Billionaire investor Rakesh Jhunjhunwala, who's often referred to as India's Warren Buffett, says, the financial year 2012 has been, so far, the worst trading year of his life.
However, he is not giving up hope. He still believes that the market is in a corrective phase of a long-term bull run.
In an interview to CNBC-TV18’s Udayan Mukherjee, the big bull of Dalal Street says, although the market is showing strength, he has had the worst trading financial year of his life starting from April. And that’s what makes him cautious or confused. “I still don’t think that there is a clear picture. I think we will still have to wait for events to unfold.”
Q: We have approached 5,200 with some strength, do you think things could turnaround now or you are not that optimistic in the near-term?
A: I have never been so confused in my life. My personal perception is that there are three important factors for the market. One is what happens in the western world. Second is inflation. Third is government action. The most important factor is inflation.
The fact that government does nothing disturbs me. In 1999 or 2000, when Musharraf had visited India, at that time, there was big talk of a rift between Mr Vajpayee and Mr Advani. The political feeling then was very much similar to what it is today. But that came to passé very fast.
Elections are still two-and-a-half to three years away. So, whatever thoughts we have on the government may come to passé in the next three-six months.
As far as the Western world is concerned, I think nothing negative is going to happen. Nothing negative beyond what the market is expecting is going to happen in the next six-nine months.
I don’t think any bank or any government is going to easily default. Defaults take place, when people are unaware of things. At the moment, we are very alert. Markets, to an extent, have also discounted the worst.
As far as inflation is concerned, the Reserve Bank is acting very sensibly. They are expecting that inflation will moderate after December. So, atleast until December there are no hikes.
I don’t see any reason why inflation will not moderate just because of the base effect. If prices were to be kept at September levels, if there was to be no price increase whatsoever in the level, the inflation will be 2.3% by March. So, I don’t think we are going to have more than 3-4% price increases upto March.
Q: You seem to have a bullish kind of disposition on all the three factors. Then why are you confused?
A: Markets are showing strength. They are reacting positively to negative news. But I don’t know, maybe I have had the worst trading year of my life, financial year starting from April. And that makes me cautious or confused.
I still don’t think there is a clear picture; I think we will still have to wait for events to unfold.
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Q: In the near-term, do you think we could breakout of this 5,200 range or extend it significantly, surprise people?
A: I am quite circumspect. Nothing is going to happen in the Western world till March-June.
Q: Nothing bad or nothing good?
A: Nothing bad, which is beyond what the market has already discounted, will happen. I am quite sure Greece is not going to default.
In America also nothing negative beyond what is known is going to come. I don’t think Italy and Spain have a case for easy default at all and Ireland is doing well.
As far as inflation is concerned, I am still concerned; I am not so sure that inflation will come down. The Reserve Bank is not only looking at the inflation, it is also looking at the heavy commodity prices.
When Musharraf came to India, I was in Bangalore. I had gone to meet a company there. We were all discussing that our government is good for nothing. There is no governance. But things slowly perked up.
Q: Will you concede that it has been very bad from the government point of view over the last 9-12 months?
A: The problem is everybody is aware of what needs to be done, but there is no unanimity. There is no reason why you can’t have the Goods and Service Tax (GST), there is no reason for a discussion there. The DTC Bill is also before the standing committee, and considering the state of flux we are in it will pass as well.
Q: How long will it take though because a lot of people say even 2012 calendar year or 2013 fiscal year might be a difficult growth wise?
A: I do not think so; one thing which is very reassuring for us is that our exports are growing well despite the world slowing down.
Q: You believe the export numbers?
A: Absolutely, I think it is all hogwash that money is coming back through the guy who is doing all this today you can get it by paying 15% tax by getting dividend from Dubai, right so why will anybody create a false export? Export income is taxable today, so why will you create false exports in order to get money?
Exports are absolutely genuine. And I believe and respect government of India that their figures are not going to be hogwashed month upon month and also the Reserve Bank goes through those figures. So, it is the question of confidence, and if the government acts and inflation slows down, the confidence will come back soon.
Q: You think the investment cycle can be restored because from the CEOs we speak, they seem to be having their chins down about how long this investment drag might continue?
A: The investment drag is also an effect of the moderation in demand. If interest rates peak and moderation in demand corrects, then investment cycle will come through.
