'Samvat 2072 to be better; expect tsunami of local money'

On sectoral picks, Jhunjhunwala cautions investors against the banking sector due to its alarmingly high levels of bad loans. The only exceptions to this avoid list, he adds, are Kotak Mahindra Bank and HDFC Bank.

Below is the transcript of Rakesh Jhunjhunwala’s interview with CNBC-TV18's Udayan Mukherjee.Q: It has been an average year. Last Diwali to this Diwali any my last conversation with you was ended on a note where you said that you were feeling cautious and confused. Would that describe your state of mind even today or is there more clarity in your mind now?A: There is more clarity. Markets have corrected, time has passed, expectations have moderated and the flow of local money is progressing very well. Slowly but surely the economy is on an uptick. So, with expectations bellied and commitments reduced, with domestic money coming, economy on upswing we are at a bottom.Q: That is a big statement. You think we have a bottom somewhere in the zone of 7600 to 7800 Nifty. It would surprise you if the market broke those levels and went lower?A: The big uncertainty only is this banking problem. So, the matter of this bad debts in public sector banks and private sector banks is going to come to a head in the next six to nine months. I don't see any other area where the markets will catch us by surprise. Because suppose you had expectation, Make in India, Defence, BHEL - to name a company, now you know the stocks have corrected and with time to come those expectations will actually turn out to be real. Market got too excited initially, it was not without reason. So, I feel the initial euphoria or the honeymoon that the market had is over, reality has set in and at the same time the government is working slowly but surely and we are going to see results of all the efforts they are making.Q: Last Diwali when we spoke the mood was so buoyant and everybody was talking about swift policy action, PE multiple expansion because of policy action finally. You are saying that reality has caught up, you think between last Diwali and this Diwali that process which inevitably happens after expectations going up so high that is finally in place, those blinkers are off and those expectations that might have got priced in then they have got levelled out?A: I think they have got levelled out substantially. At the same time it is not that the government is not doing something. They are trying on all fronts. Just now Uday Kotak said India evolves, there is always going to be evolution never revolution. So, slowly but surely things are changing. Lot of the initiatives are going to have lot of effect. We must also remember that we have kept to our fiscal and monetary promises. We have not become fiscally imprudent. I think this Make in India in the defence sector is going to have a tremendous effect in India. You will have Rs 80000-100000 crore worth of goods, let us give it 12-24 months being manufactured in India. I feel in 15 years India will be a very big arm exporter. So, there are various initiatives, government is trying to introduce GST, the way they have done about subsidies, the way they are doing modern laws of bankruptcy, lot of things which they are doing are going to have an effect. They are trying to clean up the banking sector, they are looking for solutions there. They have made environmental clearances much easier. Lot of real estate policy what used to be taken as bribes are now being allowed by law and the state is taking charges. There are numerous things which they are trying. This UDAY project I think is a very good thing. If the transmission losses can be brought down I don't think there will be power cut in India.Q: To come back to this banking problem, I was speaking to Vallabh Bhansali just a few days back and he constantly spoke of that problem as being a real Achilles Heel and you started off this discussion by alluding to that as well. Do you think things can actually get much worse there over the next 6-9 months before they get better? Because that seems to dampen sentiment significantly in the stock market and also has a huge impact on the kind of money which can get funnelled into sectors like infrastructure.A: All countries have had problems with banking sector. The question is it was being hidden. In the next 3-9 months it will come out in the open and once it comes out a solution will be found. It is not that assets are not there, only the banks were trying to prolong the inevitable. You had systems where promoters were managing, collaborating with banks, extending the time, now that is not possible, it is going to come to a head.Q: But do you think it is a problem, as a lot of people think it is a public sector banking problem or does the Axis Bank experience tell you that there could be some skeletons coming out of even the private banking closet?A: Except Kotak and HDFC, it is a problem with every bank, but in varying degrees. Some banks have more of it, some have less of it.Q: And do you think in the next 6-9 months you might also get an opportunity to buy some of these banks which you may have wanted to buy and you thought at some point you might have missed out on. Could you get that opportunity once again?A: Yes, you couldQ: You started by saying that we could be at a bottom right now. However in my last conversation with you, you were quite clear that we are not going to 9100 Nifty anytime soon. Do you still stick to that, that the next few months we may not make a new high or do you think we may be surprised on that front over the next 2-3 months?A: I would think 