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In an exclusive conversation with ET Now, Big Bull Rakesh Jhunjhunwala says that the next 3 months are likely to be very difficult period for the markets, but he is extremely bullish on their long-term prospects. Excerpts:
ET Now: Indian markets have been stuck in this range from last six months. Do you think we could remain in this range for an extended period of time?
Rakesh Jhunjhunwala: The next three months are going to be a very difficult period for the markets. The chances to break down to me seem to be greater than the chances to break up, at least in the next three months.
ET Now: Do you see 5000 acting as a base for this market?
Rakesh Jhunjhunwala: That is difficult to say, but I would think so, 4800-5000 is a level where markets will surely find a base, strong support which goes there.
ET Now: So what is the biggest risk for Indian markets currently?
Rakesh Jhunjhunwala: The headwinds are on Indian markets, the most important thing is inflation. Because inflation controls everything, interest rates, growth and the second headwind is the government inaction. Although we have very good people at the helm of government and they know what needs to be done, but politically they are not able to give any consens US at all. There was ho PE of some big reform after the elections, but nothing has happened up until now. And unless we get some kind of a reform in the subsidies and some kind of a clear roadmap for the DTC and goods and sales tax, GST, the markets are waiting for that.
ET Now: But would you bang the table and say that or predict rather that in next 3 years, Sensex will be at least 50% higher than where it is?
Rakesh Jhunjhunwala: I am extremely bullish in the longer period. Three months unless and until we get clarity on the monsoons which we will get by August end, and we will see what kind of government action comes through. Until then, the markets are going to have a downward bias. Three years, 5 years, 10 years, I am extremely bullish.
ET Now: Do you think the golden period for Indian equities is not over?
Rakesh Jhunjhunwala: It has not even started.
Why do you say that?
Because the Indian economy is going to grow for the next 30-50 years and that growth is going to surpass everybody's expectations. In terms of consequence of that growth, equity and with such low exposure to equity markets, local investors and India this year will save about $650-700 billion. It is legitimate to expect that at least 10% of that should come to equity markets, but we are not seeing that at all. It will come with time. So the golden period is still ahead.
What do you make of the earnings? One is getting a sense that earnings are slowing down and India's economy generally seems to be slowing down?
The interest rate sensitive companies are going to face some kind of pressure and the banks are going to face some kind of pressure. But it is very difficult to say on earnings. The market may project itself partly on the current year's earnings, but also the market is going to predict itself on what it thinks the long-term earnings are going to be. In near term there could be pressure in earnings, but in longer term there is no reason why earnings will not grow 15-20%.
ET Now: Let me get this right and this is one point I do not want to get it wrong for our viewers, near term you are not bullish, but your long-term outlook is still intact.
Rakesh Jhunjhunwala: Absolutely and near term I mean until things clarify and it depends how events turn out. If the monsoon is good and commodity prices ease which I personally expect, oil prices should be at $80-85 and some government action comes through and inflation may not have come down, but it becomes apparent that in future months, inflation is going to come down, then the Indian markets will have a very strong ride after that. So I am saying that the next 2 to 3 months are uncertain depending on how events turn out. The period for the next 9 months could be very good or could be okay.
ET Now: But is the rampant speculation in commodities over?
Rakesh Jhunjhunwala: I do not think so. Speculation in commodities is at an all-time high.
ET Now: But insiders tell me that you have been short commodities of late.
Rakesh Jhunjhunwala: Yes, I am short on some commodities.
From an India perspective, after QE2 if a QE3 comes, is that bad news for us?
I do not think a QE3 will come. If it comes and if the US economy grows further because of some stimulus or there is ease on money or there is a downward pressure on the dollar, it is always good for India.
Which to your mind could be the biggest moving part for next 12 months?
Inflation and government action are the most important points.
Are markets seriously disappointed with lack of any government action?
They are. The tragedy is that we, instead of blaming any individual, as a nation are not able to form a political consensus. No use blaming the politicians or those who are in power. We have so many conflicts in our society that to come to a consensus and do what is right is very difficult. That will last essentially until behind the era of coalition governments.
But are you a bit surprised with the resilience Indian markets, of late, have exhibited? On a relative basis, India is still outperforming and foreign institutional investors have not been rampant sellers this year?
No. If the predicted earnings come through at Rs 1200 earnings for the Sensex, 15 times is a long-term average. Long-term, everybody is extremely bullish on India, if markets are down or they are correcting, people are going to do individual stock picking. We must also understand that the exposure of the foreign institutional investors worldwide in relation to the emerging economic size is very low. That is going up and I think that helps.
