kind of pessimism that we have and the way the market is gaining! We are at the peak of the interest rate cycle surely. I am bearish on commodities. We have made some kind of a bottom which will not be violated easily; it could be in the start of early bull market. In 2001 September, the market bottomed, but took off after 2003 March. So the real kicker in the market could come after 14-15 months but we could have bottomed. This is a feeling I get, of course I do not see the kind of rise we saw from 2003 to 2007 immediately, but we could have bottomed. It could be an early start for a good market.
Q: You gave the example of 2001 and 2003. What would convince you that we are in a phase like that and a bottom has been formed? Do you think over the next 12-14 months some of the data points will take off once again from here as in 2003? What would you expect to see over the next 12 months from the screen?
First, fall in commodity prices or a fall in inflation. We can surely call it a peak of interest rate cycle and then can have some aggressive correction of interest rates. Second would be some of the resolution or problems, better growth in America, a resolution to the European problems, Greece problems etc. But, most importantly there is an indication of a strong government in India in 2014. In 2014 we are going to get a good, strong reformist government.
Q: If a lot of people believe that it will come in the way of a progression for this bull market then the election uncertainty will actually become more pronounced after 2013-14 with the formation of a government that is fragmented. Do you think it will actually work out in favour of the market?
Yes, because the Congress and the Bharatiya Janata Party (BJP) constitute majority. There are certain regional reasons why someone like Mayawati will not join a government in which Mulayam is participating; Jayalalitha will not join a government in which ADMK is participating. So we have those reasons where Congress and BJP together have a majority or a near majority. Then there has to be a government supported either by the Congress or by the BJP. Also, the fact today is that people are voting for those who are bringing growth and development; it is one of the most important developments. It amounts to maturing of Indian democracy. So, we will get a far better government in 2014 or whenever the elections are held than what people are anticipating. Whichever government comes in, will have to take right decisions even if it is fragmented. I feel we will get BJP-led government and if Mr Modi is made the Prime Minister, I am told he is going to be BJP’s prime ministerial candidate, we can have some good work very soon.
Q: What about earnings. You gave me the 2003-2007 example but their earnings trajectory was strong. Do you see the combination of circumstances over the next three-four quarters where we can have a launch pad for the next three-four years in terms of earnings acceleration or are you apprehensive on that score?
We won’t have a ferocious bull market, but earnings growth in India can rebound to 20 percent. We had three years of 10-12 percent growth and reduction in interest rates. This in itself will be a big factor both for higher earnings and revival of the investment cycle. People will anticipate that with the revival of the investment cycle and a lot of companies' earnings will go up.
We are not sure about 2001 in terms of the interest rates, inflation or spare capacities with companies. But power companies are unbelievably leveraged. If things turnaround, they can get coal then they can be very profitable and consequently, there will be a big effect of increase in electricity production in India.
Q: How your own portfolio has done since last Diwali? Looking at your set of stocks, Titan and Lupin feature prominently on top of the list once again. Are there some pockets in your portfolio about which you are a bit disappointed at how they have turned out in the last one year?
I do not review my portfolio in that matter on a year to year basis, but within the portfolio Titan Industries and Lupin are very large. They are a large part of my portfolio so, if they do well everything is well. I am disappointed with how Hindustan Oil Exploration Company (HOEC) has performed.
Geometric has performed well. I am extremely disappointed at the way A2Z Maintenance and Engineering Services has performed. So, there have been some hits and misses, but the hits have been in the largest part of my portfolio. So I am happy, I have done quite well.
Q: You have been a long-term holder of Lupin and you have picked up other stocks in the pharmaceutical space. Last year or a year before that had you picked up Orchid. Are you disappointed that other stocks that you have picked from the pharmaceutical sector have not turned out to be the kind of right that Lupin has given you?
I was extremely disappointed with Orchid Chemicals and Pharmaceuticals. I have already sold it. So, Lupin is the only pharma stock, which I have in my portfolio, but I have a large commitment.
Q: Have you been examining other stocks in that space of-late? A clutch of other midcaps like Glenmark Pharma, Divis Laboratories, etc have also been doing very well, almost as well as Lupin has. Is that a place where you have been sniffing around for another good deal?
A: No. I have large investment in Lupin. I have large investment in a pharma company, which is only invested in Ahmedabad and it is doing very well. Therefore, out of choice I have not bought any pharma stocks. I am very confident on the long-term performance of Lupin.
Q: How long will it take to review this investment cycle because some of these bets like A2Z, Punj Lloyd, Praj Industries have tested your patience. When do you think the investment cycle will start getting galvanized and some of these stocks will start doing well again?
I have already exited Punj Lloyd. Even if I have such large investments, I cannot sell them in a bad market. Praj is trying to do some pioneering work on use of grass and other non-agricultural based raw material for ethanol production. Praj has really not done badly, but I agree, price-wise it has not done well. It could be an out-performer in time to come, but it could take a year or two.
