Samvat 2074: Jhunjhunwala says mkt staring at 'very long' bull run; bets on complex generics in pharma

However, he also cautioned a rebound in the space could also depend on individual companies as very few firms have the capital and capability to invest in generics.

Below is the verbatim transcript of the interview.

Q: I remember last Diwali, when I was talking to you, you had sounded a little disappointed with the performance of your portfolio. One or two stocks had not done very well and you said it was a challenge for you to bounce back this year. So how have the last 12 months been since last Diwali? Are you happier this time than you were at the same time last year?

A: As far as my portfolio is concerned, all I can say it is a Happy Diwali. It is financially Happy Diwali for me, the year has been good. I would not like to comment beyond that in spite of the fact that Lupin and CRISIL have not done well.

Q: Lupin has been a bit of a sore thing for the last couple of years but it has been almost two or three years that the pharmaceutical sector has been out of favour for the market. Do you get a sense that now with so much pessimism around the sector we might be at the darkest hour and maybe the sector is slowly forming a bottom out here?

A: I think the sector is near the bottom or would have already made a bottom but the rebound will depend scrip wise. Everything that could go wrong for pharma industry went at the same time. The US market got very competitive, the rupee got depreciated and they had very bad sales domestically because of first quarter with goods and services tax (GST). So I would say the worst is behind us. The rebound will depend a lot on the individual companies.

Q: What is telling you that the worst maybe behind? Is it the price performance of the stocks which is showing you some sense of a bottom or any of these factors that you alluded to just now? Do you think they have started reversing?

A: I think the US market pricing has made a bottom. I have never seen such fright and such recognition that the US market is not going to be good. I mean Amazon is going to sell medicines. People are so bearish. I think it is very positive because Indian pharma will have one more buyer instead of there have been three buyers, in generics there will be one more buyer. The more the buyers, the better it is. So just because Amazon is going to do something doesn't mean prices are going to crash. Second, at these rates a lot of companies will dropout for investment into generics and the real money should be made in complex generics now for which very few companies have the money and the capability.

So I personally think that pricing in the US has peaked. I think the rupee has topped. Rupee is around 65/USD now, it had gone to 63.75/USD. I think rupee will go to 66-67/USD. The local market was just a temporary disruption. It had to come back. I think it has in Q2. Therefore, I think the causes have reversed. There is a fair amount of pessimism and there is too much pessimism about the US generic market and about pricing there.

Q: But how do you go about choosing stocks in this sector because it appears to be that even if pharmaceutical bottoms out as a sector, it will still probably be a stock specific kind of a play, not an IT sector kind of a vanilla play. I know you have got holdings. Lupin is your biggest holding but you also have exposure to names like Aurobindo Pharma and Jubilant Life Sciences. How do you go about cherry picking in a sector where the dynamics can be much despaired between companies?

A: People who have very large business in India are going to do well regardless of what happens in America. In America, those who can go to complex generics, they have got a good pipeline, the research costs are not very high, they will do very well. Longer term, India is like fast moving consumer goods (FMCG) market for medicines. It is going to grow at 15 percent every year. And I think the rupee has also topped. Now individual companies, I would not like to discuss them. You have to have your own way of choosing them.

Let me make a disclosure, I own all the three shares that you have just said and I am interested in everything that I say here.

Q: The other theme that you are very bullish on obviously from a look at your portfolio is the whole financialisation of savings theme. You own names like Edelweiss Financial Services, Geojit Financial Services. These stocks have done remarkably well in the last one year, but do you think they are good for much more? This whole theme, do you think it will expand even more exponentially from here?

A: I do not know whether the price will expand or not, but the business will expand and that I know. I would not like to comment on individual stocks. The story of the financial savings getting huger and huger or large part of the savings in the household sector being invested in equity has just started. So from that point of view, but I agree with you that valuations are not easy. So, some of it has been priced in also.

Q: What is the best way to play this according to you? Is it through brokerages, is it through insurance companies, is it through private banks that have got a leg in many of these pieces. What is the best way to approach a theme which is fleshing out so nicely?

A: Take your choice. I have not done any research. I would like to speak more about the general market than about financial sectors and specific investments and all that.

Q: The reason I ask you this is because a significant part of how well the market has done is dependent on this kind of money which is coming in from domestic investors. Do you see that as a secular theme and being such a continued source of support for our market going forward?

A: I have been shouting that Indian money into the markets is going to come, it is going to be a flood, it is going to be a tsunami. It has not even reached a flood because to my common sense in a growing economy like India with reasonably good corporate governance practices, tax free, I think India will grow nominal gross domestic product (GDP) at 12 percent. I see no way that Indian equity will not give you a return of 15 percent. Now you tell me one investment that I can sit in my office, have a liquid investment, borrow at very fine rates and get a 15 percent return. I do not see many investment opportunities like that. So by my sheer common sense, I feel that this money is going to continue and I think this is not even a flood, it is going to be a flood and it is going to be a tsunami.