What do you make of the recent US economic data?
There is no doubt that the world economy is slowing and also it is partially slowing in the western societies because of the structural challenges and economic challenges. It is slowing in developed world because the governments want to fight inflation in the developing world.
Do you expect FY13 to be a big year for Indian markets because that's the time the base effect will kick in, commodity prices could correct?
If commodity prices correct and we have good monsoon, we will have a very good year. It is difficult to predict what will happen in 2013, but I have one worry on my mind that the Euro will break. Whether Greek defaults today or Greek defaults one year later, it is going to default and there is no doubt about it. They are already given $110 billion. I was just reading on the Bloomberg , they need some 90 billion Euro further and the fact is that there is no economic waiver, which they cannot default. It is like an endless nallah, you can pour as much water as you want. That is one event that we should try to keep track of because that can have destabilising effect on markets worldwide.
Are you short on Euro?
No, I do not trade Euros. There is no Euro trading in India.
Dollar, the international index?
No, I am not short. I do not do any trading internationally.
ET Now: How come you have not made any large investments in last 6 months? Delta Corp was only large investment you made and that was just before Diwali.
Rakesh Jhunjhunwala: I have applied for a loan to my father-in-law. When he sanctions it, I will disburse it. I will make it. I am fully invested and all that I have done in my life is investing. So now even though I have some money, let me buy something else.
ET Now: But if you had enough capital, do you see currently enough opportunities which are available?
Rakesh Jhunjhunwala: I am always capital short. If I see the opportunity, I will get the money. So if I see an opportunity, I will surely invest.
Are you still scouting for opportunities like Titan, Praj?
I wish I could find the next Titan. Of course, if I could find one, I will gladly do, but I do not see any on the horizon at the moment.
Are those multi-baggers and those days now over for Indian markets now?
I do not think so.
ET Now: Are you excited that Titan is at an all time high, your biggest investment?
Rakesh Jhunjhunwala: I am happy that the company has proved itself to be an extremely good robust company, very good growth prospects, now getting very aggressive. I am extremely very happy really.
ET Now: But you are still of the view that Titan potentially could be $1 billion investment for you?
Rakesh Jhunjhunwala: I am hopeful now it should be more than that.
ET Now: More than a billion?
Rakesh Jhunjhunwala: Why not?
ET Now: Why is Titan an exciting business to own?
Rakesh Jhunjhunwala: Because this business has the highest entry barriers. They have good growth. They have excellent management. They are expanding very aggressively. They have good brands. So I think the retailing is going to be one of the biggest growth stories in India and Titan is in a sector which dominates whether watches or jewellery and now they are coming to frames. They could enter other areas also. So with such high entry barriers and growth and very high return on equity and good positive cash flows, Titan surely is a very sweet spot.
ET Now: What about the PE multiple if you look at estimates and again I am looking the consensus estimate?
Rakesh Jhunjhunwala: By Indian measure of measurement, it is expensive. But good stocks always remain expensive.
For someone who always benchmarks the price and in very early part of my career I have learnt from you that when you make an investment, you always consider price as the benchmark. Some of your investments are wildly expensive viz., VIP, Lupin, Titan, Delta Corp?
I see it in relation to the price at which I have bought. I have an exit value and time, which is dynamic and is subject to change. I am not bothered. Titan may get expensive for six months, maybe another correction, that does not change the long-term prospects for Titan. I do not want to buy something, sell something because it is expensive in the hope that I will buy cheap. I do not trade my investments.
But you are in no hurry to change your investments or sell any of your investments? What I could say that I do not intend, but I could. I do not know, but I do not really intend to. I do not have a consolidated portfolio. I do not want to bifurcate it, and I do not want to do this idea, 'this stock is expensive, buy it, there I will get 20% return, here I will get 25% return'. I do not want to do all that.
But on a blended basis, on a five-year basis, do you think your investments could generate a 20% CAGR return? If they generate anything above 18%, I will be very happy.
That's the investor Rakesh Jhunjhunwala, but what is the trader Rakesh Jhunjhunwala thinking and doing? Thinking and doing? I am trading. I feel, markets at least for the next three months will have more downsides than upsides.
Can I safely assume that the trader Rakesh Jhunjhunwala is short or he is not bullish? I am certainly not bullish and let's not discuss my trades but I would like to disclose that I am interested in everything that I am saying. Please take everything with a pinch of salt.
What you think will happen? Flavour is downside according to me.
Where do you think the new leadership in the markets could emerge from? Titan will be one of the leaders.
