Sensex may never go below 11,500 levels: Rakesh Jhunjhunwala

Part II

In Part-I of CNBC-TV18’s exclusive interview with trader & investor, Rakesh Jhunjhunwala, he shared his perspectives on global markets, on where the Indian markets have reached in this rally; the fact that he believes there could be a period of consolidation right now but he expects there will not be a deep correction from here on, not more than 10% as he classified.

In Part-II of the same series Jhunjhunwala told CNBC-TV18 that the investors are likely to see a range-bound market, and it is unlikely to see a major move either way. He sees consolidation and feels that the market may not move 10% plus or minus.

Regarding volatility, he feels that the market must expect corrections from time to time. However, he assured that the Sensex might never go below the 11,500 levels and the he sees the Sensex EPS at Rs 840 this year. He hopes that the US rates will come down and the domestic inflation, in India, may not go above 5%. For present, he feels that the government may have achieved its tightening target.

Excerpts from CNBC-TV18’s exclusive interview with Rakesh Jhunjhunwala:

Q: What could be the potential risks to that kind of expectations?

A: We have earned Rs 730-740 last year. The expectation in the context of what we have done in the last 4 years is not extremely high; it’s only 15-16%; but this is on a higher base.

Risks can be many – it can be demand in the software sector it could be a depreciation of the rupee; but by and large, it should come through.

Q: Do you think either technology, which is almost a fifth of the Index or autos, which have started showing some distressed signs – they could derail these earnings?

A: Autos is a very small part of the Index, really.

There could be other sectors which would compensate; some of the banks could do very well, Reliance could surprise – refining margins are at all time highs, some of the refining companies could do better; ONGC could do better.

And we cannot look only at the Index – maybe Index is around 16 – it could be 14. But if you look at the larger context of the quality of the earnings, the general growth, the potentiality – you have taken twenty years to come to USD 30 billion of a software exports; the projection is that we are going to double that in the next three years. What kind of a kicker that means for every other industry in India, whether it is for hotels or for housing or for retailing or for real estate!

How I structure my investment; rather than looking at year-to-year growth, I invest in the business model. And over that business model, do I feel the earnings have peaked, whatever investments I have made? I feel that the peak is far from here.

Also in terms of valuations, I do not think that we have had peaked valuations; we are going to have something like ’92, maybe in the next four-five years and that is where valuations are going to be.

Q: Have you taken any cash off the table; since you spoke about investing in a business and riding it till you believe it has peaked – in any of your significant investments, have you booked profits?

A: I have booked profits in all my investments. But I have reinvested that in the market, except maybe, buying a house or some small other assets. All my wealth is in equity and if I get money, I would put it back into equity.

Q: Not fixed maturity plans and stuff like that?

A: I have some Rs 40 lakhs lying in the public provident fund. Apart from that, I pay interest; I do not earn any interest.

Q: But in your top five businesses that you have – investments in stocks like Titan, Praj; you don’t believe they are anywhere close to their earnings peak yet?

A: They are surely not close to their earnings peak.

Q: Valuation peak?

A: Valuation peak, may be; but I personally feel in some of the investments, I don’t know whether Titan or Praj, earnings growth are going to really surprise on the upside and if the earnings growth is going to be extremely high, then the growth in the value of the investments – even if the valuations remain what they are, surely in some of my investments, I don’t expect the valuation or the P/Es to increase. But if the earnings growth is going to be very good and P/Es are maintained, then the appreciation can be quite good. That is at least what my hope is.

Q: You spoke about being surprised on the Budget day – the biggest nasty surprise was construction. Did you change your view at all on that sector, which you have been very bullish on after what came through on the Budget; and any of the interest rate concerns that are bounded?

A: No; effectively, you increase a dividend tax after such buoyancy in revenue – to have an increase in the dividend tax; and also the negative international factors played out a very big role just prior to the Budget day.

