Moneycontrol
Last Updated : Nov 08, 2018 08:59 AM IST | Source: CNBC-TV18

NBFC problem ‘nearing its tail end’: Rakesh Jhunjhunwala

Jhunjhunwala said he is always bullish on India and does not see a reason to go bearish.

CNBC TV18 @moneycontrolcom

When Rakesh Jhunjhunwala says something, the market sits up in rapt attention.

Jhunjhunwala, often dubbed as India’s Warren Buffett, made his billions from equity investments, and his stock picks are closely tracked by India’s retail and institutional investors.

It is not for nothing that Jhunjhunwala, an investor who runs his own asset management company called Rare Enterprises, is known as the Big Bull.

In a wide-ranging interview with Shereen Bhan, Jhunjhunwala said he is always bullish on India and do not see a reason to go bearish. Jhunjhunwala said the market has been doing well and "we have seen a huge rally in the last few years".

He also said that the crisis in IL&FS has signified the peak of the non-performing asset cycle. However, Jhunjhunwala does not see any credit risk in the Indian economy as the NBFC problem is 'nearing its tail-end'.

He also talks about the banking sector, economy, recent spat between Reserve Bank of India (RBI) and the government and upcoming election, his plans for 2019 among a raft of other topics.

Edited Excerpts:

In June you said that 2018 is going to be a year of consolidation because 2017 was a year of extraordinary gains. You told me then that 10,000-11,000 that is the range you expect and if that happens next year you will be a happy man. As you sit here today and forget what has happened at the index level, the kind of erosion that we have seen in some specific sectors or some specific stocks, are you still a happy man?

I more than a happy man. My happiness does not come from the fluctuations of my wealth and I think wealth is not the source of happiness. I would wish all the viewers a very happy and auspicious Dhanteras and happy Diwali and New Year. I am a bull, bulls are always big, so why you have to say big bull? Bull means big, so why do you want to call me a big bull?

Are you still bullish on India because the camp is now divided between those who are cautiously optimistic, those who are bearish and those who feel that perhaps things are not as bad as they might seem, where do you belong?

First of all, you know I am always bullish on India. There are times when the economy is not doing very well and the market in anticipation is still bullish. Then there are times when the economy is doing well but for various factors, the market is not doing very well.

Is that the time where you feel the economy is doing well but the market is not?

The economy is doing well and I feel markets are doing well. I do not know why you think markets are not doing well. If you have a longer-term look, in 2013 the Nifty was 4,800. In five years we have gone to 11,500. We have had a very poor correction if you see the rise from 4,800 to 11,750 and we have had the biggest FII (foreign institutional investor) selling ever.

Last time when we had this kind of FII selling in 2008, you saw an absolute demolition of the market. This selling has been absorbed exceedingly well and I think the flow of local money is continuing and in my opinion, it will continue and increase.

As far as the economy is concerned, I think it is just doing fine. Whatever I interact with businessmen, there is good demand, there is good consumption, there is good infrastructure investment. So I do not see any reason to be bearish.

One of the main factors for the short-term correction was the apprehensions about the rupee and the oil prices. In my personal opinion, I had that even when oil was at $85 per barrel, It has peaked for a good period of time and the move from $29.30 per barrel to $84-85 per barrel I think is over and we are going to go into a big correction in a downward move.

I see a range for oil anywhere between $60 per barrel and $75 per barrel. I see the range of the rupee between 70 and 74 per dollar.

So the immediate factors which led to the fall, along with the huge absorption of FII selling, and technically there is a complete surrender in the market. Never ever in the futures, generally in the futures, on the first day of every new settlement, the positions go up by 20 percent. Now six trading sessions have gone up after this settlement where the Nifty has gained 500 points, and the positions have hardly gone up. So that means there is an absolute fright. In my opinion, fundamentals have reversed.

They have reversed for the worst or for the better?

The rupee bottoming and the oil peaking, the macros will change surely in India’s favour than what they were. I think you will see -- if you now link the petrol and diesel prices to where fuel is today -- another Rs 3-4 reduction in both. So, the macroeconomic factors, in my opinion, have reversed, there is complete surrender in the market, there is a big liquidation, there is highest ever FII selling, and there is still local participation.

