In a candid interview with CNBC-TV18’s Udayan Mukherjee, Rakesh Jhunjhunwala, one of India’s most respected equity investors, said the Sensex could go up to 20,000 and then slip into a trading range between 15,000 and 16,000. The benchmark index won’t hit 21,000 in a straight run though, the Big Bull said.
“If the Nifty breaks 4650 decisively and holds for a week or so, it could hit 5900-6000,” Jhunjhunwala said. The markets would consolidate between 4,000-5,000 for three-four years, he added.
The correction seen in the latter part of 2008, he said, was a part of a major bull run that continues and which started in September 2001. “The bull market started in September 2001. We had the first leg up to September 2002 after which there was a correction. Then it started from April 2003, that leg lasted till 21,000,” the ace investor said. “That gets corrected back now to 7,500-8,000 and now we have resumed that bull market. So we can go to 20,000 and again come back to 16,000-15,000, make a range and then make a move which goes above 21,000.”
Here is a verbatim transcript of the exclusive interview with Rakesh Jhunjhunwala on CNBC-TV18. Also watch the accompanying video.
Q: We spoke on the day after the election results. I do not think even we imagined the market would be here. What is the screen telling you now?
A: The screen is telling me that the bear correction of the larger bull market in India is over. If the markets do not break below 4,000 levels in the next six-nine months — and the screen is telling us they won’t — then surely the fall from 6,000 to 2,500 for the Nifty and from 21,000 to 7,500-8,000 for the index was just a correction in the longer-term bull market in India. Actually, in my opinion, the correction started in September 2001 because the real bottom the market made was post-September 11, 2001 and then the market went up to 3,500 and had a historic correction back from April 2003.
Despite people’s apprehension and doubts about the economic scenario worldwide, it could be that the fall [in 2008] was just a correction. I also feel so because of the way the [subsequent] rise took place with its tremendous breadth, tremendous pace with good volumes — but with a lot of cynicism and lack of participation among the larger people.
Q: You do not agree with the consensus feeling right now that we should be scared by the pace of the rise. That we are now approaching a mini bubble kind of a situation?
A: You first asked what the screen was saying, you never asked me what my opinion was.
Just like others, there is a fair amount of doubt in my mind too. Internationally, things are not clear at all and I do not think that the downturn in the western economies — even if there is some kind of an improvement in the next 12-24 months — has really peaked. So with that knowledge about the world economy, it clouds the judgement of what can happen in India.
However, If you look at the other side of the story, I see no reason why — if Indian software exports grow by 10-15%, commodity prices hold at reasonable levels and we have good government policies — India cannot grow at double digits. We have large internal savings. If we do well, the world capital will be at our doorsteps, there will be no lack of capital if the government is able to facilitate investments. So those are the two sides but I am more tilted towards the second side because in the initial stages, they say, bull markets always go up on a wall of worry and bear markets always go down on a ray of hope.
The fact is that market is just going up in an unexpected pace and everybody is worrying. Surely I am also apprehensive about the valuation and the pace but markets are markets.
Q: When you look at the screen, what worries you? Does it worry you that valuations are far ahead of fundamentals or do you see the kind of participation or mania that you saw in 2007 or that is not visible just yet?
A: Not at all, not even 5%. I don’t go to any cocktail party where stock markets are even talked because everybody is totally left out. And the futures positions are indicative, the number of calls you get, the apprehension that people have in the buy stocks — I don’t know where the buyers are coming from but I don’t think there is even 20% of the participation of that what was in 2007.
Q: Will they all get sucked in you think before this rally tops out, people who have been sitting out?
A: It is very difficult to leave a burning cigarette in a rising market. Everybody will ultimately join. I don’t know how many calls I got when we made a 52-week high. Normally, a lot of channels call me, no channel called me to get an opinion when the market was at a 52-week high. I don’t even know how many people know we were at a 52-week high.
So I think crowd psychology-wise or sentiment-wise, I don’t think at all we are anywhere near any kind of a top.
Q: Are you trading yourself with a bit more caution because you were saying you are also in two minds right now or are you trading the kind of volumes you were trading in the big momentum of 2007?
A: I don’t think I am trading the way II was in 2007. After all, I am a human too and I am also affected by what my thoughts are. However, I am far surer about the [country’s] longer-term growth prospects and the strength than most people.
Q: Why did you pick out the level 4,000? Any significance or do you think below that…
A: Instead of 4,000, I would say 3,800 or maybe even 3,600 — no level is sacrosanct — but I would say the level where this market made a gap, that should not be violated on the downside. If it breaks 4,650 decisively, that’s what my technical analyst tells me, that market will make or at least challenge the previous high of 6,100.
Q: Do you think 6,100 is possible in 2009?
A: Did you think 4,500 was possible?