But those negative international cues; the expectation was that there will be a corporate tax cut. There was an effective increase in corporate taxes. I think that is what really disappointed the market.

Of course, the overall fiscal picture was very good and it has turned out to better than what he (the FM) had projected also. I was reading the Business Standard today in the morning; the growth in direct taxation in the first two months this year is 70%.

Q: What about construction as a sector, have you changed your views at all?

A: What has happened in Indian infrastructure? China added 1,10,000 megawatt of power last year, we added 8,500 megawatt.

This is the situation of the order book of our construction companies. When I think, the investment needed in infrastructure today is not 10% of what I think we will eventually have annually, after 4-5 years. I have retained my investments in Nagarjuna and in Punj Lloyd. I am bullish on this sector.

Q: You don’t think interest rates or margin concerns will derail growth or earnings visibility for this sector?

A: What has interest got to do with it?

Investment in infrastructure is going to take place, it’s at a very initial stage. There are big entry barriers in this sector. Although one negative aspect of this sector is that it is very capital intensive. But there are big entry barriers in terms of qualification, project management skills and I think there is going to be very good growth.

Q: What about oil? You said that refining margins are at an all-time high. How do you see crude panning out because the refining marketing companies are still laggards – HP, BP, IOC, all of them?

A: That is because of the subsidy policy of the Government of India. I personally, on oil price, I feel the range is between USD 50-70. I think ultimately price will be closer to USD 50 than to USD 70/bbl

Q: You have any investments in the oil sector?

A: None.

Q: What about other commodities like metals? I believe you turned quite bullish on Tata Steel after the hammering of stock post Corus?

A: Yes, if Tatas can bring the consolidated margins to 25%, then the kind of profitability they can do it on equity of 800 crore or the kind of profitability (they are) talking, is unbelievable.

In general, I feel over a period of time, commodity valuations will go up. Today, if you see, all commodity stocks they have valued at six times to seven times.

But with the increase in commodity prices, the base prices of commodities – the base valuations of commodities, stocks will go up; and they have done it in Tata Tea. What I feel personally is, as an investor, I will wait because the real efficiencies are going to take three years to kick in and three years is a long period of time.

Q: So you won’t buy now or would you buy, hold and wait – what are you saying?

A: I will wait but I will be alert.

Q: Your call there is on the management or on the steel cycle as such?

A: It’s more on a management than on a cycle.

Q: Are you bullish on the steel cycle even from these levels?

A: I don’t have much of ideas; I have only one investment, which is Bhushan Steel. In general, I think oil prices are g

oing to remain good; they are not going to go down to the levels which people talk of.

Q: As an investor, have you ever taken a big contrarian kind of call? Or do you just identify growth businesses and stay with them for a long time? Sometimes do you think that nobody likes this sector? I think eventually value will emerge; it’s a good time to buy in and wait – have you ever approached investing like that?

A: I don’t know that. I think my whole call in 2001-2002 was a very contrarian call; most people were bullish.

The dogmatic emphatic bullishness that I have would be India and equity market itself is a contrarian call because I don’t think many people share it really and genuinely.

When markets are up, they all say – no, India is going to boom. But the moment there is weakness; everybody is out with a sword.

I don’t think in terms of contrarian or non-contrarian. If I think the stock has got prospects and the valuations are attractive, I will buy.

When I bought Praj, it was very difficult decision because in January of 2003 the price was Rs 10; I bought the stock at Rs 100 in December 2003. So the stock had appreciated 10 times in a period of one year before I bought the stock.

So, I don’t know; stock appreciated 10 times is a vast appreciation and I bought after that. So I am not buying anything to be different. I am only buying it if in my thinking, the earnings will grow and valuations are reasonable.

Q: Do you sometimes fear that your vision or investing wisdom might be clouded by your innate bullishness that you may have failed to spot some danger signs when they are coming up?

A: I am not an innate bull. I have made some of the biggest money in my life by being a bear, right?

Q: But that’s pre-2000 right?