The economy is doing as well as it was doing in October. It is doing as well as it was doing in August and as well as it was doing in September. So I am not very bearish. I think the market has still held on to that range.

So you are saying that you are not very bearish which means that are you on the neutral side then?

I would like to pick stocks. The other thing also we must realise is that what has happened in IL&FS, according to me is the peak of the nonperforming asset (NPA) cycle. When do you have a big credit crisis, when you have a big capital investment which is financed which India did between 2010 and 2014. Now IL&FS is the last big defaulter in that capital investment cycle.

Or you finance assets who fluctuate in value, who have consistently raised and there is a lot of borrowing and speculative investing which has never happened in India, neither in housing nor in equity. Housing prices have not gone up for the last 5-6 years. So I do not see any kind of a credit risk in the Indian economy and the NPA problem which arose because of the capital investment, in 2010 and 2014, it is tail end. So I do not know why people are so frightened.

But you are conceding the fact that people are frightened in the market today?

Conceding means the positions are saying, the opinions are saying. I have to concede reality.

Let me then link that to the IL&FS story and the larger implications of what it means for housing finance companies as well as NBFCs? I mean this is a clear pocket of pain at this point in time, where it ends we do not know.

I do not agree.

DHFL down 58 percent, Edelweiss down 50 percent.

Prices being down does not mean it is the reality. Prices were very high. Edelweiss at Rs 355, that time it was good. I do not know what has changed so it should be Rs 170, it is bad? Do not judge reality only by prices.

But what about the fundamentals?

There is an asset-liability mismatch, there is no solvency risk. Their assets are liquidated, are good enough to pay for the liabilities. In the world, if you choke anybody, your money will fail including the government of India, including the government of US.

Tomorrow if the government of US stops getting money how is it going to pay. I don’t say that there could not be a problem and NBFC, they could be one or two but there is no systemic problem.

You don’t believe it is a systemic risk?

India has the lowest level of mortgage to GDP. We are at 10-12 percent, Thailand has 32 percent, so housing is one of the most important methods by which we can have growth and it is the prime need for the people. Now we need to finance this. How do we do it? So we got to come up by measures which people who are financing housing are able to get liquidated. As a country we have to do it, it is not a question about you, me, RBI or government. It is for the growth of this country that we need housing finance.

I will get to RBI and the government, but on the issue of liquidity for the NBFC sector, the measures that have been unveiled so far, do you believe that they will alleviate some of the pain or do you believe it is not enough?

Nobody has alleviated some great measures, it is in the interest of banks. If the State Bank of India (SBI) has got liquidity, it is in the interest of the bank to buy good assets. So, what is the great favour the government is doing?

No, I am not saying favour, I am saying that is it working on the ground or not?

Yes, it is working on the ground absolutely. You will see 99.9 percent every NBFC will repay the commercial paper (CP) and I will write on the stamp paper and give you that those who are sitting at the sidelines in three months they will all be buying back the commercial papers. Because this is a shuck it is not reality.

So you continue to bet on this sector, would you be?

I don’t know, I don’t want to say what I will do, what I feel is that there has been no financing of assets who have fluctuated greatly in value. We are at the tail end of the NPA problem which started because of the capital investment boom. From 2014, I have been saying not to buy public sector banks. But now I think it is the end of the NPA cycle.

So you would buy public sector banks, would you reverse that warning?

Yes, literally I would, I would look at each bank in isolation.

Because you have been bullish on private sector banks, in fact, the last conversation that you and I had you said that you would like banks who are in trouble?

They have done well, ICICI Bank has done well, Axis Bank has done well. I think they will keep doing well.

Do you believe that we are now going to, I mean the NBFC rally has been the clear outperformer, and banks have underperformed in comparison? Do you believe we are in the midst of seeing a reversal now in light of what is happening?

I don’t understand, it is not if and then. If banks can also perform well, then NBFCs also can perform well. As a long-term investor let us not, markets cannot keep on running at a speed. They got to stop and pause. The question is, the rise from 4,800 and then we had 6,800 at the time of demonetisation has that up move peaked out? I don’t think so. I think we are a correction in that upmove.

You still believe that the correction that we have seen so far is a poor correction so do you anticipate a further fall?

I don’t see the Nifty going below 10,000 or 10,100. I think at that level it will find support. I think that 11,000-11,100 it will show kind of resistance.

