Repost: We are at the start of a bull market, it is going to make us forget 2003: Rakesh Jhunjhunwala
The original interview with Rakesh Jhunjhunwala appeared on The Economic Times and is available here.
In an exclusive interview with ET Now, Rakesh Jhunjhunwala, Partner, Rare Enterprises, says markets could correct any time it is going to correct more time wise rather than price wise. Edited excerpts
ET Now: I want to start with something which I picked up on my WhatsApp couple of days ago and it says that there is a strong market rumour that a big bull, which is you, has informed his close circle of friends and his associates that markets have topped out and now we may see a significant correction going forward. Have you told your friends anything like this?
Rakesh Jhunjhunwala: My opinion especially in oil, I think $60 for oil is not to be crossed. Onshore oil costs $3 and the fracking capacity is 10%, 15% of oil capacity in America. The whole world has still not even started and in lot of other countries there are not so many as might have been concerns as there are in America. Third thing is with lower prices, OPEC countries are compelled to produce more because of the cost. So I think personally oil prices at $60 is a line which is not going to be crossed, it is a prediction, I reserve the right to be wrong but it is my opinion that to cross it is very, very difficult. Even in other metal areas, I am not very bullish on prices. I think metal prices in general may have topped out.
ET Now: Last time you told me that Indian investors or Indian household saver should look at buying into gold. Would you still endorse that?
Rakesh Jhunjhunwala: No I never. I said I do not buy gold…
ET Now: …you will not buy but…
Rakesh Jhunjhunwala: …but I am bullish on gold because when everywhere in the world… there are two factors. Everywhere in the world economies or central banks are interested in depreciating their currency and interest rates being what they are, some people are going to look for physical assets and there is very limited supply of gold in relation to the availability of liquidity. And even technically I think gold has made some kind of bottom.
ET Now: A month ago, exactly a month ago, the headline was that Brexit has caused the biggest market, single market cap erosion ever. Today, we are not talking about Brexit. Can we safely put Brexit behind the backburner? Do you think when we will look back, it will be more like a footnote in the financial history?
Rakesh Jhunjhunwala: I think Brexit is like three years away because the British Prime Minister said there has to be a negotiation. First, British parliament has to pass it. Then she said the EU cannot do anything. The English have to give a notice to the EU and then for 24 months it has to be remain status quo. She said we will give that notice, provided parliament passes and provided we prepare for the negotiation completely. So I think six months to one year they are still going to decide what they will negotiate. Then, their parliament will pass. I was in London about a month back and two months back, a lot of people are regretting that they had voted for Brexit. So the parliament might not pass it. There is no anti-defection law in Britain. People vote as they want and if the parliament does not pass it, they will go to election. Even if they give a notice after a year, it will take two years. So I personally feel Brexit is going to be turn out to be a non-event.
ET Now: Is that a blessing in disguise for Tata Motors? Markets panicked on the day Brexit was announced but ultimately a company like Tata Motors will benefit disproportionately. Pound has gone down?
Rakesh Jhunjhunwala: I do not know what effect Brexit will have on Tata Motors but I do not anticipate any effect and we will have to see the final law, provisions and Tatas import some large per cent of their components from Europe and they export their cars to Europe. So the Europeans are concerned about selling the components. Then, England imports a lot of Mercedes. So then if they put duty on Jaguar cars, it will put duty on German cars. So it is an uncertain situation.
ET Now: But somewhere secretly I am sure you are pleasantly delighted with the numbers which have come out. Their domestic business is making money. Margins are at 15.5-16% now.
Rakesh Jhunjhunwala: Well again you are forcing me to talk of a stock. I mean I am not giving my opinion but most analysts have raised the price and I cannot believe that a company which is a fortune 500 company with profits amongst the largest in India even today, can be at 6, 7, 8, 9 PE. When the general Nifty PE is 23, by sheer size, by sheer ROEs, by sheer of growth, I find it difficult to believe that its PEs will not expand. I am very much interested. I have a large position in Tata Motors. Please consult your financial advisor before you do anything.
ET Now: Of course, you told us in our last interview that Tata Motors was one of your biggest commitments.
