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Saturday, November 06, 2010

Rakesh Jhunjhunwala Interview

This is Samavat 2067. Udayan Mukherjee, Managing Editor of CNBC-TV18 caught lucky mascot of the Indian bull markets Rakesh Jhunjhunwala reminiscing about the past year. Jhunjhunwala also shared his thoughts on what he expects the next year to be like.

He said that he sees no negative factors on the horizon. “I think with the good monsoon and good momentum in the economy and in my personal opinion with time even inflation is going to come under control.”

How long will this rally last? Jhunjhunwala said it would be very difficult to predict but he does see the Sensex earning 1,100 this year and say 1,250 next year. He added that the Nifty is now unlikely to go below the 5,850-5,900 level. “The bull market is going to be very much alive,” he said.

In an ironic twist, Jhunjhunwala begs retail investors not to trade in the equity market, "I think 98% of retail people lose money in trade. Whether correction - no correction, bull phase – bear phase. Everyone has a sad story. The proof is in the statistics and we know people will say, you trade yourself but stop others from trading, I say dad used to drink whisky and asked us to refrain from it." Instead, he says, one should invest in mutual funds.

Below is the verbatim transcript of the interview on CNBC-TV18. Also watch the accompanying video:

Q: Are you bullish for next year?

A: I am. There are no negative factors on the horizon. I think with the good monsoon and good momentum in the economy and in my personal opinion with time even inflation is going to come under control. I don’t see any negative factors and I still think there is a lot of doubt and suspicion over whether this rally will last or not or this market will last or not.

I think Indian companies have fared very well, Q2 results have been good. I see no reason why the Sensex stocks will not earn 1,080 to 1,100 this year. I see that growing 18-20% next year and I think the government also sees that we have to bring about some change. Although politically very little has been done and it’s a difficult proposition. So I see no bearish factors.

Q: Between this Diwali and next Diwali do you think we can see something between 7,000 and 7,500 on the Nifty?

A: It is very difficult to predict. If the PEs are maintained I see no reason. If the Sensex is going to earn 1,100 this year and say 1,250 next year, I see no reason why we cannot have the Sensex and the Nifty in new highs. Where they will go and at what level they will stop? I think the important thing is that if we hit a new high what level do we rise to, what quality the rise has and then when we correct where do we come. I think that will really determine and tell us what kind of a bull market we are in.

Q: For now where do you think the floor of the market is for the Nifty?

A: I don’t see the Nifty going below 5,850-5,900. The results are out. I see the foreign flows are going to continue in my opinion. Also I feel there is some kind of exhaustion in the local selling. The thing is that none of us are listening to the screen and the market. We are placing our opinions ahead of the screen and the market. I think that’s where the key lies. So as long as we follow our opinion and not the market I think the bull market is going to be very much alive.

Q: When will retail start participating? Last Diwali to this Diwali they have been out of the game?

A: I think if the market will not go down for another 15-20 days, one month, already - I think as much as the retail was not participating, the fund managers themselves were bearish because I think at the end of the September they were carrying 9% cash in the Indian mutual fund industry – if I am not wrong, normally cash is 4-5%.

So I think retail will slowly and surely participate. When and how? I don’t know but I can tell you one thing when and how they will participate I don’t know but one thing I can tell you is this rise cannot end without their participation. Their participation has to come and will come in my opinion.

Q: Gold is up 20% between last Diwali and this Diwali. Do you think it can generate that kind of performance again?

A: You have to ask my wife. She knows better.

Q: But you do the buying?

A: I don’t do the buying.

Q: You are not bullish on gold?

A: I am not bullish or bearish. I don’t buy any gold. But there is a very big paradox there that you have interest rates at all time lows and you have talk of inflation and because of that you think gold prices will go up. And now there is a lot of consensus trade also in gold. I don’t know, I am not bearish but I am not too bullish also.

Q: Do you think commodities will have a big rally in the next 12 months including crude?

A: I am not bullish on crude at all. I think the world is oversupplied. Already Organization of the Petroleum Exporting Countries (OPEC) is not producing 2 million barrels. I think the OPEC itself doesn’t want prices to go up above USD 75-80 per bbl. More production capacity is coming on stream and all the hullabaloo of peak oil and all that has been proved wrong. So I don’t see crude prices going above USD 75-80 bbl.

I think even the steel market is quite weak despite cut of capacity in China. I think the commodity that is really showing price strength and where inventories are going down is copper. To some extent even aluminium has done well. I haven’t said that I am any expert on commodities, so I don’t know.

Q: You don’t trade commodities at all?

A: I used to earlier but I have stopped now because I guess the market is enough. Trading at night at 9 o’clock-11 o’clock, its better not to trade them.

Q: You still find value at these levels because you have been buying large chunks of some midcap companies over the last few months?

A: Last few months I have bought two stocks, Orchid and Delta.