9100 is a high which will take some effort to be broken. I think breaking that is still substantially away.Q: What is substantially - 6-9 months?A: 6-12 months. Improvement in local business conditions, faster growth, improvement in banking sector, faster environmental clearances, more infrastructure work. Someone told me that Telangana is now giving Rs 30,000 crore amount of waters to be executed in three years for drinking water. So, with general improvement in sentiment, further deduction in interest rates I think the local money is going to turn into a tsunami. The kind of local money which is going to come is going to surprise us. It is my personal feeling and instinct that local money coming to the markets will be higher than FII money.Q: Last Diwali to this Diwali FII net investment is practically zero and domestic money is Rs 50,000 crore, you see that trend being more pronounced next year or are you hopeful that foreign money will also start coming in over the next 12 months?A: I think CLSA has predicted in a report and even Morgan Stanley and I agree with them this will turn to USD 20 billion.Q: Equities?A: Yes equities, why not? You have USD 300-350 billion of financial savings.Q: What is happening with other asset classes? The story of last year is quite clear, money has come out of gold, money seems to have come out of real estate and money has gone into practically two asset classes which is fixed income and equity, that is what the figures are suggesting, you see that trend accelerating?A: Accelerating and accelerating faster with each year.Q: What about FII money, do you see that coming into play next year or do you remain cautious on that front?A: I think money will come. I don't see the commodities recovering anytime, I don't see China growing above 6-7 percent. I think we are in a sweet spot. If we can streamline our procedures the kind of money which can come is unbelievable.Q: Last time we spoke you seemed quite cautious and circumspect about the global situation. You said I am very confused about what the US is going to do, what is going on in China. Therefore I am not going to invest in a very aggressive manner just yet. Since then have you had more clarity on the global situation?A: Clarity on the global situation are US interest rates are going to go up.     The day they go up we should short the dollar, it is the most anticipated event and when it goes up even Mrs Yellen is going to say the next increase is going to be very measured. I don't think commodity prices are going to recover any time soon and growth is going to be slow in Europe and Japan. But I was thinking some time that there could be a big bear market worldwide. That doesn't seem apparent at the moment, we should be alert and India could escape that bear market also.Q: So, you don't subscribe to the views of some global commentators like Mark Faber and Mohamed El Erian of PIMCO who are suggesting that the US is probably flirting with bubble kind of territory which will get pricked in 2016. Do you fear that or do you think it is a low probability outcome?A: The bubble territory is all in the - not that I am much knowledgeable of the American market but generally they had 4-5 percent yield. The bubble is in the internet stocks. The Facebooks and the Baidus. The profit of Apple is 12 or 13 times earnings. It can't be a bubble.Q: Let me talk about domestic recoveries because that is the point that you have made earlier. What is telling you that a consumption recovery is underway because this quarter we saw the numbers of the Fast Moving Consumer Goods (FMCG) companies were not mostly that great. We saw companies like Bata, Jubilant Foodworks delivering very pedestrian numbers. The stock that you own yourself Titan disappointed this quarter. Does it worry you that consumption trends are still looking quite weak?A: But I am told the consumption trends in Diwali are good from whatever I could find out from some retailers. Titan was because the golden harvest scheme, many because of that. But I am told Diwali is good. There is going to be an uptick. Right now how far is the uptick, nobody knows. I say the economy is on an uptick, the magnitude of that uptick is debatable but it is improving, there is no question about it.Q: Do you think that is a 2016 event or do you think that is a 2017 event - the resurgence that you are talking about in the investment cycle?A: Difficult to say but a lot of investment is now coming in roads. In railways we are ready, lot of defence orders are going to be released over the next 6-9 months. Lot of railway orders are being released. Roads a lot of investment is being made. I told you about this Telangana example. So, infrastructure the orders will come in and don't foregut this is after two continuous bad monsoons.Q: What signals are you picking up from the auto space? Because a lot of analysts watch that very closely for signs of some kind of a recovery happening on the ground. You own a couple of auto stocks but the two wheeler market is soft. The commercial market probably is improving. So, what signs are you picking up?A: Car market is good. I am told November is good for the Medium And Heavy Commercial Vehicles (MHCV) market. It has recover. From about 350,000 trucks came to 200,000 trucks. As mining opens up, as more infrastructure investments come in, as more roads are built, I for one can't believe the demand for all this in India will not rebound.Q: You think the commercial vehicle cycle has turned because Ashok Leyland has been one of the outperformers of last year. Tata Motors is mixed because commercial vehicles (CV) are