Rakesh Jhunjhunwala - The sage of Mumbai

Source : Asiamoney

India's answer to Warren Buffett is catching the eye of some of the region's biggest investor. Meet the renowned Indian investor Rakesh Jhunjhunwala.

Renowned Indian investor Rakesh Jhunjhunwala has been credited with single-handedly turning the fortunes of a company simply by buying its stock. Likened to Warren Buffett, the canny stock-picker with an eye on macroeconomics has profited handsomely in the country's market upswing. Only time will tell if his style is sustainable. Yassir A. Pitalwalla reports.

Rakesh Jhunjhunwala, stockbroker, punter, long-term investor and the latest darling of India's investing classes, is a reluctant hero. For any large foreign institutional investor making an exploratory trip to India, Jhunjhunwala is the man to see. Rumour has it that regional heavyweights such as the Government of Singapore Investment Corporation call him for his views on where the market is headed. "Rakesh's major strength in the last 15 years has been his ability to identify the turning point of the markets," says one hedge fund manager. "By leveraging his own capital he has made a packet of money. Correctly calling the major trends in the market enables him to reduce leverage as the market moves in his favour, rather than assume leverage once a move has begun."

For the son of a tax commissioner who claims to have started 20 years ago with just Rs6,000 (US$138) in borrowed money, Jhunjhunwala has done well for himself. According to data sourced from the Centre for Monitoring of the Indian Economy, his investment portfolio includes as many as 25 companies with an estimated value of Rs6.3 billion.

His friends describe him as a man who dreams big and turned bullish at the right time, making the right calls. "Everything that he has bought since the time that he has come into the limelight has doubled," says Abhay Aima, country head of equities and private banking at HDFC Bank.

Sitting at his desk on the top floor of a swanky building in Mumbai's prime commercial district in Nariman Point, the betelnut-chewing, cigarette-smoking Jhunjhunwala is focused on a slew of trading screens. He constantly calls his traders to direct them to buy index futures or stock futures in big Indian names such as Reliance Industries. While his style may seem that of a day trader, he says he only derives value from his investments over time, rather than overnight. And, typically, only 10% of his wealth is deployed in trading operations. "I want to ensure that if something like September 11 happens I will not lose more than 2-3% of my wealth," he claims.

Small beginnings

Jhunjhunwala's first investment, in Tata Tea, the world's largest producer of branded tea, tripled in just four months. Such immediate success explains why he has never worked for anyone—except during a compulsory period of articleship while studying chartered accounting.

"I wanted to make a career in stocks, which I have found fascinating since childhood, but everybody was apprehensive that I wouldn't make it," he says. That probably explains why his investing commandments include: 'Absolute returns – a passion; safety of capital – a religion; and never forget risk, the four-letter word.'

His strategy of taking large stakes in mid-cap stocks has paid off. A pick such as Bharat Earth Movers, which he first purchased at Rs20 a share, is now worth Rs602 a share; while software outsourcer KPIT, purchased at Rs60 per share, is now worth Rs323.95. Other investments include a stake of 1.4 million shares in medical packaging supplier Bilcare, first acquired at Rs108 apiece and now worth Rs380.6 each. Similarly his stake in Nagarjuna Construction, purchased at around Rs134 apiece, is worth almost Rs729 per share now. Hindustan Oil Exploration has almost doubled in the past two months, while the stock market index has fallen by almost 200 points "Rakesh is a hard worker who knows everything about a company he invests in," says the former head of a domestic mutual fund. "Combine that with the huge pile-on effect of others buying after his name gets associated with a company, and you can understand why his picks are doing quite well on the bourses." Analysts say that with his track record of identifying fundamental stories, Jhunjhunwala has developed a huge following of fans, who emulate his buying and selling habits in the hopes of riding his calls. Thanks to this bandwagon effect, Jhunjhunwala's picks soon begin to look overvalued, says one head of portfolio management at a leading domestic brokerage.

A close look at his investment style reveals a concentration of interest amongst mid-cap stocks that are typically under-researched and, usually, where there is the likelihood of some sort of a corporate action, such as a trade sale, a buy-out or a major turnaround in fortunes. "Rakesh is very good at identifying value stocks that have major event-driven possibilities like Standard & Poor's acquisition of a majority stake in India's leading credit rating firm, Crisil," says the head of a leading investment bank.