Q: Large quantities though.

A: Yes, I would like to keep a limited number of companies. If you search, you will get value with time. We think there is value and only time will tell us if there is value or not.

Q: You bought pharmaceutical stocks after a long time because Lupin is a long-term holding for you and then you bought Orchid recently?

A: Yes, I bought Orchid after a long time. I have two investments in the unlisted space. I hope it will do well.

Q: You liked that story?

A: Yes, I like it.


Q: What were you betting on there at Orchid?

A: Let us not get into too much of details. I don’t want to discuss it. But I think it will do well. It has made large investments; those investments will now come to fruition. A large part of the investments have been made in areas where others cannot enter in. So there is some kind of a surety to the future prospects. That is one thing. The second is that they deleveraged substantially by selling to Hospira and they have a good deal with hospitals where they can supply the APIs. So it is an area where people cannot enter easily. It has made large investments and it will bear fruit. As usual you have to be a patient investor.

Q: Delta because you like their gaming business or real estate?

A: I like the gaming. I don’t think the real estate business has any value. I like the gaming business, I love to gamble myself. He will have three of the six licenses in Goa and also I think they have an ownership in a hotel, they are planning to make a hotel. There is also a large investment of about Rs 320 crore has been committed. What is going to be important is when you go to a casino, the kind of atmosphere you can create. So I think he would really be able to get customer pull.

Q: Have you been to any of their facilities in Goa?

A: Yes. I have been to one of his casinos.

Q: World-class?

A: Good.

Q: Are you tempted about taking profits in Titan since it has gone up about 200% in the last one year?

A: It is well known that either I will sell my stake for a billion dollars, or I will take it to my grave. I might sell some shares, maybe at some time if I want to buy some property or something. But I don’t intend to really. Good stocks always surprise on the upside, and they always remain expensive. The recognition of Titan’s entry barriers and the dynamism of the management and the magnitude of the opportunity, I think it is still not recognized.

Q: You said just now that maybe the domestic selling is coming to an end but we have seen Rs 33,000 crore last Diwali to this Diwali from mutual funds, what makes you confident that maybe it is exhausting itself?

A: I don’t think there are any more redemptions and I am seeing what is happening in the last four-five days. A lot of the money is blocked in Coal India. LIC has booked Rs 10,000 crore of profit in the first half which is more than what it did in the last year. They applied for the entire issue of Coal India for which they will get Rs 600 crore, they will get a refund of 15,000 crore.

All of this money is going to come back and I think retailers will also join at some point. I think market is showing that it did not go up without a reason. It is not that valuations are absolutely out of whack. Also as long as today maybe next year if some estimates for Infosys are Rs 150 next year, we know it is 20 times 2012. That can go to 30 times, and that is okay. Then you see a stock like KPIT could also gain. But if only KPIT gains and Infosys doesn’t gain in terms of P/E, I think then we will be coming to the end of the rise. But that is not happening at all.

Q: You are saying that you are seeing that kind of valuation gap converge completely between midcaps and largecaps?

A: What happens in the last stage in 2007, I heard it so many times on the channel, compared to 2007 and 2008, there is a world of difference today. First of all there was no consciousness or realization in the western world of what is going to come, in terms of the breakdown of the markets and the housing market and the end of the thirty year bull market. I think that is something which is very different.

Second is the western world itself is in fright about what is going to happen in Europe, what is going to happen in America, what is going to happen in Japan. Thirdly, at the last leg of rise, the second grade and the midcaps and the smallcaps which will really catch speed. That is not happening at all. Every rise has been led by the largecaps.

So, I think in terms of what is the situation in the outside world and in terms of the local participation and the quality of stock that is gaining, I don’t think we are anywhere near a top.

Q: You don’t see any signs of it, stocks like VIP which you bought went up Rs 250 shortly after you bought in one month I think?

A: I bought last year from Rs 65 to Rs 130.

Q: The last tranche that you bought, after that I think it went up Rs 250.

A: Yes, it went up, but fair enough. If a stock goes up from Rs 65 to Rs 800 in a year or a year and a half, it is right that the stock should correct. I have no complaints.

Q: You didn’t think that it was excessive, the kind of rally which happened recently in stocks like VIP or even Orchid what is going on now?

A: I am a long-term investor; I look at entry value and terminal value. I am not the one to comment if it is excessive or not. If it is excessive, the market will correct, like they did both in Orchid and VIP.

Q: Do you feel bad about some of your laggards like Praj or HOEC; they haven’t performed in the last one year?

A: There is nothing to complaint about HOEC because if you look at the three-year picture, it has gone up from – it has had a tremendous rise and I am confident about long-term prospects. Of course Punj is in a spot of trouble but the good always comes with the bad and the rose is always there with the thorns. You cannot do anything about it but I am confident even about Punj in the long run.