We are building 11 kilometer highways everywhere. It is not that everything has slowed down. Of course, it is very disturbing with coal and power shortages, especially on Diwali, but the employees in Telangana have called off their strike and hence, if the Singareni Collieries is back to work, it will really help matters.
Q: You said it’s been the worst trading year or your life. Did you get the bullish calls wrong or the bearish calls wrong?
A: I got all the calls right despite that. I remember when the index was at 5,700, we had a meeting in April, I was the only guy who very circumspect. I got all my calls right and all my tradings wrong. It happens, it is life. You have to take it, accept it with a smile.
Q: Right now, do you think 4,700 might still work out to be the base or you don’t have that confidence yet?
A: It will take a lot to break 4,700.
Q: If it has to break, do you think it breaks in the next three months or you are more circumspect about what happens later in 2012, after the next six months?
A: If the earnings are Rs 1,150-1,200 on the Sensex this year and if you project 10-15% growth, atleast 10 % growth next year, I don’t think then breaking 4,700 is very possible.
2008 was an end of a 20-year old bull market in all asset classes and the end of a six-year bull market in India. Commitment was wide, and people had lost a lot of money. I think there was a lot of commitment.
Today, I think Indian public has not participated aggressively. So, for markets to really take a deep dip, you will have to have a big rise and a plethora of commitments. So, I think 4,700, in all probability, will be protected.
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Q: Do you think that kind of participation may come, if the Nifty say surprises by rallying to 5,700-5,800 and everybody gets the feeling a new bull market has started and then gets sucked in? Do you think that’s possible?
A: That’s possible. But if earnings growth continues then even if people commit, to come back to 4,700 after 18 months, 19 months means things will have to really crack. In December next year, you will be looking at 2013 earnings, 2014 earnings maybe the year after that. So, I think 4,700 could be protected for long time to come.
Q: But you are clear that we will get some earnings growth. In 2008-09, we didn’t see any earnings growth.
A: But we had very big earnings growth prior to that, which we have not had now. The software sector is holding on well. Also, if inflation is to peak and the interest rates are to peak, the interest rate sensitives—automobiles, banks— would be at the bottom of their earning cycle.
I essentially feel that if the interest rate rises were to stop and we have some kind of decline in interest rates next year, we will see some come back of demand for all interest rate sensitives —infra and auto.
Q: When is the earliest do you think we can have a bull market again?
A: I personally believe the bull market, which started in 2001 September, is still very much alive. It’s a correction within a bull market.
I feel the Indian gross domestic product (GDP) growth in the next decade will be atleast 15% nominal, maybe 5-6% inflation, 9-10% growth.
Look at the underexposure position on equity. In India, everybody thinks that jewellery and real estate is wealth, stocks are paper. Unfortunately, all my wealth is in paper.
Q: Akash Prakash (fund manager and chief executive officer of Amansa Capital Pte. Ltd) seems quite sceptical. The kind of damage we have done with policy, we may have reverted to a 6% kind of growth for the next couple of years. Could those projections be true?
A: Well, they could be true, I don’t rule them out. But I think if policy could only change things then policy will come. If there are deeper structural problems that would be difficult to correct then 6% could be right. But if mere change in government policy could get us to 8-9%, I think that change in policy will come regardless of government.
Q: And you don’t see anything major structurally which has changed like inflation. Once this base effect plays out, could we still have a structural inflation issue?
A: If investment falls, it could be a cause for inflation. Until now, India has gone through short six months, one-year periods of doubts, circumspection, slowdowns. But it has always been able to come back. I don’t see any reason why we should not be able to do.
Whenever we have slowed down, we have slowed down because of government inaction. The next step of policy was always more aggressive and better.
I think the revelation of all these scams is good for the country because it will lead to modification of policies. It will lead to more agility, and alertness.
I don’t know why I can’t get negative on India. The factors that drive India are not man made, whether it is democracy, whether it is demographics, whether it is entrepreneurship, whether it is skills. These are three-four primary reasons, they are irreversible. So, there can be delay, but there cannot be denial.
Q: How has your portfolio done between last Diwali and this Diwali? Are you happy with how things have performed?
A: I have not compared from last Diwali to this Diwali.
Q: Broadly, the last one year — are you okay?
A: I am happy. I have nothing to complain. It’s nearly at the top.
Q: You have made a couple of investments in the last one year. You bought Pipavav and Subex.
A: Subex is just a pastime. I invested Rs 6-7 crore. For Pipavav, I have still not paid the money. They’ve passed the resolution, so I will be paying the money in the next 12-10 days.