By catching companies early, Jhunjhunwala is not deterred by low liquidity. "We are very clear that liquidity follows quality; quality does not follow liquidity," he says. "When I bought into Bharat Earth Movers, the daily traded volume was 25,000 shares. Now it's 15 lakh ( 1.5 million) shares."

Jhunjhunwala's simple investment philosophies are based mainly around the beliefs of successful investors John Bogle and Warren Buffett—to buy stocks that afford a significant margin of safety. The difference is that he also looks to buy the stocks before the market discovers them—companies that are sitting at the cusp of a major opportunity. " India, with its under-penetrated markets for goods and services, is a good place to start most new businesses," says the head of a value investing fund manager in India. "Thus the chance of getting mid-cap companies which will do well is itself quite high. Now, if you can compare the business model of such companies with the performance of companies and sectors globally, you can increase your chances of success."

Another of Jhunjhunwala's quirks is that few of his stocks are institutional favourites. "Most of his stock picks are not investible for us to start with," says a leading mutual fund manager in India. "You need a private equity fund that doesn't have to proactively manage liquidity, rather than an open-end mutual fund, to invest in the kind of stocks he picks." Most of Jhunjhunwala's picks tend to have extremely low trading volumes and he acquires a stake. To ensure he doesn't get stuck with a dog, his team maintains close contact with the company concerned.

While he has earned the majority of his wealth from his investments, it's Jhunjhunwala's ability to make trading profits that provided the seed capital in the first place. "I look at trends and try to play them. I track micro and macro trends and follow corporate performance," he says. "My positions are built in consonance with market liquidity, in liquid stocks and derivatives, so that my transactions have the least effect on the market."

Midas touch or just plain lucky?

His exit strategy is earnings-based, rather than price-based. "We sell our investments dispassionately if we have made a wrong call. Otherwise we exit if we find a better opportunity elsewhere; or [if] earnings have peaked, markets' expectation of earnings from that stock peak or [if there is] a frenzy where valuations peak resulting in unsustainable price-earnings ratios," says Jhunjhunwala. That means instead of setting a price target for the company, Jhunjhunwala sells if earnings are lower than expectations or if the market valuation implies earnings that are far higher than what he expects the company to deliver. "We invest in the realm of possibilities and we have to be prepared to accept that, at times, an anticipated event or growth may not materialize," he says. " Opportunity cost of capital becomes a paramount consideration then."

Not everyone agrees that Jhunjhunwala can be compared with Warren Buffett. Chetan Sehgal, senior vice-president at Templeton Emerging Markets Group, says: "In 2001, 90% of Indian stocks were almost 90% from their all-time highs. So, in a sense, the tough game starts now."

This could explain the change in Jhunjhunwala's investment style, moving from passive investor to a more active investment role. For example, he acquired a 6% stake in Provogue India Ltd before it went public. The company is seeking to create an Indian fashion retail brand and retails through a combination of chain stores, multi-brand dealer outlets and its own exclusive studios. That move marked a clear change in his strategy from listed companies to investing in unlisted ones as well. While the underlying theme of a company poised for exponential growth is there in Provogue's case too, Jhunjhunwala has also been active as an investor influencing the company's strategic direction.

But his detractors say he lacks a cogent investment thesis; and the link between his macroeconomic outlook and how it feeds into his investment operations is tenuous. There are also suggestions that some of the stockbroking firms in which he has large stakes market his picks and sectors to fund managers and investment advisers looking for good ideas. Jhunjhunwala dismisses such claims. "Time will tell," is the curt reply he gives.

In the end, Jhunjhunwala's continued success may come from his ability to focus on one stock at a time, helping him to identify when the up-move has ended. Or it may be a function of the environment, which has seen a period of unprecedented change with commodity prices going from all-time lows to all-time highs. "My luck has changed," says Jhunjhunwala. He has also learned the hard way to not be easily lured by business plans and to challenge businesses' scalability. "I have learned the importance of size," he says. If he can sustain his success, Jhunjhunwala will have single-handedly broken the love-hate relationship cycle that the Indian stock market has habitually had with its heroes.