Q: Praj, that has also dragged for a while?

A: When I was coming to the interview, I just read an article on biofuels. Let us see how the story plays out. I think Mr Choudhary has now himself taken charge again. We investors, in good times or bad, all we can do is be hopeful.

Q: What do you think of bank, do you think there is value in any of the banks or you will still own one or two like Karur Vysya and have not bought too many banks currently?

A: I only have two investments in the banking industry - Karur Vysya and Central Bank. Both have done well in the last three-six months, nothing to complaint about. I am not going to be a long-term investor.

Q: What’s the biggest risk to this market over the next one year according to you? You said locally there aren’t too many headwinds that you see, but what worries you what can destabilize this market?

A: I think inflation beyond a point.

Q: Global inflation?

A: Not globally, I don’t think there is going to be global inflation. But I think local inflation, and may be oil prices out of whack. Apart from that I don’t think there are many reasons. Of course unknown risks like geopolitical and Iran attacking Israel and Israel attacking Iran and all that is always there. But I don’t think it is going to happen or a very severe slowdown in the western world.

Q: Which we can’t see today?

A: Which you can’t see but which I don’t rule out in 6 to 9 months.

Q: Despite all the stimulus which is going in?

A: What is the stimulus going to do? It is going to bring down interest rates down, it is not going to create employment. Corporate America is sitting on its highest level of cash in non finance corporate America ever in its history. So they have their own money, and they don’t need borrowings. The fact is they don’t want to invest. I don’t think that Quantitative Easing is going to achieve anything except for some temporary spike in commodity prices and drop in interest rates.

What is really required to be done is to repair the housing market which can be done if you apply this to write-down mortgages of defaulters rather than buying government bonds.

Q: You think this kind of flows will continue into India? We have seen some USD 25 billion this year, this pace of flows?

A: This will continue for long periods of time. If you look at India we are 3% to 4% of world GDP, we are not even 0.5% of USD 30 to USD 35 trillion in the investment of institutions worldwide in equities. Our share is USD 250 billion, USD 200 billion may be and it could go upto USD 1 trillion.

So I see no reason why money will not come. Don’t forget one thing that India is an open country. Indian companies have return on equity. Among the emerging markets we have the best corporate governance. We are well regulated; we have got good trading systems. Why will the money not come you tell me?

Q: What will it mean for the rupee?

A: At 2.5-3% current account deficit I think the government of India welcomes it. Today the Yen has gained 20% in the last one year and Japanese exports are up 25%. I read an article by JP Morgan recently which shows that Indian exports are much more sensitive to demand in the western world on these importing countries rather than on the value of the rupee. Don’t tell me if Infosys margins go down from 31% to 24% India will not export there.

Q: You don’t see the rupee going to 40 in the next one year?

A: I am no expert on currency. But I can tell you one think that as long as we have these kind of current account deficit I don’t see the rupee going below 43.50 – 43. At 46, everybody’s prediction was 50, at 44 everybody’s prediction is 42, I am no expert.

Q: It’s a strange market, you look at the Nifty this year, last one year, its up 18% -20%, Reliance is down 1%. I don’t remember Diwali to Diwali when we have had a situation like this?

A: We should look at it from 2003 to present; Reliance is effectively Rs 2700–2800. It has gained 11 to 12 times and the Nifty has gained may be 8 times. So over a period of time there has been outperformance. It is a perfect market. The one which outperforms in one stage corrects in the second stage. I find it nothing surprising, I am finding it healthy.

Q: Are you surprised that many of the infra stocks have not moved in the last one year relatively?

A: Similarly in 2007 they were the best performers. And I think wherever you go you have to be very careful in infrastructure because some of them even today have incredulous valuations. I wouldn’t name anybody.

Q: As in cheap valuations?

A: Incredulously high valuations.

Q: That includes construction companies or power companies?

A: I think the most highly valued are the companies who are doing these power projects and all the BoT projects, incredible valuations.

Q: So you are careful on that space?

A: Always.

Q: What about real estate, you have bought anything recently?

A: No.

Q: Last one year?

A: Nothing.

Q: Not a single real estate stock in your portfolio?

A: I buy some, I sell some in trading. I am not going to invest in any real estate companies.

Q: Why?

A: If at these prices they cannot gain and their debt cannot be corrected, when is it going to be done? Should housing in India, Bombay is as expensive as in London. I don’t think they have a business model which is sustainable. They say they have bought land cheap but how do you get the volumes. Today suppose if a real estate company has Rs 2000 crore of interest a year it must sell Rs 6000 crore worth just to pay interest. And the moment you try to get volumes prices come down.


Q: So even in regional plays you don’t see any kind of value in real estate?

A: May be you are right, there could be value somewhere.

Q: What about autos, have you ever bought an auto stock?