A: Yes. But the qualities I have as a human have not changed after ‘pre-2000’; this is the same Rakesh Jhunjhunwala.

Q: In this whole bull run, from the mistakes that you have made in investing, have you learnt a lot or have you approached investing differently from the few stocks, which have not quite worked the way you thought they would have worked out?

A: I think what I have learnt in the last four years is more than what I have learnt in the previous 43, because whatever has happened in the last four years, has led me to a lot of introspection. I have realized that some of the worst mistakes I have made, (are) in the best of the times.

Q: Give us a couple of examples.

A: In the sense, that god has been kind; my portfolio has really appreciated in the last four years. Sometimes that could lead me to extremely high commitments or try and feel that whatever I have done is right or that why should I review what I am doing? But, in fact, I feel I have now become more careful and more alert than ever.

Q: Are you saying that at some points your arrogance has crept in? You think you are bigger than the market.

A: No, no. I feel I am alert, but that should not creep in.

Q: But has it crept in?

A: Never. The first thing I learnt from Mr. Radhakrishna Damani from whom I learnt so much, that the market is supreme. So we never approach the market with the thinking that what we are thinking is right. When we go there at 10 o’clock, what the screen is doing is right. But the biggest lesson I have learnt also, is that I should approach things without prejudice.

Q: Is it difficult to do? Easier said than done.

A: I think it is easier said than done. Also, what happens, that sometimes if you have been right, you tend to be dismissive. Not tend to be dismissive of the market, but tend to be dismissive about some ideas which you have.

Maybe I was dismissive of real estate 15 months ago, right? That no, I don’t want to invest in this sector. I think I should have paid greater attention. But I console myself with the fact that this quest to learn as an investor is a journey, not a destination.

Q: Has it happened in the last four years that sometimes you have closed your mind to an opportunity too early and have missed out on an opportunity?

A: That has happened and it happens all the time. In fact, in the technology boom – because I am not computer savvy myself, I never understood what software was, I never made the attempt to understand what it is; because I only understood in 1997-1998.

Q: You were telling us about some of the other lessons, what else it taught you?

A: The other lesson is that do not expect that you will have this kind of return constantly. Some of the worst mistakes are made when you get an abnormal return and then you start feeling that you must take steps so that this return can be replicated. We must realize that these returns have arisen also because of external circumstances, which may not be prevalent today.

And therefore, all of the investors must realize that returns in Indian equity are now going to dilute. The low hanging fruit has been taken. But still I think returns are going to be better than lot of other asset classes. And if I see the risk profile, I think Indian equity may still offer the best returns over a period of time.

Q: But what you are saying does not gel very well with your prediction that in three-four years, there will be mass hysteria and euphoria in the market – 15% annualize for the next three years would not lead to mass euphoria; do you see a blow out at the end of this run then?

A: I hope we will have better returns on that.

Q: You think it will be little more than 15%? I am not talking about you as an expert investor, but for people who are less sophisticated and more passive in their investing styles?

A: I do not know about them.

Q: How can everybody generate a Praj and a Titan kind of returns every year? You cannot be the benchmark for the average investor?

A: No, but I personally feel that there could be a consolidation in earnings growth this year.

But I think we will have better earnings growth post-2007-2008. I am personally of the opinion that economic growth in India will kick off to double-digit figures; it may take twenty-four months. I see no reason why we should not.

We are a domestic base consumption story; now we got to go in the investment move and these capital investments combined with the consumption, should take us to 10% double-digit growth.

We have very low FDI levels of investment; our saving rates are going up.

Q: Where do you see politics in the midst of all of this; next couple of years that’s one constant refrain that we won’t see too much by way of reform where they are leading upto another general election – does it worry you?

A: No, we talk of reforms; Mr. Chidambaram made a very important observation after the Budget. He said my growth in tax collections budgeted this year, is more than what my tax collections have been in five years.

Was it possible India without reforms?