If you are saying that you don’t believe that the NBFC – HFC problem is a systemic risk at this point in time and you think that this is a short term issue, it is more shuck than reality. If that is your assessment then what would you quantify as the big risk to the market?

Big risk to the market can be trade wars.

But that has been playing almost for the entire year?

There can be more than anticipated increase in US dollar rates, US interest rates. The Indian economy, we have seen 8 percent growth. I don’t see growth going below 7 to 8 percent regardless of many factors. I was very much afraid of oil prices and I think it is absolutely reverse. If you look at the technical charts the market has made a double top and the way it is has retreated - when do you make a real top?

When markets go down and face incredible optimism. What optimism was there at $84-85 per barrel, oil will be $100 and 200 and 400 per barrel and what kind of crap talk. So oil is a very big macro factor for India. I think the 10-year bond had peaked and if there is worthiness in borrower they will find a lender and why don’t we forget one thing that we have gone through the worst period for banks during GST and demonetisation that is behind us.

It is not going to recover and don’t forget that the prediction was that India’s GDP will grow between 1 and 3 percent extra because of GST. Everybody forgets that. So we have seen the worst of GST the best is still to come.

I don’t say I am incredibly bullish, but I think this is a correction within the rise from 4,800 which took place in 2013 and I don’t see Nifty going below 10,000.

The fundamentals have turned in favour of India and that is largely on account of oil is your perspective. You, in fact, didn’t expect the rupee to go to about 75-76 per dollar?

I still think the rupee will stabilise between 71 and 73 per dollar.

I just want to pursue with NBFC line of questioning for another few minutes and then move on to other issues. You said SBI is not doing anybody a favour and the measures that have been unveiled are working on the ground, what more, what next to ensure that this, in fact, becomes a systemic risk?

It is not going to become a systemic risk. I think long-term measures have to be taken so that there is the availability of finance for financing low-cost housing. It is a much needed. That is how steel will be consumed, that is how cement will be consumed, that is how labour will be consumed, that is how India’s growth rate will go up, that is how poor people will find housing. So I think and there can be measures by which it can be done.

One way you can do it is that we can levy a rate of surcharge of 25 basis points on every housing loan and use that for financing an insurance corporation which will say give some kind of an insurance to housing loans. Suppose the rate of interest is 8.75 so that you charge 9 percent and pay 0.25 percent to insurance corporation and let the insurance corporation partially guarantee loan given for housing.

Remember one thing, in housing, prices may not appreciate but they don’t depreciate. So, when I have given housing loan for three years the asset depreciates and the amount of loan outstanding decreases.

And by nature, nobody wants to lose this house, so it is not easy that defaults take place on housing loans. But as a country, we have to think whether it is a government or the Reserve Bank that how do we enhance the availability of money for the purpose of financing housing. We are at the lowest level of mortgage to GDP in the world. Countries like Thailand are way ahead.

Since you talk about the government and the Reserve Bank of India and the need for both the government and the central bank to sit across the table and work out some long-term solutions to address this particular problem how is the market reading what is happening between the government and the RBI today?

It has happened earlier also.

No, it has happened earlier but?

I think the press is reading it more than the market because for the press anything that is exclusive or anything which is news it catches.

Isn’t it newsworthy?

Do you think is it as news worthy as people are making it. Who knows what is happening? You know what the government said that what happened between them and the Reserve Bank has always kept secret. Who knows what is happening.

Then the economic affairs secretary tweeted just 48 hours ago taking a dig at the RBI and DG?

I strongly object it. I am not taking anybody’s side, but as an Indian, I strongly object to taking the name of India and Argentina in the same breath. We have never defaulted on our bonds domestic or international. Argentina has defaulted several times how can you take the name of India and Argentina together.

Even Theresa May spoke against the governor of the Bank of England. Donald Trump is openly speaking against the Fed chairman, why don’t you take their name. Donald Trump is interfering with the Fed. Why don’t you say that India will become like America, India will become like Argentina – I strongly - Viral Acharya has his own views, but how can you take India and Argentina names in the same breath.