In America, investment in mutual funds in equity, mutual funds went up from USD 162 billion in 1984-1985 to USD 1.3 trillion in 1994-1994. So once this starts and people gain there can always be a flood and you are living in a country with at least USD 400 billion of household savings. Indian equity wealth, household wealth in equity in India is 4 percent. In China it is 9 percent. In America it is 29 percent. So I have been shouting for the last 25 years, last 10-15 years but this is now finally happening. And I think this money, just a little has come, is going to be a flood, it is going to be a tsunami. So I see no way that Indians will not invest on a continuous basis in mutual funds.

Also, a lot of the investment by Indians in mutual funds and equity has been delayed because of the two scams that we had. I do not see any sign or smell of a scam now.

Q: How does this sit with the way global investors are viewing the Indian market right now because Indian investors seem to have just about getting  into the habit of putting money through systematic investment plans (SIP) into mutual funds, but if we speak to global investors, they seem less optimistic. They are worried about valuations in India and periodically they are withdrawing money from the Indian equity markets. How do you resolve these two and how do you see trends in global investment flows now?

A: I personally feel the selling by the foreigners will reverse. It is going to depend a lot on US interest rates and interest rates worldwide and there is a divided opinion in the Fed that whether they should wait for inflation to come to 2 percent or they should increase the rates even if inflation does not come to 2 percent. My personal judgement says the Fed will raise but in a very measured manner. So once that is clear, the interest rates in US will not go up and India has never had such a stable macro with the currency, with inflation, with the fiscal deficit. So I think it is not very far away that the foreign money will stop. In stock market there is a rule that if there is a seller, whoever he may be and the market keeps gaining, that seller does withdraw and has to withdraw. And if the market keeps losing and there is a buyer who keeps buying, he will have to withdraw. So in phase of the continuous rise of the market, and US interest rates, I personally have the opinion that the selling has already moderated and I think it will reverse in a month or two.

Q: You were talking about global interest rates. Do you have a view on Indian interest rates because that has also been the hotly debated subject on whether more cuts are warranted because of slowing growth and some people believe that because of the way crude is behaving, maybe we will not get too much support or additional support from interest rate cuts going forward. Where do you stand on that debate?

A: It is difficult to judge. If inflation is lower than the 4.5 percent which RBI has predicted for the second half, then there could be a chance. Otherwise I do not think Indian interest rates will go down. But the whole reduction in interest rates is still not passed on. I used to borrow 12 percent, now I get money at 8 percent. So there has already been a substantial reduction and over a period of time, I think interest rates will come down. Maybe not in the immediate next six months.

Q: When do you see earning pick up? That has been the sore point, maybe for different reasons. There have been disruptions like demonetisation, now GST transition, but we have not got the kind of earnings pick up that we speak about every Diwali and it keeps getting postponed. When do you think we actually start to see the kind of earnings pick up which will justify valuations?

A: We just did some research. Hear me carefully. For the last four quarters, if we exclude six Nifty stocks which is State Bank of India, ICICI Bank, Axis Bank, Coal India, Tata Motors and Bharti, you know what has been the growth in earnings, quarter on quarter? 23.7 percent is the growth on Nifty's earnings if you exclude the earnings of these six stocks. Market cap will be about 5 percent of the Nifty or maybe 7 percent of the Nifty.

So who says there has not been earnings growth? And this earnings growth has come in face of demonetisation and GST. So I do not agree that there has not been earnings growth. Selectively market and in pharmaceuticals there has been degrowth and software has been maintained. Sometimes the foreign institutional investors (FII) get negative also because 60-70 percent of the investment was in pharmaceuticals and in software and that is not gained.

And also remember one thing. Market does not only price in the present and the past. Every economic agency, every economist is predicting that growth will go up in the second quarter and the next half. And if you look, people are also extrapolating. Now Morgan Stanley has come out with a report, India will be a USD 6 trillion economy by 2027 driven by privatisation, digitisation, reforms and demographics. So people are looking at 10 years, 15 years also in investment.

And look at it if India's GDP is expected to be USD 6 trillion in 2027 and USD 4,200 per capita income. If you have that kind of per capita income, what power it will unleash in consumer spending, in housing, in entertainment, in all consumption items. So I do not think surely market is scrip wise expensive and there is lot of, some golmaal going on in some midcaps. And in the worst market is a new issue market. I think there is a biggest from there. But you cannot term that market is expensive and who are we to judge that market is expensive, it is 16 P/E or 20 P/E high. Who has said which P/E is high?

And if you look at the screen, I have some experience, I look at the screen every day. If you are bearish go to your hometown. So I do not see any, the screen tells us market is not willing to go down. There is commitment but I do not think there is humungous commitment. There is a lot of commitment to come. The bad news came, growth will go down and this thing will happen with government. Nothing happened to the market. So I do not agree with these foreigners. They will come, their grandfathers will come, do not worry. It will take some time. And I do not agree with all this valuations nonsense.

