The market taking a pause is not a reason to worry, says big bull Rakesh Jhunjhunwala. "There is no doubt that the economy is seeing a cyclical upturn, India is structurally a good story, the government is doing a good job and interest rate is on a downward trend,” he says. According to him, the government is setting the base for good growth.On a cautious note, he says Indian equities may be head for testing times. Fourth quarter earnings have been disappointing. According to him, the market at the moment is in a consolidation phase and the Nifty may revisit 7900-8000. He does not see much difference between a good public sector bank and good private sector bank as they end up lending to the same customers.He sees real uptick in earnings from the third quarter of FY16.Jhunjhunwala says the market is expecting a rate cut on June 2. “It will be seen as a sign of weakness if the market doesn’t move up on rate cut,” he told CNBC-TV18.
Below is the transcript of the Rakesh Jhunjhunwala's interview with CNBC-TV18. Q: It has been a patchy performance for the market for the last few months. Do you feel worried that something is not going right? Are you disappointed with the string of disappointing earnings which has plagued us over the last few weeks? Would you say that you are a bit more concerned than you might have been six months back?
A: You have an index which has gone from 5200 to 9200 in may be two years. Someone who has ran a marathon has to pause or he will have a heart attack and die. Whatever expectations, you go from 5200 to 9200 you outperformed the world for two years continuously. A market pausing, at this moment is, the fact that it has not risen beyond that and it is pausing is no cause for worry at all. I would be worried if it just goes on going up. I think the expectations there are unrealistic.
Q: My question is whether you are worried about the reasons?
A: What is it that pulled the market up? There is a cyclical upturn in the Indian economy. There is no doubt about it. India is structurally a very good story. We have a government, which we were optimistic about and I am optimistic today also, which will bring about lot of change, decline in inflation because of decline in commodity prices and a consequent decline in interest rates.
Marc Faber has said that bull markets go up on rising profits, declining interest rates. We are having and we are expective of further decline in interest rates. We are setting the base of the stage for a very good growth and a continuous growth in earnings. Market will pause, has paused and market is going to take time. I don’t think we have to cross 9000 in a hurry and if it takes 3-6 months, I am not bothered. It is going to take time.
Q: Let me turn the question around. Would you say then that in the next three to six months, the base for the next phase of this bull market will be formed whether it is 8000 or 8200 or 7800 or 7500? Do you think in the next three to six months will form a base at a level which will probably not violate for maybe through 2016-2017?
A: No, if I say that India is in the mother of all bull markets and if we believe that that bull market is alive, then the base which we form, that bottom should never be violated. I had said even two- three years ago that when will you have a true bull market and when will the mother of all bull markets be confirmed.
We crossed 6300; we came to 9200. Let us suppose that we have made the bottom at 8000, maybe it could go to 7900, maybe 8000 we already made it, we don’t know. It could further go down also.
When it crosses 9200, it is absolutely tested; it is a bull market. I would say, but I don’t know the time period-markets could test us for three months, six months, nine months but market is going to test us. Market may give another chance. It is not so easy to make money in markets.
Q: But what makes you believe and that is my central point, which I started by asking you. What makes you think that we might be in for testing time for another three to six months? Is it because the earning support is not coming through? Is that your central point of concern?
A: There is a section of the market whose valuations are unbelievable. You have midcaps at 25 times, you get analysts reports, midcaps, and okay quality companies 25 times FY17 earnings. There is no scope to go up so. You have some very good quality companies where everybody is piled up in valuations are unbelievable. So, those companies will sure take time and the fact is that earnings have disappointed.
Now, the whole premise that the macro is good - the interest rates have fallen and will fall, earnings will go up, we have had a gain. Now, we need empirical evidence. Market needs to be convinced that actually there will be a big cyclical upturn, there will be a big structural upturn and I believe it will happen. I can’t tell you the time period.
Q: What is your best guess though if I had to pin you down on that? I know this cannot be predicted because it is already taken longer than what most people would have thought. This earnings acceleration that everybody has been hoping for, but if you were to stick your neck out and say by the end of this year, by the end of this fiscal, what is your best guess on when we will start to see the first of this upturn in earnings?
A: Third quarter.
Q: Third quarter of the calendar or the fiscal?
A: Of the fiscal, the real uptick which will give conclusive evidence. I don’t think the first quarter is going to show you anything. Maybe, second quarter; another thing is with respect to the government.
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Q: What disappointed you most about the earnings picture? Some of your big holdings, as all of us know, companies like Lupin usually do not disappoint with earnings. Were you disappointed this time that such companies were also showing some kind of slackening of momentum?