The process of consultation with the Reserve Bank of India is provided for in the Act. So the freedom of the RBI should be respected. In my opinion, RBI is a very good institution. It has managed the monetary policy of this country well. It has regulated banks well. But we cannot take the name of Argentina and India in the same breath. As an Indian, I strongly object to that. We have never done what Indonesia has done and we will never do it.

On the merits of the arguments, especially on the four contentious issues, for instance when it comes to the review of the prompt corrective action framework or when it comes to the issue…

It is like this – if I tell my son to study he will think its interference. So a manner of consultation with RBI and government of India is provided for. Somebody will think it is interference, somebody will think it is my right to consult but we do not know what is happening between them.

So we cannot say that everything that the government tells the RBI is interference. I do not want to go by the press reports, I do not know what transpired between them. So surely the government has a right to be in a consultative process with the RBI and the central bank has a right to take its own independent decisions. So now the question is whether it is interference or whether it is consultation.

If this were to precipitate further, is this a big risk for the market, is this a risk at all for the market?

The market is greater than all individuals. There was a big perception that if Raghuram Rajan leaves the RBI this will happen and that will happen. What happened? So this country is greater than all individuals but I do not think it will precipitate. I do not think any precipitation or blowup of this matter is going to happen.

Let me talk to you about some of the other issues that you raised and that has to do with what is happening globally with the trade war and the fact that it could intensify or escalate further with what’s happening with the dollar, what is happening with US interest rates. The implications of that for India?

My personal judgement says that the dollar has peaked and that will be bullish for emerging markets. If you see a lot of the emerging market charts and if you see the MSCI emerging markets. It is on the verge of making a higher bottom-higher top. At the moment its lower top-lower bottom and they say that most probably the Democrats will win the House of Representatives and that will lead to dollar weakness because then Trump cannot do what he wants because he cannot pass legislation for both the houses.

I do not know. I cannot reason everything but I personally feel India has made a bottom. All the fear there and the fall is in the FANG (Facebook, Amazon, Netflix, Google) stocks. There are no FANG stocks in India. All FANG stocks in India are unlisted and seeing the screen also I feel, not that we are going to get a very big rise. I do not think there is a trade war, it’s a geopolitical war. So how it plays out is difficult to say but for the needs of short-term growth, I think both sides will cool off, at least temporarily.

So you see a backing down of some sorts is your hope?

It’s my judgement.

You said that as you look at the screen today what is interesting outside of the stuff that we have already spoken about?

Except for my wife, I do not tell anyone what is looking interesting.

I am not asking you stock specific but sectorally?

I think from about two-three year angle pharma is looking interesting. And I am interested in everything I say, please take everything with a pinch of salt. Pharma is looking interesting. I think the way infrastructure stocks have been beaten down and after Larsen’s performance infrastructure stocks should do well.

What do you make of the earnings season so far?

Not bad. We were seeing the first pinch of input cost because of high oil prices. I think we will play out for another quarter and then things will ease. Although my friend Raamdeo Agrawal (Motilal Oswal Financial Services) has become very bearish and when he becomes bearish I become very bullish because he is a bull all the time.

I agree with his thesis that earnings growth in India as a totality is not taken off but in certain sectors, it has taken off well. We are a growing economy, we grow at 8 percent, how long can corporate profit remain at 3.5 percent.

But this has been the argument that you have been making for a while?

You heard the story of a boy who cried wolf. When it will really happen, nobody will believe us.

How many of your friends like Raamdeo have turned bearish?

Not many.

Are you the only bull in town? 

There are people who feel the market has bottomed but that is also a thing that majority may feel it’s bottomed, so we do not know. I feel 10,000 (on Nifty) will not be broken easily because we are not going to see $8 billion of FII selling and this kind of a liquidated market.

I was with some group of businessmen two-three days back and people are saying business is just fine. Look at the way the chemical industry is fairing. I think the pharma industry will do well. Steel is doing well and even the fast moving consumer goods (FMCG) industry is doing well.

On steel in specific, are you concerned about, for instance, what is happening with Tata Steel-thyssenkrupp sort of rearing their head about the competition regulator looking at the joint venture?

I think with present steel prices if they continue even without the merger they are fine.

You said that you continue to be bullish on pharma. What about IT. Does that look like a story that you would want to consider?

Pharma is well priced. It’s not that it will go down much.