Q: But there has been controversy on that one. You are okay with all that?
A: There is always controversy.
Q: Not with every stock of yours. There is no controversy in Titan or Lupin?
A: So be it. I have made a long-term bet with the impeditive of Chinese naval power and the inability of Indian shipyards at the present state. I am told that public sector shipyards have USD 25 billion of orders and USD 1 billion is the execution value every year.
It’s a huge shipyard and I believe they will get huge orders. I have made other investments. I have made investment in Sterling Holidays. I have made six new investments in the last three years.
Q: Aside of these three?
A: In last three years, I have made investments in Rallis, Delta, Orchid Chemicals, VIP, Sterling Holidays and Pipavav.
Q: VIP is a star in your portfolio. It’s gone up 40% since last Diwali. Any apprehensions on how fast it’s gone up and whether you want to checkout of it?
A: For me, I always look at entry value and exit value. As long as the exit value, I feel or the exit story is relevant, a quarter and a year won’t make a difference. I started buying at Rs 62 2.5 two-and-a-half year’s back. If it goes from Rs 1,000 to Rs 800 or whatever, it doesn’t make any difference.
I feel the long-term story is good. The company will do well. So I’ve retained my investment. Today I intend to, but I don’t know about the future.
Q: In past discussions, you have often said that the time to sell would be when stocks in India start trading at 25 kind of PE multiples.
A: The index.
Q: Yes the index. However, some of these stocks that you own are trading at 30 kind of PE multiple.
A: But they are always going to trade at premium to the market. You look at the return on equity and cash flows. I think the three most important determinants are growth, return on equity, cash flows and governance. So any company, which carries these four qualities, will trade at a premium to the Sensex.
I personally think whenever India peaks — and it will happen in next 5-10 years — it will peak with Sensex nearly 25 times forward. So, if today Sensex is at 15 times, there are stocks, which are at 5 times and there are stocks, which are at 25 times. Unless things about the specific stock change, these kinds of premiums are going to prevail.
Q: You have no apprehensions on Titan etc that it is slowing down because this quarter has been a bit lower than what people were expecting.
A: I think after the kind of growth Titan has had and the kind of challenge the economy is facing, to expect some slowdown was reasonable. I said so also. Also, if you look at the way they are positioned — in their businesses — their competitors are half their size or 30% their size.
I am a great believer in Titan story. It’s also not easy to find better investments. I want to have consolidated portfolios. If I look at five-10 year horizon, to find a company positioned like Titan, I’ll think there are fewer companies in India.
Q: If you sold it you won’t be able to find another Titan quite easily?
A: No, my return expectation is not very high. It is 18-24%.
Q: From Titan?
A: From Titan or my portfolio. If I return 18%, I am a good investor. If I return 24% in the next decade, I am a star investor. So I am not looking for those kinds of — and as time is passing, it is maturing me to think that a bird in hand is worth 1,000 in the bush. So where growth maybe little slower but surer and return maybe little lower, I would like to go there.
Q: The disappointment in your portfolio last year has been Aptech. Are you disappointed with the way that story has turned out?
A: I wouldn’t like to comment much on Aptech. A lot of my stocks in my portfolio have not done well. Aptech has not done well price-wise. Bilcare has not done well. Geometric has not done well and Pantaloon has not done well. So be it. There are years when they are good.
I also realise that, as I analyse when I make mistakes and I think about it, I made two mistakes. One is I generally trade with strict stop losses in trading but when I make large money in trading, then I forget the stop losses.
In fact, last Diwali I was sitting on the largest trading profit of my life but I lost 30-40-50%. I’d gotten so confident. And also certain stocks, I do recognise in advance the problems, but then I am in a state of inertia and I don’t sell given that I have made these mistakes. But I have realised them and I think with time I will correct them.
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Q: Would you have sold out construction names like Nagarjuna Construction earlier? Would you have liked to do that on hindsight?
A: A stock, which was at Rs 380, and today is at Rs 52 — in hindsight everybody would have (had liked to sell it).
Q: But just in terms of tracking the story, could you have seen such pain and such destruction in construction and infrastructure?
A: I would not really. But to tell you a story: I’d made the investment in Prime Focus. I bought the stock for Rs 4 — a Re 1 share. I bought the share on April 21, 2004. On December 2007, someone offered me Rs 115. I told him, “who?” and the price went down to Rs 8. Today it’s Rs 55.