Rakesh Jhunjhunwala: It still is.
ET Now: It is still one of your biggest commitments. You are bearish on oil but I know you have changed your view on the airline sector why is that?
Rakesh Jhunjhunwala: I have not changed my view on the airline sector. I am still an investor in IndiGo. My view is that… any company which can grow its business without raising equity. On Rs 5 crore of equity, they do Rs 500 crore of turnover. IndiGo is never going to need money. They never going to issue equity. They have great cash flows. So I think over time, I am an interested party. I think IndiGo may not be a good trading bet but I think surely it would be a very good investment bet.
ET Now: Do you think the market is underestimating the demand which will now get unleashed because you had not had good monsoon for last two years. There is OROP. There is pay commission rollout which will happen and somehow I get a sense that at least when I look at the macro reports, I talk to some of the my friends in the industry, they are not anticipating the demand which could get unleashed.
Rakesh Jhunjhunwala: Because they have anticipated that early and they have been wrong. Do you think demand will not come? Look at the way the airline sector is doing, 25%. So when demand comes and look at what is happening in paints, what is happening in tiles… So when I came to the market, Bajaj Auto grew less than 20%, we thought oh! less than 20%. Now we think of more than 10%. I am hopeful and I wish and I predict that 20% will come back. It may take some time.
ET Now: A year ago we were criticising the current administration about their pace of reform but extraordinarily measures have taken place in last one year whether it is cleaning up of banks, discom, GST has seen light of the day. When do you think we will start feeling the effect of it?
Rakesh Jhunjhunwala: Well as soon as GST is launched, we will take a year or two years to feel the effect. The effect is going to be phenomenal. Mr Vijay Kelkar who was one of the pioneers, I met him one day he said average India GDP will go up by 2%. I don’t know if this is right or wrong but there is going to be big gains.
About discoms, the most pertinent gains will come when the transmission losses are brought down. We attempted that many times we but have not succeeded. That does not mean we would not purchase this time but that is a key. It took time for the effect to come. I have learnt one thing about India. India has raised its level of growth in every decade since Independence, the path of India and its growth trajectory is always upward, the pace is its own.
The governments can accentuate growth to some extent but because India is too large a country and too large a democracy for making changes. It took us 12 years to pass GST but we did it finally. Think of the telecom industry in 2002-2003; getting a phone used to be so costly. There used to be MTNL agents but once government liberalised the policy, everything changed. So change is slow to come out in India but once it comes, it is a phenomenon.
ET Now: We can see the change now. We will feel the change very soon.
Rakesh Jhunjhunwala:We are anticipating it. One thing I want to tell you. We Indians are frustrated with our rate of growth but we got to realise the direction is sure. It will accentuate with time and just because you are frustrated, let us not recognise or let us not ignore what we have already achieved.
ET Now: Enough and more was debated when Dr Rajan decided to move on but that made the market nervous for half an hour-15 minutes and then markets have not reacted to that.
Rakesh Jhunjhunwala:India is greater than personalities that was a point I want making. Having said that, I think we always have to acknowledge the contribution Dr Rajan has made to this country. I think the NPA problem would not have come down for how many years I do not know if he was not there. I personally agree with his stand on monetary policy because just reduction in interest rates is not going to lead to anything unless it is transmitted. So his contribution is going to remain, his legacy is going to remain and we must thank him for the good work he has done.
ET Now: And Dr Patel is a natural successor for…
Rakesh Jhunjhunwala: People were criticising the government as if they had some axe to grind with Dr Rajan but the government has appointed a person who has exactly the same views as Dr Rajan.
ET Now: One big change which is happening at the liquidity front is that we are no longer a one-trick pony which is we are no longer dependent only on foreign flows. Domestic flows have come back. You have told me this point two years ago and I have got that quote with me that the contribution of FII flows to Indian equities will be far less than the contribution which will come from domestic savers and you could see a Tsunami of domestic saving money into equities, we are reading there?
Rakesh Jhunjhunwala: In which cocktail party do you see the stocks being discussed? I am not been well so I have not gone to any cocktail party lately but I do not get phones what to buy. I do not get people talking about markets so the Tsunami is still ahead of us.