How much of nervousness is linked to what is likely to happen with the elections? You have got state elections coming up and then general elections in 2019. How much at this is a play in the market today?

I think the market is confident that BJP will come back to power with reduced majority may be in a coalition – that is what the market is expecting. If that happens market is fine.

So there isn’t any extreme nervousness on account of elections today?

Not at the moment.

What do you think could change that two of the states go in the other direction? Could that cause anxiety, nervousness?

It is difficult to predict because in 2004 when the BJP lost, just six months before it had won the state elections handsomely. So you can take a call only a month or 15 days before the elections. I do not think the opposition is going to unite the way they are at the moment because the division of tickets within and also what happens that if the Samajwadi Party (SP) and the Bahujan Samaj Party (BSP) tie-up in Uttar Pradesh (UP) – otherwise they are going to have 80 candidates each, right. Now they will have 40-40. The guy who has dropped as a BSP candidate - will he work for the SP?

I have asked you this at the start of the interview but let me ask you again, if elections are not top of the mind as far as the markets are concerned as something that is causing them to be nervous or skittish and you do not believe that the non-banking financial companies (NBFCs) issues that large to cause the market to be excessively anxious. What is making the market so frightened today?

Market maybe believing that the NBFC, some of them will default. I am confident they won’t but the market wants to see them -- and by November 30 it will be known because a bulk of the CPs will be repaid. There are two things. One is the short-term liquidity which will be 101 percent repaid. The second question is, they were raising a lot of finance through short-term means. Will they be able to get that finance and if they do not get that finance the rates of growth for NBFCs will slow.

What kind of slower growth would you factor in now as far as NBFCs is concerned?

When the growth was 30-40 percent it comes to 20-25 percent but the growth is still good enough and also the market has become too bullish about NBFC, forget the listed space and unlisted space you are getting deals done at mad valuations. So that corrected itself.

Has it corrected itself or the process is still on?

It is. Corrected itself means always correction is a process, right. I do not think most NBFCs are going to go below the levels which they have had gone earlier.

Let me ask you about the kind of wealth erosion that we have seen in the midcap space and we spoke about it the last time as well, this was a pocket you were concerned about and I would imagine that you continue to be concerned about it. What is the story there? Is there light at the end of the tunnel?

Yes, a lot of midcaps have corrected.

That is stating the obvious.

Yes, now what else? You cannot state that midcaps have now corrected and they will go up. I think it is a scrip by scrip story. Certain midcaps did not correct, they were very strong. Some are corrected they will go better. There were two or three categories of midcaps.

One was pure speculation who will never get earnings. So, once they have corrected, I think for them to recover will be difficult. Then there were certain midcaps whom you were anticipating in the future and you were discounting but who will perform but take time. So they may correct, they may regain. There are certain midcaps who are outperforming, they will outperform.

Speaking of companies that are performing, what has caught your interest and I will ask you this in the context of what we are seeing happening with the auto sector for instance and again the sort of divergent signals that are coming in. You talked about the fundamentals of the economy looking better, fuel is now on the mend in terms of moving lower, the auto sector at least for what one hears anecdotally from most of them and it is showing up in the sales numbers as well have seen perhaps one of the worst Diwali’s in the last few years.

We do not know Diwali figures, it is all speculation.

You are right pre-Diwali. What do you make of that and is the auto sector something that you would look at?

They had very high growth last year. So it is correcting. 10-15 percent automobile growth we are going to have in this country. I think after the further reduction in petrol prices, we went to Rs 90, came back to Rs 70-79. If oil remains at this level, then I think it will give a bump to automobile sales.

In terms of earnings, in terms of valuation, in terms of future prospects, where do you see value today?

I am also searching. When I come to know, I will call you.

There has to be something, you must have identified some areas.

I have no money left to invest because I am making a very large investment.

Are you putting in any fresh money into the market?

I do not have any fresh money because I am already making a very large investment. However, there are pockets of opportunities sure.

Where do you see these pockets of opportunity?

I see it in banking, I see it may be in some NBFCs, I see it in the pharmaceutical, and I see it in infrastructure.

Since you spoke of banking, I will ask you one private sector question and one public sector question. We spoke about consolidation, we have seen this Dena Bank, Vijaya Bank…

I think it is a tremendous move. It will finally be beneficial to all shareholders because the labour cost will come down, you will have common branches, so finally it will be a tremendous cost saving measure.