See from 7,800 a rise to 10,200 I will not predict any floor, but I feel the money will supply into equity is going to increase, the foreign selling is going to moderate. The earnings are going to be very good and the screen says it refuses to go down. Nine out of 10 people I meet are bearish. So everybody is bearish, most people are. For a rise from 7,800 to 10,200 I see no turbulence at all. No one says sell your wife's bangles and buy shares. I do not find anybody very anxious to buy shares, so I think we are just at the start of what is going to be a very long bull market. This is my opinion, I can be wrong. And all psychological and behavioural matters by which I judge markets also are in favour of the market.

Q: You used an interesting phrase just now. You said there may be some golmaal in midcaps. Were you referring to valuations or do you see any unusual activity out there?

A: No I am referring to valuations and unusual activity keeps on happening. It is a market, what have we got to do with that? Stay out. I am referring to valuations primarily and mainly in the new issues.

Q: What are your thoughts on the primary market because that has been another revelation over the last 12 months. Of course Avenue Supermart s has been the star from the primary market owned by your friend, but what are your thoughts on the kind of pricing these IPOs are coming with and how they are getting listed.

A: They put a skull and two bones, stay away. For me it is stay away. I am a long term investor and I do not want to make short-term gains in the new issues. I do not want to trade the new issues and I do not find any of them worth investing at the valuations at which they come.

Q: Just to go back to earnings for a second. You spoke about earnings growth in the non-six Nifty stocks that you mentioned, but a significant part of the contribution has also come from global commodity companies like metals. If you are talking about solid global platform, do you see a lot of upswing still left in commodity earnings going forward? Do you think the commodity cycle can extend much longer?

A: If China keeps cutting capacity and the fact is that world growth is expected to be much better this year and more better next year, consumption of commodities can go up. So there you cannot have these kind of price increases without some shortage being there. I am bullish on the metal stocks and on steel stocks. And what is also in the favour of the buyer is that I do not see – Vedanta has gone from Rs 80 to Rs 320. Tata Steel has gone from Rs 260 to Rs 700. I do not see any fellow saying buy Tata Steel, sell everything and buy Tata Steel. That public participation which leads to a climax is just not there.

And a disclosure I am an interested party in all the metal stocks.

Q: Only steel stocks or across the board because all kinds of stocks have done well. Zinc stocks have done well, aluminium stocks have done well and of course steel has done well too.

A: All metal stocks; ferrous, non-ferrous all of them.

Q: I want your thoughts on some of these non-performing assets (NPAs) which are getting resolved because I read with interest a few months back that you have picked up a stake, I don't know whether you still own it in JP Associates but my question is not about JP Associates, it's about some of these assets which banks are grappling with right now. How do you think this saga will end for the banking sector and if you see any opportunities in some of these assets which banks are trying to resolve?

A: One thing is that once the issue resolves -- suppose Essar Steel today needs an investment of Rs 5,000 crore. It can increase its capacity by 3 trillion tonne. Where is the money? So I think these NPAs will be resolved, the assets which have been unproductively used or not fully utilised because of cash constraints, will be constraints. There will be fresh investment in those assets.

I also want to point out one thing to you; we are at 7 percent growth this year at 27-28 percent investment to GDP. China is at 45 percent. We have been, at times at 35 percent. I am sure that this investment to GDP is going to go up from 27-28 percent to 35-36 percent - that itself is a stickler for 150-200 bps growth in GDP. The predictions from 1.5 percent to 8 percent GDP growth because of GST. I stick at 1.5; 150 bps and that can cause another 50 bps rise in GDP. I think resolution of NPAs and the productive use of those assets can contribute to GDP. So I do not see why and how - we have borne so much pain because of GST, demonetisation. I think once the National Company Law Tribunal's (NCLT) bankruptcy law is properly implemented, credit cost and interest cost in India will go down because slippages in the banking and other sectors of NPAs will be much lower in future.

Morgan Stanley says we will grow 10 percent in dollar terms. I totally agree with. I do not know why people are so bearish and say market is high, money is going to correct. I do not agree with them.

Q: Are you expecting another year like the one that has gone by? Last Diwali it seemed improbable that we will have 20-25 percent kind of a rally in the market. Are you expecting another cracker of a year like that or some digestion of the gains made over the last 12 months?

A: It could be either. We have risen from 7,800 to 9,900-10,000. A year or two could go by --- and I am talking from the Budget of 2016; the market could have a breather. There is nothing wrong in it but the reasons for the bull market are very much alive and the fundamentals of that bullishness will improve every passing day.  So it could be a year where it could be very good earnings growth. Market may not go up but I think it is unlikely. It's a market; we have to take it by the day.