Even after this run up? Yes, why not?
Which businesses to your mind are capable of scaling up? I cannot say in any area, but wherever there is growth prospects for the economy, any business can scale up as long as there is demand. Titan was a Rs 400-crore turnover company when I invested, and last year its turnover was Rs 6500 crore. Wherever there is demand, ability and capability, you can scale up.
It is interesting that you are betting on the consumption theme, but you are not betting on the manufacturing theme. Now India has got three parts - consumption, manufacturing and services.
I have done a lot of services investments. I do not have any manufacturing investment other than Ashok Leyland, maybe. Though nothing is by design. I am a long-term investor and all sectors have their chance to perform better. I have not designed my portfolio that I must not be in manufacturing or I should be in manufacturing, it's all an accident.
Will you ever buy real estate stocks? Real estate stocks are now available at distorted levels, there is too much of fear and pessimism? You wait for the next three months, there will be further distortion.
You are still not bullish on real estate? I am not bullish.
Why is that? Because we examine they are all laden with debt, no genuine cash flows. There are prices but there is no saleability. I have not liked real estate stocks from the day one and I do not like them.
What are your thoughts on banks? There is a sense that banks may be markets also are mis-pricing growth? No. Banking will grow in India, but the question is efficiency. If you look at SBI, there is growth every year, but the cost to income ratio just does not go down, and therefore that financial efficiency never comes through. Growth will be there, there is no doubt about it.
Would you ever take a sizable bet in any of the PSU banks? I would not say 'yes', I would not say 'no'. It depends on the situation and the valuation, but I would approach it with an open mind.
Do you like the private banking space, especially the smaller mid-cap private banking space? I have two investments in
Karur Vysya Bank and
Federal Bank . I intend retaining them.
You like both those banks? Yes I like those banks.
In Karur Vysya there could be a change in guard. Is Mr. Kuppuswamy on his way out? Yes, they appointed some new person as the CEO.
That's not going to change your outlook for the bank? No, not at all. I am invested from 1993, and it would be one of my best investments in life.
You do not like commodity stocks, you always trade in and trade out of commodity stocks and you only have one commodity investment, Hindustan Oil Exploration . Why is that you do not like commodity stocks? They have appreciated substantially, and I am not bullish in commodities as people are. It is not by design; it is by accident that I may not have bought any commodity stock.
And you have no intentions to sell it? I do not want to speak about the intention of any stock. I may sell tomorrow. I do not want to say any intention. I may, I may not. But generally I do not sell my portfolio easily.
What do you make of the recent RBI policy? You have to balance on both sides, but instead of RBI, we as a nation and as a society have to focus on supply side problems. What are we doing to revive agriculture productivity? What are we doing to build infrastructure? They are the larger problems to be dealt with regarding inflation rather than just interest rates. But to some extent, you have to raise interest rates in order to contain demand, if inflation is high.
Do you think interest rates in the system have peaked out? I do not think so. We will get further hikes, especially this May inflation will be quite high.
Where do you see inflation finally settling? I am not an economist, but I feel that if we have a good monsoon and the commodity prices correct, surely inflation in India will correct and there will always be a base effect.
I have a presentation in my hand and it is a two-year-old presentation where you have clearly indicated that the next big thing Rakesh Jhunjhunwala wants to bet on is going global. Have you decided on something?
No, let the government have capital account convertibility, then I can go global. Otherwise I can only remit $200,000 a year and along with my wife and children $1 million. $1 million capital abroad is what value? Its not value. Only when the government allows capital account convertibility, can I take my capital outside.
99.9% of your wealth is currently parked in equities. Are you looking at diversifying it? No, not at all.
You are absolutely convinced that equity is the place where you should be? Yes because equity will hopefully give me a 15-24% post-tax return. I cannot do any business myself, any investment which can give me a higher post-tax return on large volumes.
It is interesting if I look at your investment portfolio. You do not own any Nifty 50 or Sensex 30 stocks. Why is that? I hope that some of those stocks which I own will become part of the Nifty or the Sensex.
Apart from Titan, which other stock has the possibility of being part of Nifty 50? Lupin.
Lupin is a fairly large company now.
What makes you so bullish on Lupin? It is growing well, they have done well. They are growing well. They are doing well in Japan and America.
What about the pricing power? The generic space is getting extremely competitive? So what? They have 28 products, they are No 1 in 14 of them and 1-3 in 8 of them. I like Lupin as a company, let me not go too much in the details, but I like it as a company.