A: Lupin went up from Rs 600 to Rs 2,100 in 15 months flat. It earned 24, then earned 41, then earned 55. It has grown more than double in two years; then there is disappointment. In my holding of Lupin for twelve years, there were two-three year periods, therefore six years Lupin never went up even one percent and see ultimately what happened.
So, every rise has to be digested, both in profits and valuations. I am not disappointed by Lupin at all. Look at how it has risen and look at what the prospects are. For one year Lupin does not go up, what is the difference? It is the highest appreciated Nifty stock of the last 12 months. Let us be a little bit rationale. Let us look at the expectations in relation to reality. If Lupin went from Rs 600 to Rs 2,100 in 18 months, I should expect the next 18 months to be around Rs 4,200.
Q: That never happens. I take your point. Let me come back to the point about high valuations that you spoke about. If I remember correctly, a few months back, you said the same about private banks. These are banks which everybody owns nowadays. You look at any portfolio there is Yes Bank, there is IndusInd Bank, and there is Axis Bank. They are notably absent from your portfolio last I checked. Is valuation a point of concern in private banks for you still?
A: What happens is; I wanted to buy a house, I didn’t buy the right house. Now, I can’t get out of the other house and buy the other one. So I misjudged; I missed it. Just because I have a large portfolio doesn’t mean I haven’t made any mistakes.
I have made many more mistakes and as time passes by and I mature, I realise how many more mistakes I have made than the right ones. I always looked at EPS. I never look at book value, I never looked at return on assets or I never looked at quality of management.
But I feel one thing about private banks that except one or two banks, I don’t see much difference between say a very good public sector bank and a very good private sector banks because I find they lend to the same people. So, I don’t know and for these kinds of valuations, you have got to really have faith to keep buying at these valuations and I missed the bus, let me tell you. Maybe the grapes are sour for me.
Q: If you were to get another opportunity, may be the market corrects more, say we go down to the levels that you just spoke about 7500-7800 and you find some of these private banks 10-15 percent cheaper from where they are today, would you consider buying it or do you think even at those price levels they won't be attractive?
A: First of all I never said 7500 or 7800. I said 8000, 7900. I said markets are in a consolidation phase. What I will do at what level I don’t know. I don’t plan what I will do. If those valuations come, we will have a look at it and we will see what we will do.
I am debt free. I have no debt for the first time in my life. When I entered the stock market in 1985, I had Rs 5000. I built my life on debt. Today, I have no effective debt against equity. I am not going to invest easily because I don’t want to have debt and there may be a lot of personal reasons involved in it.
Of course I don’t rule it out. Tomorrow, if I see an opportunity, I will take any amount of debt and buy.
Q: You made an interesting point about top quality public sector bank being not terribly different from a high quality private sector bank. Would that translate into saying that if you could find State Bank of India at may be 1.5 times book versus a private sector bank at 3.5 or 4 times book, you are inclined to look at an SBI favourably?
A: I refrain to comment on individual stocks.
Q: So, this point about 8000, 7900, you think this correction or whatever you want to call it, will take the nature of a time-wise consolidation for 3-6 months? You think most of the price damage is done?
A: I think it will. To predict the price damage whether it is done or not I don’t know. There could be further price damage. I can tell you one thing, we know the top. I don’t know the bottom. Bottom could be 5 percent, 7 percent below this. The future markets will also depend on what the markets are. As I would tell you two years ago thump the table and buy randomly. I don’t think this is that kind of market. The risk reward ratios are not so attractive according to me and I deserve the right to be wrong.
