Rakesh Jhunjunwala - cautious, RNRL, RPL don't deserve to run up like this

Q: Last year, you were telling everybody that 15% is great and that we should not expect 50% every year. We have done that again. Are you a bit surprised?

A: I would say I am surprised to some extent by at least the gain of the last one-month. The space and speed has surprised all of us.

Q: Do you think we can do an on core, third time lucky with 50% again or is that being too optimistic?

A: It is time to reflect, we have had a rise from 3,000 to 19,000-20,000. I do not think economic conditions in America are very good. Asian markets there are deteriorating at a fast speed. It is an economy, which is drunk on credit. The credit markets are value effected, so I will not be circumspect at these levels.

We have had such a humongous gain from 3,000 to 19,000-20,000. I think markets are going to consolidate around these levels and would feel more comfortable as an investor.

Q: Would you be cautious here or do you see much higher levels even next year on this base?

A: What makes me uncomfortable is the divergence in valuations. You cannot have Infosys making a 52-week low as their earnings have not come down and they are still growing 15-20%. It is one of India’s best performing investments in time to come. You cannot sustain this kind of divergence in valuations, where you keep giving value to momentum, and you lose all value to value. That would be the first sign of an indication, may be it could happen in a week, ten days, or maybe we are in it. May be it could not happen in the next three months and we could go 20% higher, but I think this is the first indication and we have to be very cautious in this market.

Q: When you say you are cautious, are you cautious because of the excesses that have happened? Is it why you are calling for a correction or have you in the medium-term too become circumspect?
A: There are two-three things internationally especially in America where we are facing large uncertainty. We don’t know how this uncertainty will pan out, what value will the dollar lose, and what disorder it can cause to financial markets. I am extremely bearish on US financial markets and think the sub-prime problem is going to be far larger than what people are imagining. There is a paradigm shift in India. The bull market is very much alive. The factors driving this secular bull market are very much alive and kicking, I have no doubt about it. I am hopeful that five years later we are going to be far higher than where we are today. But the fact remains that we at 19,000 are at 19 times 2009 earnings. There is vast divergence in the valuations of the Sensex or Nifty, you have very narrow group of stocks gaining.

Q: Undeservedly are you saying?
A: I will reserve my opinion there. The fact remains that in a true bull market you cannot have quality stocks going to 52-week lows. You can have stocks with no operating income, whose valuations are 100-200 times earnings. The narrowness of the rise, the uncertainty that we are facing, and the speed of the rise, is why I feel the markets need to pause. They need to take a breath and that will give it strength for the long-term rise.

Q: When you speak about a correction, are you speaking about a major sell-off or just about a 10-15% correction? We have seen three of those this year and we are still up 50%.
A: There is a difference between opinion and the empirical evidence of what the screen is telling us. In the last 15-20 days, flows from abroad have considerably slowed down. World markets after the second Fed cut are showing some kind of resistance and weakness. The market is losing breadth and is facing resistance at higher levels. The market should pause and correct, it is more than opinion, as that is what the screen is telling us. We have not had any correction right from 3,000 to 20,000. We have had very severe corrections but they have been related to prices, there has not been any timewise correction. What will really test people’s belief in this market and country will be when the market corrects not so much valuewise but corrects valuewise and timewise. I can’t believe we are going to have a ride from 3,000-40,000-50,000 where investors’ conviction and patience are not going to be tested.

Q: You see this as a likely scenario. Is 16,000 not inconceivable or are you looking at that big a correction?
A: Our last rise was from 14,000 to 20,000, so surely we could carry a 50-60% rise. Things internationally are going to turn far ugly than what people have anticipated. I don’t know valuewise, but timewise we are going in for a good correction. The sheer momentum with which any stock that has some kind of story build around it goes up at unbelievable volumes. I feel the market is ignoring a lot of stocks, these are the first signs of danger. For the whole rise, the market is going to test us timewise and valuewise.

Q: Are you getting the first sense of euphoria creeping into the screen after those 20-25% blowouts that you have seen in the last few weeks?
A: Absolutely, blowing into all kind of stocks. There are some bull and cock story scrips that are seeing tremendous volumes, unbelievable price rises, and nobody wants to talk any sense there. Somebody guesses, spread some story, and advises a buy and investors just go and buy. These are signs, the markets always do that, there is noting surprising about it. But when markets do this, it is time to be alert in my opinion.