A: I am extremely bullish on Telco and I want to disclose that Telco, Orchid, Lupin, Titan I am an interested party. I am bullish on Telco.

Q: You own Tata Motors or you are trading in it?

A: Yes, I was trading it.

Q: Trading position?

A: I am extremely bullish.

Q: Only on that one in autos?

A: I have an investment in Ashok Leyland, and that’s doing well.

Q: You own it?

A: Yes I own Ashok Leyland.

Q: Large quantity?

A: Yes large quantity. I bought it effectively at Rs 4 in 2002.

Q: That position you are still holding?

A: I am still holding. They give Rs 1.5 dividend today.

Q: You said you are skittish about public sector banks but you are bullish on State Bank of India at one point, what happened?

A: I am not bullish so much on State Bank of India also. But banks cannot provide what the central bank requires it do and requires time. I can’t be bullish on those banks.

Q: So what would you tell retail investors watching you today? Just buy equities at current levels, wait for a correction, buy some equity and some gold, what was a good portfolio allocation according to you?

A: Have faith in India and invest in MIPs.

Q: MIP or SIP?

A: Systematic Investment Plan or Monthly Investment Plan. I think that is the best way.

Q: Mutual funds?

A: I think for a retail investor, don’t trade please.

Q: Why do you say don’t trade? Is there a risk of a correction in the near term?

A: Because I think 98% of retail people lose money in trade. Whether correction - no correction, bull phase – bear phase. Everyone has a sad story. The proof is in the statistics and we know people will say, you trade yourself but stop others from trading, I say dad used to drink whisky and asked us to refrain from it.

Q: What about HNIs? What would you tell them who are slightly more sophisticated?

A: Don’t trade.

Q: Don’t trade still?

A: Invest, have faith in India. It doesn’t change. It’s the same. Expect a reasonable return, invest for the long term, take expert advice, have faith in equities and India. That’s what I have done.

Q: But you have traded also and created a lot of wealth for yourself.

A: I have traded because it’s my 24 hour profession and I am doing it for the last 25 years. Trading goes against basic human nature. You have got to die 1000 deaths and 1000 egos in order to be a good trader. It’s not easy for every human.

Q: So if you had to carve up a Rs 100 between real estate equities and gold what would you do today?

A: I have all my wealth in equities. I don’t have much real estate, have some investments, some partnerships but not really significant, not more than maybe 2-2.5% of my wealth. All my wealth is in equities. For real estate I advice every middle class, HNI person that before he ventures elsewhere he should buy a house. Whether you buy it in Bombay, Delhi, Lucknow, Hyderabad, I think housing is one primary need in India which is very difficult and very expensive. Beyond that, my only allocation would be equity. Do it systematically, you don’t do it all at a time.

Q: What are your plans about giving away wealth between this Diwali and next Diwali? What are you doing? What have you done this year to give?

A: This year I gave about USD 3 million.

Q: USD 3 million?

A: Yes.

Q: To what kind of projects?

A: There is an organization called Agastya in Bangalore which I will give this year a million dollars. They are involved with, I believe that all source of knowledge is curiosity. I am what I am because of my curiosity and father always encouraged it.

So what we do is we mount labs with objects, like the solar system and everything, on vehicles and take it to villages and we study, we teach science to the village and I feel people don’t have clothes to wear. Their noses are leaking but they all are learning science. They have very auxiliary programmes where we train people to become young teachers and I have got my boys home, which is still only about 45 people, we have to take them to 375.

I suppose Impact, which works for girls’ education in backward districts of Rajasthan and UP. Then I am supporting an organization called Friends of Tribal Societies which is working within tribal areas for education and healthcare. Then I support the quest for gold. I have decided to support a lady who is working for making young children between the first and seventh standards aware about sexual exploitation.

Then I have decided to support a school for Aakanksha at Andheri, Mumbai. I have supported making of a hostel for CA students. So there are various kinds and I want to increase it and I am sure I want to increase it and I am sure I want to increase it.

Q: This year you will give away more you think?

A: Next year I will raise it by at least 15% to 20%.

Q: Any major project you want to be engaged with before you retire or hang up your boots?

A: My orphanage, eventually there will be 375 children. I want to bring up 1000 children. That orphanage full capacity will cost about Rs 1.75 crore just for the recurring expenses. I would send the children to English speaking school, give them good food and I want to bring up 1000 children. Then I want to work in an ancient water treatment systems in India. I think they are very good.

Also, and I believe that the biggest spender of charity is still the state. So what we should do is we should setup a Ralph Nader type institute, buy land spend Rs 5-7 crore, make a lovely institute near Bombay or Delhi and have a budget of Rs 7-8 crore a year, understand and analyze government expenditure. Then try and pressurize the government to make that expenditure better. If I must say that this year I have given a small contribution it would be, working towards capitalism and free societies because I think the only way out is creating more capitalism, more competition.

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