Would you be a taker in any of these?

That I do not know. I have not studied, but I am generally a big supporter. I have some shares of Bank of Baroda. I am a big supporter of consolidation of public sector banks. If you go to Pedder Road, there are 14 branches of 14 banks with a common owner. What is the need? So I am a very big supporter of consolidation of banks. Anything which the government does which is right also, longer term, people do not like it. The first process is to consolidate those banks.

On the private sector side, since you said specifically last time around that you like banks that are in trouble, what about a story like Yes Bank in light of all the developments that have happened and in light of the changes that we are likely to see?

A lot of people ask me. I said I know nothing. So I would not like to comment. I just do not want to hit a sixer without knowing anything.

Shikha Sharma signing off on a strong note at Axis Bank.

But I know the successor, he is a very capable person. Axis Bank is lucky to have Amitabh Chaudhry, he is an extremely capable person. I know him personally.

Since you said that most of your money, as well as a lot of your time, currently is being spent on Star Health, let me ask you about how that is going?

Fine. We have applied for permission to IRDA. We have got the Competition Commission permission and FIPB and there is some dispute between the promoters which we are trying to reconcile. So it should happen in a month or two.

So the larger insurance space?

I think insurance is a space which is good but you will have to look at the valuation. Like whenever I go to a restaurant, I look at the food, it is tasty, but I also look at the right-hand side.

So the froth is there as far as the insurance space is concerned?

I will not say that. Insurance as a sector can do very well and you got to study the individual scrips. I will not go and say that do not buy this and I will not say that buy this unless and until I have a proper study.

 Let me ask you this, Diwali is here, we are at the end of 2018, what is it in your playbook as we start in 2019, as we start a fresh calendar year that you would sort of – what would be the priority that you would look at that could decide which way you are headed?

Should I truly tell you what my priority is? God give me the power to not earn money. I do not want to earn money. He has given me enough and if I just maintain it, it will be fine. So I said god let me not get up every day in the morning at 7:00 and first look at Bloomberg and then kiss my son.

I can live with my dividend income. Give me time so that I use this money for good purpose, for my health, for good holidays, for time with my children and forgiving and take away from me this spirit of wanting to earn money every day because it has no use for me.

So how has it changed your trading strategy?

I have some positions even now which I will square up in maybe in next month, two or three months. I want to take a sabbatical for one year.

You want to take a sabbatical for a year, Rakesh Jhunjhunwala is going to take a sabbatical from the market for a year?

Why not?

I am asking a question?

My investments will also be there, I will reshuffle my investments. Suppose I earn 10 percent extra or I lose 10 percent I am going to leave in the same house, travel in the same car, eat the same food, drink the same whisky, I don’t smoke now.

This turn is a philosophical turn nothing to do with the way the markets have behaved?

It is more of a personal turn that from 1985 when I came into the market, I have fought to earn wealth in a legitimate manner. So 33 years, God has given me enough far more than I need, like all of us so I must respect as a human that I must develop other priorities in my life. I want to take away from me this quest, this passion to earn wealth.

Because I question what it has given me, it is not the sources of happiness it is only means to an end, I have far more than I need, so let me devote time to my health most importantly and to holidays, to spend time with my children, to giving myself and actually using my hands to help others. This is a feeling I get and still every day in the morning I look at the...

Get the itch and the urge?

It is the passion, for me the world without markets is like the world full of gloom. A lot of people ask me how are you. I say as long as there are markets, liquor and women I am always fine. So the market is on top of it.

Let me end then by asking you what is the world from the market's perspective going to look like as we approach next Diwali? You have got some sense of where things are today?

There is a lot of uncertainty, but if the elections pass in a manner which is palatable to the market.

Which means the BJP returns?

Whatever is palatable right, maybe not by majority, with collation and there is no major friction on the trade front I think markets will higher.

What you intend doing on your sabbatical?

Well first let me start with.

Are you sure about starting it though?

I am going to do it. I will do investments.

You will do strategic investments?

Investing, I can see still do, for investing I don’t have to look at Bloomberg every day in the morning.

Source: CNBC-TV18
First Published on Nov 6, 2018 11:02 am
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