So, if you think of the kind of mistakes you have made and what they have cost you — you can’t sleep in the night. So look at the total performance and learn from the mistakes. And I made many, many of them but they are far less known then the successes.
Q: At least the big ones have compensated for it and that’s what a good portfolio does. Are you okay with Lupin because that’s gone up 6% between last Diwali and this Diwali?
A: It’s not question of what about the last three years.
Q: Terrific performer but has slowed down a bit.
A: You can’t get good stocks to invest every time. I think Lupin today is a mature company, doing reasonably well — 15-20% growth, good balance sheet, and diversified product range.
It has given me 18-24% return. I am very happy. It should give 18% return.
Q: Why have you never bought another bank other than Karur Vysya Bank?
A: I bought Federal Bank.
Q: You bought Federal Bank. But none of these new sector kinds of banks — the Yes Bank and IndusInd — never attracted you or was the price wrong?
A: No. They have performed so well, the price was always right and I was wrong. Alright, so maybe by chance more than anything else or maybe I thought they were too expensive. They were two-two and a half times book. But I think Karur Vysya Bank and Federal Bank have also performed quite well.
I still think by all measures Karur Vysya Bank is extremely cheap bank in terms of valuation. For a bank, which has given 18-20% earnings, has net NPAs, which are close to zero, is growing 15-20% a year, good return on equity — I am very satisfied.
If you ask me what’s my best investment in life, of course, it will be Titan and after that Karur Vysya Bank.
Q: Do you ever trade in gold? It’s done so well over the past.
A: Yes, I do trade in gold.
Q: What’s your view there now?
A: I think it won’t go down. It will consolidate.
Q: Around USD 1,500-1,600 per ounce?
A: At USD 1,550-1,650 per ounce — whatever. Gold, according to me, is not going to go down unless and until this crisis of confidence in the western world is resolved. It will take a lot for that confidence to be restored.
Also, because central banks have sold lot of gold between 1999 and 2003, they are big buyers. If gold comes down central banks will again be big buyers — not that I am very expert on gold. I don’t pay too much attention on it.
Q: I asked because Indians have largely been buying gold or putting in fixed income over the last one year. They have not just got into equities at all. Do you think it’s time to get out of that mindset?
A: It’s popular to do what’s popular but it’s not profitable to do what’s popular — don’t forget that. So I think gold investing and fixed deposits are also now very popular. I don’t know; maybe in the next one year equity may underperform.
As far as I know, if any asset can give me an 18% post-tax return. I don’t think I need to look elsewhere. I am confident equity will give me an 18-24% return over the next decade.
Q: That’s you. I am saying for a regular investor who is just probably buying an ETF or just a regular diversified mutual fund who is not giving that kind of return, do you think it still makes sense for equities at these kind of levels?
A: Well depends. What I would advice anybody is to put good amounts in equity but put it on a monthly basis. So you don’t put at one value you put at all values. And then when that peak comes, whenever it comes — 5-7 or 10 years — don’t get greedy or don’t ask anybody. I am not going to forget the lessons of 2007 easily.
Q: Do you think in the next one year there could be a massive capitulation in the market like we saw in 2008? That’s the fear, which keeps people away.
A: I don’t think so. There is no commitment. Who are going to capitulate?
Q: Global guys, maybe?
A: Global guys, also, the commitments are I think at all-time lows. I don’t think there is any question of that kind of capitulation at least in India. I don’t know internationally.
Q: What’s your approach to for the next one-year? How are you approaching things for the next 12-months?
A: Low on my trading because good trading means when you are not doing well, you must withdraw your volumes. As far as investing goes, I am looking to disinvest one or two of my stocks — both in listed and unlisted. Get debt free and relax.
Q: Do you think you will probably liquidate one of your big bets in the next 12-months?
A: I won’t comment on that. I won’t liquidate any of my big bets. That’s what I think at the moment. I never know what I will do tomorrow.
Q: And you were saying what will you do after you sell some and get debt free?
A: Take life easy.
Q: Any new resolutions? Last time you were telling me you want to learn to swim etc. Have you made any progress on those fronts?
A: Not really. Every year’s resolution is drink and smoke less. But doesn’t happen.
Q: That’s constant. But when will you do this? You are not getting any younger.
A: Well, I don’t know. I haven’t thought of any resolutions. I’ll talk to my wife today and ask her.