Ace investor, Rakesh Jhunjhunwala, Partner, Rare Enterprises said the ratings upgrade by Moody’s earlier on Friday did not come as a surprise for him but, it could be for those who were criticizing efforts made by the Modi government to revive the economy.
Jhunjhunwala said he sees the economy growing by 7.5-8.0 percent by next year. Most importantly, he said it is a recognition of the fact that however disruptive in the short term the measures were, all the actions which the government took were correct, bold and required, he said in an interview to CNBC-TV18.
It will lead to faster economic growth in times to come. “This upgrade is also in recognition by the Moody’s that there is not going to be some big havoc on the fiscal side, and the direction which the government is undertaking is going to lead to higher economic growth, and it is also a befitting reply to critics of Modi government,” said Jhunjhunwala.
Coming to the impact on markets and India Inc., Jhunjhunwala said the mother of all bull markets has just begun and investors have nothing to worry about. Financials will be the biggest beneficiary including private, public sector banks from Moody’s upgrade.
The biggest advantage to India Inc. from the Moody’s upgrade, he said, is that it will allow India to borrow funds at a lower rate. Lot of funds which have a mandate to invest in countries with a specific rating can now invest in India.
It will also allow Indian companies who borrow most of their capital from abroad to get better rating which would be much cheaper. Now with influx of funds, investors should keep an eye on the investment cycle which could well add 100-150 bps to the GDP.
“In 2002-2003 the ratio of investment to GDP was 26-27 percent, it went up to 35-36 percent in 2008. I expect that kind of cycle. The investment has to revive in this country. If the ratio goes up to 34-35 percent, that itself would add 100-150 bps to the GDP,” said Jhunjhunwala.
Commenting on the elections, Jhunjhunwala said he is confident the ruling government will win Gujarat elections and 2019 general elections is still far away.
Below is the verbatim transcript of the interview.
Q: Does this come as a surprise to you?
A: It does not come as a surprise to me to the extent that I always said that whatever the government is doing is going to lead to higher growth and better conditions. It is only a recognition by Moodys.
Q: But what are the implications?
A: The implications are multi-fold. First, it will allow India and the government to borrow at lower rates. There will be a lot of participation of a lot of funds who by that mandate, can only invest in countries which have a certain rating. So a lot of pension funds will be allowed to invest in Indian tech and also Indian equity. Also, no local companies' rating can be greater than the sovereign rating. So it will allow a lot of companies, for example, Reliance does a lot of borrowing abroad. So Reliance Industries will be able to now get a rating on the bonds which are better and as good as the Indian rating.
Q: It is not only the cost but also the availability of funds.
A: And availability of more funds will automatically lead to lower costs. So this is the financial implication. But I think that is not so important. As a fact that there are two divided opinions in India that what will be the economic growth in the future and the disruption which was caused by demonetisation, goods and services tax (GST) or any of the reforms that government is doing, what will it lead to, especially after last year's gross domestic product (GDP) figure? At least I was from that camp that this was a temporary disruption. We have made a bottom and growth is now going to rebound in a big way.
Q: So you see that 7-8 percent GDP next year?
A: I surely see 7.5-8 percent. Most importantly it is, first we had the upgrading in the ease of doing business. The most important thing is it is a recognition of fact that however disruptive in the short-run, all the action that the government is taking is correct, bold and required and will lead to India's faster economic growth in the times to come.
Q: So do you think Real Estate (Regulation and Development) Act (RERA), demonetisation, GST, all those things, we have made a bottom in terms of the cycle?
A: I think so. It is a recognition also. A lot of people are very much concerned on the fiscal side. This upgrade is a recognition by Moodys that there is not going to be some big havoc on the fiscal side. That does not mean that we may not overshoot the fiscal deficit provisions this year. But Moodys, long-term recognises that India's fiscal situation is absolutely good and will remain so.
Q: Do you think that we should not open champagne right now and wait for Standard and Poor (S&P) as well?
A: It is not that my opinion about India or the Indian stock market was going to change before Moodys upgrade and it is not going to change after Moodys upgrade. But it is one recognition of the fact that the direction which the government is taking and all the reforms that the government has done is going to ultimately lead to much higher economic growth, whatever may be the temporary disruption. And it is also a fitting reply to all the critics of the Modi government about the growth and its prospects.
Q: You mentioned about the bigger corporate to benefit. Which sector according to you will be the biggest beneficiary of this?
A: The biggest beneficiary is the financial sector, but the financial sector will then pass on these benefits to the lenders.
Q: Non-banking finance companies (NBFC) and all or the private banks?
A: All banks will benefit, not necessarily private banks. But when they benefit and when their cost of funds will be lower, they will pass on that benefit to their borrowers. So therefore, everybody will benefit.
Q: Is it priced in? We are seeing a rally happening, we are almost at all-time highs. Do you think that this announcement is coming after the market has rallied?