We are coming to GST, Goods and Service Tax; I know in some of the consumer durable companies, companies will save upto one-one percent by GST logistics. So there is going to be infrastructure dividend; there is going to be logistics. So I don’t see there is no reform in India, only maybe the pace is slower than what we desired and as far as politics are concerned, I think it is immaterial.

Look at the way Mayawati has changed; I think it is very important she wants to make an all-inclusive India; means, she wants to carry everybody with her. So ultimately, whether Jayalalitha or Mayawati, it’s not going to make much difference as long as they don’t have communist support. I only wish we have a government in which there is no communist support. I don’t think politics is really going to disturb India’s economic story.

Q: What is your expectation for the next three quarters? Would you be surprised if the Index broke 12,000 on the way down?

A: Nothing in the market ever surprises me.

Q: Are you expecting it to happen?

A: I cannot say that it will not happen. It could break those levels, but in the absence of earnings. Damage to earnings growth – I don’t think it’s going to retain that loss; it will bounce back. You went to 8500 levels and you bounce back. So I feel, it could break. But if there is no earnings damage, I think it will bounce back with vengeance.

Q: What could break it then – some liquidity contraction, global even; what is the potential risk to this market, which can break it below those supports?

A: Anything can happen, maybe fears about worldwide economic growth abrupt appreciation of the rupee, maybe some political event in India; lot of things would kick it up. The biggest protection I think the market is having against a big fall is that people are not going in for extreme commitments. You are not seeing that kind of commitment in the market, which we saw in 2005.

Q: You don’t find the futures market terribly overbought or leveraged right now?

A: Not at all; when Reliance was at Rs 700, it had got 2 crore shares outstanding. At Rs 1600, it has got 60 lakh shares outstanding. In a mar

ket with this kind of market cap, what is the futures commitment of Rs 30,000 crore?

I don’t look at the Index and don’t look at the options; I only look at the plain stock futures.

I don’t think in the cash markets, there is any extreme commitment, because there is no extreme belief itself; nobody is telling me that sell your wife’s bangles and buy stocks.

So you have this big mighty falls and whatever falls we have had in the last three days, in two days the FIIs have sold 3100 crore of Index futures and I think they are going to sell another 1000-1500 crore today also. So there has been substantial amount of hedging and short selling also.

Q: Would you be surprised if the Index went on to break 16,000 this year?

A: It’s a tall order, but I won’t rule it out.

Q: What is your expectation – nothing can be ruled out in a market?

A: I have no expectations. I have an investment. I am confident about the economic growth in India and about the profit growth in those companies. I think valuations in India have not peaked. If my company is constantly growing profit, their size grows, then PEs will grow. So Indian PEs will grow because of size and constant growth in profit.

It is that feeling then; I am retaining my investments and I have absolute confidence there. Not that I don’t have right to change my opinion; I can always change my opinion and I approach the markets everyday with the scare. I also don’t know what’s going to happen in the markets tomorrow. I know only as much you know and we trade with price there. So I won’t be surprised, I won’t rule out anything.

Q: But are you getting that sense looking at the screen that this year we could form a significantly higher top from what we have formed already?

A: It is difficult this year itself. But I won’t rule it out.

Q: But 2008, you think will be a better trajectory for the markets?

A: I don’t think so; the slow down in the auto industry and the worrying thing is slow down in commercial vehicle industry.

Cars have done well and will do well. Let’s see, it is in very initial stage. If interest rates ease, then demand could shoot back in the commercial vehicle industry.

Q: On balance, you are bullish?

A: I am bullish, absolutely and my commitment reflects.

Q: Both long-term and short-term or short-term skeptical, long-term bullish?

A: Let’s leave the short-term part separate. I have all my wealth in equity and that is the biggest commitment and as of now, I need to retain. I don’t know about tomorrow.


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One Response to Sensex may never go below 11,500 levels: Rakesh Jhunjhunwala

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