Q: The biggest star in your portfolio remains Titan year-after-year, but some other consumer stocks that you have picked like VIP Industries have not quite had the same kind of sheen. Why do you think?
VIP has been affected by a number of reasons; about 30 or 35 percent of VIP sale was through central stores department and the central stores department has now stopped the purchase of a lot of goods. It was also affected by some price competition from Samsonite. We import 80 percent of goods from China and that was affected by the rupee depreciation. However, I am confident that in the time to come, VIP should do well.
Q: You were asking me about the other stock in the infrastructure space. I mentioned Nagarjuna Construction. When do those kinds of stocks start doing well? How long will it take for the investment cycle to get restarted?
A: The bigger problem with the investment cycle is interest liability. If Nagarjuna can reduce its interest liability, which it is making an effort to do by selling some of the BOT projects, they will do well. I must disclose here I am a shareholder and director of Nagarjuna Construction. I have bought shares in the last three months. I am bullish on Nagarjuna personally. It may take two-three years to revive, but the rewards after that will compensate for the waiting.
Q: Any new sectors that have come on your radar of late whether linked to consumption or infrastructure? Anything on which you have not taken big bets in the past?
Q: That must have made your Diwali, United Spirits closed day before the Muhurat at more than Rs 1,800, what price did you get in?
A: Let us not discuss the details of my trades, but I can tell you one thing that I have never seen such a price movement in my life. I am reminded of Harshad Mehta’s days.
Q: Largecap stocks are not in the habit of moving 35-40 percent in a single day. Does that stock movement make you a little nervous?
A: It may lose 10-15 percent. I am now buying all stocks with 2020 in mind. So, it is okay if I may lose 5-10 percent, what difference does it make?
Q: What convinced you about media because that is a segment where you have taken small bets in the past, but not very significant? Why do you think the story is different this time?
A: Getting news channels now will be extremely difficult. It is a high fixed cost business. So if revenues go up, profitability goes up disproportionately. Thirdly, this whole game of carriage and digitization will change the entire picture for the industry.
After all TV18 is the leader in news and Colors, so the amalgamation of the entertainment channels will make it the second or the third largest media play in TV in India.
(Disclaimer: Moneycontrol is part of the Network18 Group, which owns TV18 Broadcast.)
Q: You said markets may have bottomed out. You have been speaking earlier about the big bull market in India, you would be surprised if this turns out to be that one?
I give that a 20 percent chance. If we have the right government and the right policy reforms, India will grow double digit. I have no doubt about it.
Additionally, today equity is a bad word. What is the exposure? I think exposure of the household to Indian equity is at the lowest. There is no pension fund investment. India saves USD 750 billion a year. Even USD 1 billion does not come to markets.
I am extremely confident of India’s future because what is happening is good. The Supreme Court is working perfectly, there are civil activists. So, if anything wrong is being done, there are people who are questioning. That is what happens in democracy and that is how a democracy will mature.
Q: So when you say the market has probably found a bottom, did you mean that the market bottomed out in June at 4,700-4,800 or do you think we have a much higher floor on the Nifty right now, maybe say even 5,400?
Because of the uncertainties, which are involved, 4,700-4,800 is surely a bottom. I feel that if nothing untoward happens, it will not test that again.
Q: What about the global situation? We have got USD 20 billion of FII money and that is an important reason why the markets moved higher. Do you see that part of the equation being in place, the global liquidity aspect or does that make you a little nervous?
No, it doesn't make me nervous. I think China is never going to go more than 7-7.5 percent because the kind of investment they want to make in fixed assets is just not going to be sustainable. I think America will do well and eventually Europe will break down. Atleast, some countries will go. Greece will go.
One of the reasons that a lot of money is coming to India is because people perceive that India is at the highest end of the interest rate cycle and if inflation was to come down, it will make a very big difference. India's GDP is not lopsided. We are 57-58 percent of consumption, 15 percent of exports/ balance of investment. Unlike China's economy, the whole breakdown in Japan in 1999 took place because of over investments. Japan also invested 45-47 percent of its economy into fixed assets.
Of course valuation in China is not what was there in Japan. If we Indians get our acts together, we have a chance of outperforming the world. And there are also indications that India is one of the few assets of any substance, which is higher than on the day when QE3 was announced. So, the liquidity effect after that also most assets have lost. It is not just that global liquidity is good. That may be one reason, but people also expect that India will do well.
Q: Any thoughts on gold, would you buy it today?
Some part of our wealth should be in gold or diamonds, on non-stock market assets. I think we should keep some part.
Q: But you do expect that, at some point between this Diwali and next Diwali the market will make a new high on the index?
A new high means nothing according to me. Markets should make a new high, go at least 10 percent above and never go below the last high. Say we have 6,200 on Nifty as the high, it should go to 6,800-6,900 and not come below 6,300-6,400. So, new highs are not so important in index. But ofcourse they are also an indication that markets are good.
Q: What percentage probability would you attach to the event that you just described that the market may take out its previous high by 10 percent and come back and retest it but not break it?
If the market likes the government, it will do it 100 percent.