A: We have risen from 6,800 to 10,400. We can correct. I will not be surprised if at some point we correct. But the bull market which I anticipate, the long, biggest bull market in India, I think has just started.
Q: Will you put fresh money now, after this?
A: What I do, I myself do not know when I come. So I will not like to comment on it.
Q: But is it time to change sector allocation after this move or do you think it is a passing thing in the process?
A: I would like to speak on a very broad basis. I will not advise on all that.
Q: Earnings for you? How was quarter two?
A: We are come here to talk about Moodys and not about earnings.
Q: But if I talk only on Moodys, how do you think this entire thing will have an implication on GDP going ahead?
A: It will make cost of funds lower for India as a country and it will allow a lot of foreign capital to come into this country which is good. That will also help revive the investment cycle.
Q: The FII flows were the missing part in the last six months, eight months or even a year.
A: But they are investing double in the primary market and the bond market. So if I put Rs 500 crore in the IPO market and I sell Rs 200 crore, how can I be called a seller?
Q: But do you think this will have an implication of FIIs coming back into the Indian market? And then we will have both the flows, domestic and international?
A: It will allow a lot of FIIs, who by their mandate, especially pension funds and university endowments, who by their mandate could not invest in India, whether in equity or debt, unless and until you reach a certain level of grading. So you will have a lot of fresh capital, fresh funds coming. And ultimately, it will lead to more money coming.
Q: What are the key things you are watching out for in terms of growth in the economy going ahead? The investment cycle is picking up.
A: In 2002-2003 the ratio of investment to GDP was 26-27 percent. It went up to 35-36 percent by 2008. It anticipate that kind of a cycle because investment has to revive in this country. Already you are seeing that now a lot of investments made in steel. So as capacity utilisation goes up, I see this investment ratio to go to 34-35 percent. That itself should add 100-150 points on the GDP.
Q: You also turned a bit bullish on the financial space, public sector banks. Do you think the public sector bank recap was a right move?
A: I thought it should have been done much earlier.
Q: And whatever people are talking about the fiscal deficit.
A: No, but the recap should be accompanies with some kind of a change in the functioning of these banks on the labour costs and on the processes and systems.
Q: All these steps what government has taken and which are leading to the elections of course, there are murmurs around in the market, do you think, you remain very bullish on the Modi government?
A: Yes, I am bullish.
Q: Nothing in terms of the elections which are coming ahead? The murmurs talking about the Gujarat elections?
A: I think they will win Gujarat, there is no question about it. Now 2019 is still very far.
Q: And you remain very bullish on the Indian market?
A: I remain bullish.
Q: Will you change your portfolio? Will it be more tilted towards the financials right now?
A: I would not like to comment on my portfolio. I do not know myself what I do. It has just come today in the morning. We do not decide in one minute. I can say one thing that it is not only bullish for the financial sector, it is bullish for the country as a whole.
Q: Will the capex cycle pick up now that the cost of capital will be low? I remember Ridham also making a point to Latha yesterday that the cost of capital is now at a multi-decade low.
A: Right, so therefore your benchmarks. Your cost of capital has come down from, it was 12 percent, then you would not invest without a return of 18 percent. Now it has come to 7 percent, people invest with a barrier of 12 percent. So obviously that helps the capital cycle.
Q: But is it priced in?
A: What is priced in? What is not priced in? You cannot specify which is priced in or not priced in. These are journeys, these are not destinations.
Q: Do you think another rating upgrade should not be far behind because now we are picking up in terms of all these tax to GDP number.
A: Generally upgrades happen over, I do not expect any upgrade before two years. They are going to see the implications, actually implications what they have predicted and I think they will see the 2019 elections and then only, you can think of an upgrade.
Q: So you do not think another upgrade before 2019 elections?
A: I think unlikely before the 2019 elections because they are only now about 18 months away and they would like to see the political, one of the reasons we have been upgraded is also due to stable political situation.
Q: What do you think is a major reason for this upgrade? They mentioned about the public sector bank recap, they also mentioned about a lot of things.
A: I think there are so many items in a vegetable. So it is difficult to point to one specific thing.
Q: You also mentioned a lot of times that this is just a trailer for the Indian markets.
A: I think for India's growth, I have no doubt that India will grow double digit. And the reforms which have taken place, GST, RERA or the insolvency, the Make in India or Swachh Bharat, they are all steps, ease of doing business reform in the taxation system, since the Modi government has come, the tax to GDP ratio has gone from 16 to 18.
And by 2020, it can go to 20. 4 percent of GDP extra if you collect in taxes and Brazil is at 33. There is so much scope to improve it. The kind of money we will have. When all these factors come together, I will not be surprised if post 2020, we grow in double digits and I will be disappointed if India does not grow at double digits.
Q: That will be post 2020?
A: Yes, it will take 2-3 years to build it up.
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