improving but they had had some issues with JLR. But do you think this space has turned the corner?A: Undoubtedly.Q: The hottest space over the last 12 months has been pharmaceuticals. It is a very stock specific game. But off late the news from that sector has not been great. Even blue chips like Sun Pharma, Dr. Reddy's , the news flow is not that great. Lupin disappointed with its quarterly numbers too. So, what are your thoughts about approaching that space which has made so much money over the last one year for investors?A: Surely there was some overvaluation but over the long term the Indian pharma sector is going to be an outperformer by leaps and bounds because we have just tipped the surface, our companies are getting sized, there are lot of entry barriers. India will discover a lot of drugs given time. I am extremely bullish on the sector.Q: But do valuations worry you. 25-35 price to earnings (P/E) multiples?A: Lupin went up from Rs 500 to Rs 2,100. It is correcting, it is taking time, it is taking a breath. I am now so wise enough to know that Lupin now the correction is over. So, I should sell it at Rs 2,000. Then the correction is over, then I should re-buy it. Over a period of time it will give me good returns.Q: I am not talking about the stock price performance. I am talking about the earnings performance which has shown a couple of wrinkles for two quarters running right now. Do you get concerned by that?A: I am not concerned. Lupin went from 25 to 55 in two years. It is taking a breath. Now the analysts' predictions for the next year are 75 to 90. But I agree pharma there has been lumpy performance. We have to see whose performance can be consistent but over a period of time India is going to be very big exporter - both of pharma and software because the value added is extremely high.Q: Aviation, I read that you picked up a stake in Jet Airways. That is a publically disclosed information but what makes you bullish about aviation as a space because that has not made money for investors for the last many years. Other than the price of oil what could be the driver?A: Let me first make disclosure that I am interested in every stock that I talk about. I may buy it any time, I may sell it any time, I may contradict what I am saying. So, please be warned. What makes me very excited about aviation is and about Indigo in particular that 85-88 percent capacity utilisation, Air India's market share is shrinking every year. There are not many planes on order. Indigo is the lowest cost airline. Can you imagine he invested Rs 300 crore, he has taken away Rs 3,500 crore as dividend? The Return on Capital (RoC) is 300 percent. And if you just make his first quarter's earnings into four he will earn about just 640 multiplied by 4 is Rs 2,600 crore which is about Rs 80 per share. Rs 80 per share what price is it coming. At 765 it is coming at 10 times earnings and I am very bearish on oil prices. I don't see them going anywhere in 3-5 years. So, it is a leader, the industry - one large player is shrinking, others don't have money, he has got the largest planes on order, he is the lowest cost operator. It is a no brainer.Q: But you not only applied for the IPO, you also bought Jet Airways. What is the argument for that? Are you creating an aviation basket or would you say it was a valuation call?A: If I am bullish on a sector, I may buy not one, but buy two companies but my  substantial investment is going to be Indigo.Q: We spoke a little bit a little bit about the policy landscape. You have seen the Bihar election result, it has disappointed the market, maybe some saw it coming. Do you think it will make any change to the kind of ability that the government has to push through policy action, given that the way the opposition behaved over the last few months in parliament do you think they will make it even more difficult to push through action over the next few parliament sessions? Could that be a stumbling block?A: Part of the opposition reason was because they were in opposition, partly because the way they were treated by the ruling party. Even if you see it half glass full and half glass empty, it may make the ruling party more considerate towards opposition. And I personally think that Goods and Services Tax (GST) bill there is so much public opinion in favour of it that the opposition will find it difficult to oppose it. A lot of the states want it because it benefits them. So we do not know surely. The defeat in Bihar may push back whatever legislative permissions that are needed, but Mr Modi is going to do exactly what he was planning to do, the Bihar elections results are not going to change him. So it is not that the reform process or the spirit of the government towards the reform is going to change.Q: But having said all of this, you are still saying it may be a good six to nine months before we take out 9,100 points Nifty. If you are optimistic, why are you saying that? Are you saying that the recovery will take a couple of more quarters or three more quarters and the market may not be able to climb back to that peak till that recovery is very visible or are there any other reasons which is making you slightly less optimistic with these forecasts?A: The commodity stocks have battered, finance is 30 percent of the Nifty, pharma has not fared well this year, we have a much better year next year. And with next year's earnings growth, we have disappointed earnings both March 2015 and March 2016. March 2017 results will be much better. I do not see the market going down, but I see it consolidating around these levels with upward bias.