ET Now: There are two-three sectors where I would like to draw your attention and one is oil marketing companies. This is one big reform which already has happened but if I look at the PE multiples and the kind of value or the intrinsic value HPCL, BPCL and IOC currently are sitting on, I do not think markets are giving them much notice?
Rakesh Jhunjhunwala: I did not buy them and I regret it. I do not know at this price but they are available at far lower prices. I did not buy them, I sold them around Rs 304 and so I would not like to comment.
ET Now: You made a point that India has very low per capita agri yields and that has to change and now monsoons have come into play. Companies are also doing their bit. Are you still bullish on that thesis that the agriculture output will pick up and enablers will benefit?
Rakesh Jhunjhunwala: It has gone up and last year was an eye opener that it may have been the first time when the rainfall was below 90% but the agricultural production in aggregate did not go down. Also, livestock. Milk, eggs, fruits, vegetables are important part of the agri production and India is not actually too much dependent on the monsoons now. Of course, agriculture output in India has to improve, there is no way out and how else are we going to feed 130 crore people? About two years back, one of the biggest exports of India was $44 billion and the value could be 90%.
ET Now: So as an investor are you happy that finally Escorts is showing numbers?
Rakesh Jhunjhunwala: Well anybody if he has invested with the stocks go up you are always happy and I need to be, I am all happy but the numbers are going to come. I hope they come as the market has anticipated.
ET Now: Do you think a company like Escorts is on a path of, not incremental growth but it could be a part of an accelerated growth? They are restructuring, I mean, to be very clear?
Rakesh Jhunjhunwala:Why should we talk too much of what company…
ET Now: These are old investments, I mean…
Rakesh Jhunjhunwala: No, no, but I should– I am hopeful they will fare well is all I can say.
ET Now: Globally, what could surprise us? You know at the beginning of the year, no one thought that the China problem which is a year old problem will haunt us so badly, so what could haunt us?
Rakesh Jhunjhunwala:A good investor and a good trader is always alert, anything could happen, right. I do not think in my personal opinion, anything is going to happen in China without social unrest because the truth is never going to come out. So unless there is and you know because China is not dependent on foreign capital, it has $3 trillion of foreign reserves, it has no foreign debt effectively. So, nothing in China will come out unless there is social unrest.
I personally think America will keep growth at 2-2.5-3%. Things are not going to change much but there are much larger challenges in the western world. How they will play that out we do not know. And why suppose? It is not the end. If the western world does not do well, right, that does not mean India will not do well. America was not doing well, Japan was growing, Nikkei went from 4000 to 400000.
ET Now: So can we do what Japan did in ’80s and China did in the last decade? Can we move independently of global cues?
Rakesh Jhunjhunwala: Initially there will be problems but we will outperform the world, that is what I can say because we are in, you know, because of the demographics, because of so many factors, we can lot of factors for growth.
ET Now: I have always judged your market assessment based on your commitment levels, I know you are long and you are fully invested but when you do not feel excited about the market direction in the near term you do not have leveraged positions, do you have leveraged positions right now?
Rakesh Jhunjhunwala: Why do you want to know what I did? I am telling you I am bullish I am committed.
ET Now: Like in 2015 January or February, you decided to knock off your…
Rakesh Jhunjhunwala: I came to the market in 1985. There has not been a day from then to today when I have not been leveraged, only the degree has varied because I had no money, the only way I could gain is through leverage and once you form a habit you do not get out of it. If I do not pay interest, I do not get sleep at night.
ET Now: You are committed right now…
Rakesh Jhunjhunwala:I am committed.
ET Now: …and your commitment levels are reasonably high is what I am trying to understand from you?
Rakesh Jhunjhunwala:Well I will not comment on that but I am committed.
ET Now: What is the screen telling you about the short term direction?
Rakesh Jhunjhunwala: Well the screen is telling me that the marketing is refusing to correct. Even when markets go down, you see in the last half an hour they recover so however uneasy people feel, you know, (35:37) so the market is refusing to correct and I also feel market could correct because we have had a humungous rise but market is just refusing to correct.