Q: You would be surprised then if you saw the market going to 9000-9100 immediately and take out that top?A: I would be surprised. Remember one thing, the stocks which are holding up the Nifty are the financials. They are more than 30 percent of the Nifty. We have a money policy coming up on Tuesday and market expectation is that there will be an interest rate cut. Let’s see what happens and how market reacts whether or not there is an interest rate cut. If markets don’t go up after interest rate cut then surely that will be a sign of weakness. Q: Your gut feeling is that 25 bps is in the price; the market may sell on that news?A: My personal feeling is Mr. Rajan is unpredictable. I don’t know what he will do, but market is expecting a rate cut. At least all the analysts are as they were polled by Bloomberg. Q: Let me get back to the government’s performance because there has been some talk about that over the last few weeks on whether that is a point of disappointment and whether their paced has slowed than what the market might have priced in. You clearly don’t subscribe to that point of view that investors should be disappointed on that front?A: We have made a mistake in assessing ourselves about how India can change and how you can change things in India. Things in India can only be evolutionary; they cannot be revolutionary. You cannot change things in India beyond a point without time. So, maybe market has priced in things ahead of time but change is there; it is solid. You saw Coal India production is up some 11 percent in the first 57 days and the government is taking time. I was talking to a person who is running a defence supplies company, a manufacturer. He was saying Mr. Parrikar is changing the entire procedure of a purchase and doing it boldly, understanding it; where making in India will make a difference. Crisil has said that they are changing their tendering process in all the ministries. It is taking time. So, the change will come just that it will take time. It may not be as severe as we would have earlier expected, but it is going to come and it is going to be good. It will take time; make no mistake and for the first time in this year, the government’s tax collections will exceed what were the estimates of the Budget. Which has changed? It is so difficult to change anything in India. We started GST in 2004. Everybody says we need GST, for 11 years we can’t agree? Again politically you had to refer it to a panel. Look at electricity. It is so disturbing that Mr. Goyal is shouting there is generation. There is no buyer for electricity because more than buy, the more the money they lose and there is no money for them. How do you change that? In Gujarat, they have done it. How do you do you do it in other states? You think of it, so things in India can be evolutionary, they cannot be revolutionary. I have another point of view also. India went through an economic liberalisation from 1991. The day the managing director of a steel company came to know that his duty has been reduced from 150 percent to 100 percent, he had sleepless nights, right? But it came to five percent. Twelve years later that steel company became the lowest cost producer of steel in the world and Indian industry. India’s economy faced it and came out with flying colours. From economic liberalization, we are going to a governance liberalisation. We thought this country including Rakesh Jhunjhunwala, everything works. People will get a plan passed, floor space index (FSI) is two, they will make it five, they will do something, but now The Right to Information Act (RTI) has come. So, you bribe also and your building also doesn’t come up. We have to realize that the law in this country is changing. We cannot do what we want. You got the coal blocks; some went to jail and everybody’s coal block got cancelled. People made investment on that basis, but what is the result? This government’s revolution is taking place. It is going to change India and everybody has contributed. The RTI has contributed a lot and the stopping of the corruption at the top is also going to contribute in a major way but the period of transition is so difficult. My father was a government officer. He used to tell me that corruption in this country got institutionalized after 1970. I don't think we can remove corruption completely, but to reduce it substantially you have to change systems. The reduction in corruption has to start from the top where it has started. I am very optimistic, but it is going to take time. I think this matter of governance revolution is very important. You could create an HDFC; it is 12 percent of the Nifty HDFC and HDFC Bank. You could create an institution with integrity which is more than 10 percent of the Nifty today. Think of it. My friend Damani has created D-Mart. I think he is going to be India's most successful retailer. He has done it with utmost integrity. So, I am not talking of morals or principles. I am talking of realities that governance is going to prevail in this country and you have to do things keeping the law in mind. We are going through that revolution. People will realise what is happening; we are in the process of transition. The transitionary period is very difficult and government is also overreacting at times and over regulating, but government will also correct itself.Q: Let me ask you a little bit about the nature of participation because that is something you have often commented on in the past. The way domestic participation has picked up steadily over the last few months and the little wrinkle that has cropped up with foreign participation over the last couple of months. How have you read that?A: The domestic participation will continue and enhance. Now the government is very much insistent that some part of the provident fund money be put in equity. That is going to be very big long term money; it is another LIC in the making. We started a bull market in 1982; the US bond 10 year went from 12 percent. Thirty years if you had made that was the best investment of our life. It went from 13-14 percent to 2 percent. Germany is negative; Italy is negative two year.So, how long can this bull market in financial assets last? China is in a new day high every 12 months and if you see profits and sales are expected to dip by five percent. So how on the bases of these interested reductions are you going to continue bull markets? Thirty five years is a long period for any boom. Q: That is scary what you are saying. This has carried on – this lingering fear has been there for sometime in the market, but it has just not disrupted the market enough. I mean you get these temporary scares and they blow over. They are papered over. Are you saying that the time of reckoning is going to come over the next few months?A: Who knows? It could come next few months or it could come after five years, but it is going to come. Economically in the world we are facing a period. Mr Rajan said in his interview nobody understands the ramifications of aging. Now you have never had societies with so much prosperity, with so much life expectancy and in this kind of demographic profile. We have never had such low interest rate with such low inflation. There is no precedent. Technically, in one percent interest rate the PE should be 100 here and why it is not. In Japan, they were or they are still very high, much higher than the DOW. If the world slows, commodity prices will go through the drain and I see no reason why they won’t. That is very advantageous to India. Demographically they are very good. If we get our act together we are going to be the sinecure of the world.Q: So finally what describes your state of mind at this point? Cautious and confused in the near term or longer term very bullish still?A: You have taken words out of my mouth - cautious and confused.Q: But, bullish in the long term?A: We know nothing other than equity.. I can’t become a broadcaster or can’t go and live in Nainital. I have three children and I have to send them to school every day.
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