Consolidation healthy for mkts: Rakesh Jhunjhunwala

Q: In the last few weeks since that February fall happened, at any point, where were you significantly short because we have this phenomenon people going short and then the market moving up foreseeing them to cover up. Have you had any such experiences in the last 4-5 months? 

A: I don't think I have made any short positions significant in the last 4 years. I don't get the feeling internally that markets are going to dip in a big way or markets are valued at such levels that just sell-sell-sell and sell. 

Q: Even when the market fell to about 12,000 odd levels, you didn't consider, because that was a sharp fall? 

A: I was caught on the wrong foot in the Budget, I was long on the Budget day and I exited and I did not short anything. I hope I had, but I did not. 

Q: How do you read the global cues right now and do you subscribe to that view that the shape of the Indian market in the near term is very tight to what's happening globally or not quite so? 

A: It's difficult to say. But I don't think it's so much tight as people are apprehending because lot of domestic money is going to come. The Indian economy has got one of the lowest international exposures because I don't think that any international slowdown is really going to affect any exposure of India, other than software. Also, if there is also going to be an international slowdown, commodity prices will come down which for a net importer of commodities like India, it's going to be a very good factor; interest rates worldwide will come down.  

We have a very large domestic economy, which is largely going to remain unaffected by what happens internationally. So even if things internationally slow down in the first leg, India is surely going to be hit both in terms of sentiment and maybe economically. But over a period of time, we will find that India is the economy that will be the most resilient and may therefore attract the largest investments. 

Q: How much of this rally in the last few months is being fuelled by pure liquidity because that's what people keep talking about? 

A: I don't understand what is liquidity/ what's not liquidity, because I don't know who is to decide what is value. I think it's the most transitive word in the English language. History has never been a guide really because history has always been made afresh. So I look upon PE and valuation as an economic performance and the amount of money, which is available to buy that performance. I don't agree with all that there is liquidity chasing. Do you think analysts know what value and valuations are? They would be the richest people in the world. 

Q: You don't agree that valuations are expensive in India right now? 

A: We can't generalize. Surely there could be pockets of valuations where I won't buy as an investor or I would exit as an investor, if I have a holding. There are pockets where there is opportunity.  

But in general, I don't think; one of my biggest learning as an investor is that good stocks always remain expensive. So if India is going to perform as a market, we are always going to feel it's expensive. They (stocks) are not expensive, because expensive, I don't I think it's not going to be expressed in terms of valuations until and unless valuations are way-whack out of any reality.  

Again '92, you had SBI Magnum - it was a closed-ended equity fund. At the NSE, it was Rs 50 and the quoted price was Rs 150. Valuations are really expensive when people just want to participate, leverage and markets are rising 10% everyday, and everybody is participating. So it's more a psychological manner and matter rather than the absolute number. 

Q: You don't sense that euphoria at all right now? 

A: I don't know what you were doing in '92 - you have not seen '92. I think we are going to have another '92 in India and we are going to have in next 3-5 years. That will be the time to sell stocks; like 2001-02 was the time to buy stocks. 

Q: Do you see any extreme over-valuation pockets right now in the market like we saw in the hay days of the technology boom, some speak about real estate being one of those examples: do you agree with that? 

A: I won't equate it with the technology bubble. That was not a boom - that was a bubble. I don't think real estate is valued as the technology stocks were valued. So I don't see that kind of extreme overvaluation. 

Q: Have you invested in the real estate sector at all? 

A: I don't have any investments in real estate. 

Q: How is that possible, last one-one and half years they have been some of the biggest multi-baggers? You must have had reasons to look at those opportunities and let them pass? 

A: It's a very dicey subject. None of the real estate companies pay tax. I don't know how they get their profits. Second thing I also feel that anything, which can be valued as one plus one is equal to eleven; is not what ultimately gives you returns in markets. I don't know, I have never been into real estate bull in my life and wrongly so.

Q: But you have bought a lot of real estate yourself; how come you don't buy those stocks? 

A: I have not bought any real estate. I bought a house and office. 

Q: Commercial real estate you have dabbled in the past, haven't you? 

A: Not at all. That's not my cup of tea.

Q: So you would not be queuing to buy DLF, would you?

A: No I wouldn't.

Q: Why - valuations or innate distrust of the business?

A: I would say valuations, more than anything else.

Q: So you have had a look at it?

A: Yes.

Q: You don't agree with those - slight premium to land bank - those kinds of valuation models at all?

A: Why should I go and buy DLF, I will buy the land only.

Q: Do you think this will have any kind of material impact on the market - the fact that some serious amount of paper is hitting the market over the next 2-3 months?

A: Lot of that paper will be bought by the strategic buyers. ICICI Bank's 10% will be bought by the Government of Singapore. In the international context, this kind of paper is not much, in the Indian context surely, it will have some effect on the market. It's not coming at a valuation, which is very cheap. So nobody is going to today dump markets and buy those issues. There maybe a new class of investors, there are a lot of first time investors. I foresee, by 2010-11, we should have USD 45-50 billion of domestic money coming in. If you have that kind of money coming in, surely USD 15-20 billion of local issues will be easily absorbed.

Q: Why is that money still not coming in? We've had a fantastic run, everybody can see that equities is the place to be, but aside of some mutual funds, NFOs, we are not seeing great participation coming in locally.

A: I beg to differ. Lot of this money is coming into the insurance sector. I am told, last year the investment made by the insurance sector in Indian equities was higher than the investment made by the Indian mutual fund industry.

Q: You are talking about unit-linked plans?

A: Mainly unit-linked plans. In India, pension fund money is not allowed. Only 13% of the Indian labour today has pension and out of that pension, not one paisa comes into equity. All that has to be allowed ultimately. As time passes, market should not lose. If markets gain and don't lose much, then I think money will flow in. If there is going to earnings growth in India, even if you get 15% return, a lot of money will flow into Indian equity. I am confident that we have ssen nothing yet, as far as domestic flow goes.

Q: Why not directly? Why are we not seeing direct equity participation?

A: The general participation is through insurance and through mutual funds. Maybe we require more penetration into smaller towns and now I am told, lot of money in the mutual funds, insurance companies is coming from smaller towns. Also there is a distrust in equity, because people lost money in '92, people lost money in 2000. But I am confident that lot of money is going to flow from the domestic side.

Q: You made an interesting point that volatility and sharp falls drive people away. You don't see the prospect of that later in 2007, because when the market falls 20% in a small period, people don't come in for 6-7 months?

A: You have to see corrections from not only what value it corrects, but what time period it corrects. If we do not have earnings damage, which we cannot rule out, I don't see any way by which we should go below 11,500-12,000. But if the index is to earn Rs 840-850 next year, at 12,000 you are 13-14 times earnings. The index has historically never traded below those levels even in bear markets.

Q: That to your mind, is the flow for valuation?

A: If the earnings are 850, I think 11,500-12,000 would be the flow.

Q: You are reasonably certain of delivering Rs 840-850 this year?

A: It should come through; I don't see any reasons why it should not, at least not of now.