ET Now: What is your assessment of the IPO market, historically classic investors have always used the excitement in the IPO market…
Rakesh Jhunjhunwala: I think there is froth. There is a tremendous froth there. Tremendous froth.
ET Now: So is that not a red signal?
Rakesh Jhunjhunwala: Not at all.
ET Now: We have seen the big IPOs when they have happened in the past and the froth in the IPO market…
Rakesh Jhunjhunwala: But the hunger for stocks is so high and so tremendous that that froth will continue. I said that valuation froth does not mean anything, it has to be combined with commitment froth, there has to be commitment froth and then the markets have to go down. You know in 2008 you had the Reliance Power issue then only the froth finished. So there is a lot of way to go even there I think.
ET Now: But then you say that we are in the first leg of a bull market, that is a very powerful headline making statement which is coming from you?
Rakesh Jhunjhunwala: I am saying what I feel like. I reserve the right be wrong.
ET Now: Which means that the blow out phase, the real expansion phase is yet to come?
Rakesh Jhunjhunwala: How can there be a blow out phase without commitment, that is what I am pointing out, where valuation froth, you require commitment froth, then you need bad news, I do not think there could be places of valuation froth, there is no commitment froth and I hope we would not get bad news.
ET Now: The levels which we saw in February 2016, earlier this year closer to budget was 6800-9-6900. Do you think something dire has to happen for us to go back there?
Rakesh Jhunjhunwala: I would think so.
ET Now: So as of now this market has really bottomed out, both technically speaking and also in terms of…
Rakesh Jhunjhunwala: Well that is what my opinion is in terms of earnings and that is what the market has signalled technically, you see the list of new highs to new lows, you see the 52-week highs, you see the breadth, right, you see the talk, most people who come on television, it is too expensive you cannot– so you know that means the commitment– and lot of people these opinions come and they are left out.
ET Now: And typically the answer is why markets are going up liquidity, why markets are going down…
Rakesh Jhunjhunwala:Which principle of mathematics or which professor or which authority in the world says that a 5PE is correct and a 20PE is not correct? So what is fair value, nobody is a professor or an authority to determine what is fair value.
And the question I ask myself is not fair or unfair, high or low, I ask is it going to last because we can only predict markets, we cannot control them, they are like women, always commanding, always volatile, always exciting. And this is like the weather, you may not like it but you have to bear it. So think, I mean, I reserve my opinion on– but I personally feel seeing the screen markets are in a very sound position.
ET Now: Insiders tell me that you have not gone to office for the longest time now and is there something we need to know?
Rakesh Jhunjhunwala: Yes I have been in bed rest for about six weeks. I had a wound on my leg and I ignored it and it got infected and infection got to my bone and I had to have a very minor surgery. But that surgery requires six weeks of bed rest. So six weeks, I am having bed rest. Kala din, andheri raat, Rekha ke saath. So I have nowhere to go. I just cannot go anywhere which has done me some good because it made me reflect on life and I spend lot of moment with myself and I spend time with my children and with Rekha so I think everything has good aspects so I think although… it has made me lose some weight. It has improved my postural habits. So I think it has been good for me.
ET Now: How soon before you will join the office?
Rakesh Jhunjhunwala:This week, Friday I will be in the office.
ET Now: So just to clear the air, it just a small and minor operation, all the rumour mongering we should dismiss.
Rakesh Jhunjhunwala: Oh! it is just small… the operation was very minor so the recovery, it was in the leg so I need to have six weeks of complete bed rest. I cannot put any weight on the leg. So now that is coming to an end and hopefully I will be in the office again. I missed my office and…
ET Now: Hopefully we will do our next interview there?
Rakesh Jhunjhunwala: Yes sure.
ET Now: So we wish you a speedy recovery but I have got couple of interesting questions for you. When we look at the legacy of big investors, Buffett is known for his investment in consumer monopoly. Soros is known for his one trade in pound when he broke the Bank of England. Rakesh Jhunjhunwala has had some big investments whether it is Crisil, whether it is Titan, Lupin, Delta Corp now. What do you think is your favourite investment that you want to be remembered for?
Rakesh Jhunjhunwala:Well you are going to ask me whether I like Aryaman more or Aryavir more. How can I say?