When you invest in a company and in very early part of my career, I learnt from you that you always bet on the management, the entrepreneurship of the management. Between scalability and entrepreneurship, which feature would you bet on? Entrepreneurship leads to scalability. So entrepreneurship has to be there, then only scalability will come. Scalability cannot be in isolation of entrepreneurship.
How do you identify that? Do you go by the spirit of the management?
I meet them and try to judge people, and then I see its progress.
What's the broad message you would like to send across?
Don't trade is the first thing and invest in the monthly schemes so that you get to invest at all levels of the market and have confidence in India. Believe in India, you will make money, I am hopeful.
But you are absolutely certain that the golden period for Indian equities is not over?
In my personal opinion, I deserve the right to be wrong. I am absolutely, absolutely certain that the golden period is still ahead.
We are at 18000 on the Sensex. In next 5-6 years, can the Sensex touch 40000?
Do not ask me embarrassing questions.
Next 5-6 years?
It depends on the earnings' growth. The minimum growth in the value of the Sensex will be related to earnings.
You say that earnings could grow. At least the Sensex earnings could grow in the range of about 15-18%?
Yes and at some stages, you will have the PEs expand because there is so much money to come from local individual investors. When markets rise, everybody comes.
You have just celebrated your 50th birthday last year. How have things changed for Rakesh Jhunjhunwala after his 50th birthday?
They have not changed the way I have liked them to change. I would like to improve my personal habits, but I am just not able to. Apart from that, it has brought a lot of maturity of thought to me and with three lovely children, it gives me a new jest for life.
Are you spending enough time with your family?
Not as much. I would like to buy, surely I try to.
So when you do not trade, what you do?
I read, play with my children, have a drink, talk to friends, watch movies.
Your daughter turns 8 this month. Are you getting a sense that she is remotely interested in stock markets?
No, she does not know anything about stock markets, and I do not want to make any effort that she should be. She wants to do it on her own because I want to give her the right to choose what she wants to do in life.
Does she get excited every time she sees you on TV?
She is used to it now. Initially she used to get excited, but now she is used to it. Of course if she sees me on TV, she will shout 'papa, papa aaye'. Even my sons recognise me when I come on TV.
Behind every successful man, there is a woman. Would you give credit to Ms. Jhunjhunwala for that?
It is all her luck and maybe her bearing of me. Surely, we are equal partners in everything in life.
Do you miss your father? It has been two years?
Yes, I do not know. He was the man of last resort. I miss him surely, and I miss the most is that he could not live to play with my children.
What is the one thing which you think was on his agenda which you would like to take forward?
Charity. So that's one agenda and the second agenda is that he wanted me to improve my habits.
What drives you every morning to work? You have created enough wealth for yourself, you have created enough wealth for your family and you have created enough value for others also.
Sheer excitement of the markets. It's my life. Markets are my passion.
Will you ever retire from the markets?
The day I want, I will. I will never retire really. I may retire from trading because that after a certain age is very stressful. It involves a lot of involvement day-to-day. I may retire from trading but from investing, I do not think I am going to.
Do you think the best of Rakesh Jhunjhunwala is yet to come?
Hopefully so.
Gordon Gekko said that every man on Wall Street has a number. Do you have a number in your mind?
Of what?
Of what do you want to ultimately achieve as personal wealth?
I am not so much particular of the wealth. We have far lesser wealth than people think and far more than we need. Some extra wealth is not going to make much difference, but it's a sheer thought of investing in something, thinking about the sheer sign of success in the financial markets. I am more oriented towards being right rather than being wealthier.
In the last five years, how have you matured as an investor?
I have matured tremendously. I have realised that a bird in hand is worth 100 in the bush. I have realised the difference of market leadership. I have realised the advantage of long companies, large companies. I have realised how small companies falter, and now I do not believe these plans all very easily.
Are you looking at de-leveraging some of your risk?
I have leveraged, but I have very reasonable leverage, maybe 2-3% of my portfolio or maybe 4%. I cannot say that's reasonable.
If I look at your recent investments, Delta Corp and Orchid Chemicals, are you now betting on low concept stocks and more visible stocks?
No, I do not think so. I am really looking for that. When I bought VIP, I have been looking for a five to seven-year angle. Even Relish, Orchid Chemicals and Delta Corp are long-term bet. These are four investments I made in the last two years. It has not essentially changed.
There is a margin of safety in this market?
But I do not define all this, I judge it.
How do you judge it, it's art or...?
It's part science and more art.
Whom would you like to date?
Sharmila Tagore.
Nobody who is the youth icon?
Sharmila Tagore and Dimple Khanna were the youth icons when I was young.