Q: Are you surprised that Infosys is hitting a 52-week low while the market hits new highs. Is it a sector write off for you or do you see value there?
A: A bull market does not mean that some stocks just go up and everything else goes down in value. We are in the initial stages of what is going to be a very big, long-term bull market. In the last two-three months, along with international uncertainty we are staring at local elections in the next 6-12 months, which the markets may not like. Don’t forget that the worst mistakes are made in the best of the times.

I don’t agree with this theory that interest rates in America will go down, all problems will be solved, and all assets in the world will inflate. Markets have had a too good and easy this Goldilocks situation. This is a dream run, in the world this has never happened that you reduced interest rates and all ills are over.

You have given USD 2.5 trillion in one-year to people who did not have money to repay. I don’t buy this theory that he will keep reducing interest rates and we will keep buying emerging markets. You can’t take valuations to any level and expect people to keep on buying. Why have flows slowed down in the last two-weeks? Why is China down 5% today? All of Asia and all emerging markets have been weak in the last 10-12 days.

Q: Let me come to another sector which have been one of the pillars of this bull market, telecom. The big pillars like Bharti and even Reliance Communications have started correcting. What do you see for the next one-year for this space, is the best behind them?
A: Some of the dreams of corporate India are now going beyond all reality. Look at the people applying for telecom license, I don’t know what kind of background and qualification they have to go into the telecom business. Someone is doing a broking business and he wants to get into real estate, someone is doing real estate and he wants to get into the telecom business. The way the markets are giving money to public issues, it seems that nobody is even looking at the prospectus or reading it. They are just finding what the prices are in Rajkot and how much is the issue going to be oversubscribed. If you give money Rs 50,000-1 lakh crore or even Rs 10 lakh crore it is not going to be enough because of the way dreams are expanding and the way in which people are getting money, these are all danger signs.

Q: What is your sense on this whole oil and gas space, especially exploration and refining, and the way the market is valuing some of these stocks?
A: I do not apply my mind at all there. There is surely value in oil refining companies. IOC has got a lot of non-refining and non-marketing income. The market doesn’t want the government to decide what income they will have and whether there is very good yield. Never forget in all this momentum that in 1992 the price of Hindustan Lever was Rs 18.20 whereas the index was 4,300, but in 2003 when the index was 2,900 then HLL was Rs 328. As an investor I found that it is not how high my scrip goes, it is at what level it settles after it goes high. If a stock moves from Rs 100 to Rs 1,000 and comes back to Rs 20, then nobody really gains. But if the stock grows from Rs 100 to Rs 1,000 and then does it stop at Rs 600 or Rs 500, I don’t know.

Q: You were speaking about excesses. Have you found some excesses in any of the stocks which we discussed over the last few weeks?
A: I don’t know what is RNRL business, I am confused and didn’t make any effort to find out also.

Q: But RPL tippled and that has a business?
A: It has a market cap of more than Infosys. I can’t say anything beyond that. I am told it has a market cap of more than the entire refining sector.

Q: Some other ideas?
A: In four years, a share of Great Eastern Shipping has appreciated about 25 times. It was Rs 25, when the management bought back six crore shares, they got all those shares in the range of Rs 5-7.

Q: Will you remain cautious for the next few months or a year?
A: We live in uncertain ages and times. Let us see how this will pan out. We will react to it but let us be prepared. We will react to it as it pans out. I don’t know whether the index will stop at 16,000 or if it may have a bottom there, there may be no correction at all. I have some feelings and am going to react to it as the circumstances arise.

As humans and investors we must have the maturity to realize that we can’t earn the wealth without time passing, without it being tested, and without our conviction being tested. Nobody has earned wealth easily and retained it.

I feel we have had it too good and easy to really last. We are going to be tested. In view of the narrowness, rise of uncertainty in the world financial markets, the fact is that we are going to face an election, and the speed at which we have gone up, the only thing I am saying is be alert and cautious and always be there in the market.