Q: I am asking you.
A: Ok. What the technical analyst says — and I also think — if it breaks 4,650 decisively on a weekly basis and holds it for a week or two, then surely we can go to 5,800-5,900-6,000 levels. We could go there, then come back to 5,000-5,200 or maybe 4,800-4,500, make a range and consolidate for a year or so and then make a new high. Another scenario: we break 4,650, we are going to go to 5,850-5,900-6,000, come back to somewhere around 3,300-3,400 and maybe spend three-four years there.
Q: Do you think that’s also possible — that the market goes there, halves from there and then spends a big…
A: It happened in 1991. So at this moment, I won’t rule out any of the scenarios but I am more inclined towards the first that we will reach 5,800-5900-6000 and then we consolidate — maybe in the 4,500-5,000 or 4,600-5,200 or even 4,000-5,000 range for the next 12-18 months. Then we go into a new high — 6,100 — and go upwards or we go back to 3,000 to 4,000 where we spend two-three years to resume higher.
Q: What is your best guess for the rest of 2009? Do you think we will actually go to 5,800-5,900 in 2009?
A: I have put a lot of caveats there — that the index should cross 4,650 decisively on a weekly basis, hold for a week or two, then I think it should. I don’t know where and what range the markets go into, but they will go into a range, spend time and only then are we going to see a big move. We have already seen a big move, we don’t know whether this move will end at: 4,800, 5,800, 5,900, 6,000? I think it will surely end before 6,000.
I do not think the Sensex will cross 21,000 in a straight line. We have to correct and we have to make a range and only then we can have the next move.
Q: Range in terms of price or time?
A: Price.
Q: And that range according to you is?
A: Who knows where it will be.
Q: What is your best case?
A: I think it will be anywhere between 3,800 and 5,000.
Q: That big a range?
A: The range could be narrower but 3,800 would be the bottom and 5,000 would be the top in that range. The range could be 4,000 to 4,500, it could be 4,500 to 5,000.
Q: After that you think a bigger bull market will commence, which goes to a new high?
A: The bull market, which has started in September 2001. We had a bull market up to 2008, we had the first leg up to September 2002 after which there was a correction. Then it started from April 2003, that leg lasted till 21,000.
That gets corrected back now to 7,500-8,000 and now we have resumed that bull market. So we can go to 20,000 and again come back to 16,000-15,000, make a range and then make a move which goes above 21,000.
Q: Right now what sums up your state of mind: wildly optimistic, terribly and totally bullish or cautiously bullish?
A: All three.
Q: With an accent on what, the caution or the bullishness?
A: I am cautious.
Q: Why? You said yourself that nobody is participated; the gaon is not into stocks.
A: I am also part of the gaon.
Q: You are a sophisticated member of the gaon.
A: Even the sophisticated ones are caught.
Q: What is making you cautious? You said valuations are not crazy and who are we to say valuations are excessive? Is it global cues which you think may turn?
A: Yes, it is the sheer psychology of the fact that the global economy is in a terrible downturn. That is put into our brains.
Q: It is not the experience of the horrific 2008?
A: No, not all that. We have had more horrific experiences.
Q: Have you? 60% down in one year?
A: Yes, why not? ‘92, though I made a lot of money back then by shorting but we also 2000, which was the worst year when from 6,000, you came back to 2,900.
Q: So the fear is global, nothing else?
A: Yes, the fear is global.
Q: There has been so much talk about how much of the next move will be led by policy initiatives, Budget, government formation etc. do you think the Budget is that big an event?
A: No, I don’t think so. Market is a constraint of so many ingredients. Therefore it is not that a single ingredient by itself is going to be the decider. I don’t think the Budget is very important from the longer-term point of view. Surely it is important because it is the first serious policy statement of the new government. But I think people distinguish the policies of government from the apparent policies and the unapparent policies; apparent reforms and unapparent reforms. I think for longer-term unapparent reforms are very important.
Today I read in the Financial Express that now they will put all the applications for environmental clearance on the net. There is going to be transparency. If you do that and if you have proper land acquisition laws, so much investment will get speeded up into this country which is far more important than any statement that Finance Minister (FM) makes or even the allocation of 20,000 crore for infrastructure spending. I think this change is worth 2 lakh crore. So I think these are the unapparent reforms which are not in your mind but they have a slow effect; where you computerize things wherever the bureaucracy is dealing with the citizens, agriculture, study of subsidies, removal of anarchic clause. These are the reforms which - Indian Telegraph Law which has been in existence in 1885 and today is 2009, a modern company law. I think so many other factors are there, policy initiatives in agriculture where you look upon agriculture as a business and where we can make these businesses profitable for the farmer, the occupation. So I think unapparent reforms are extremely important.
Q: Is the market as discerning as to understand the value of those kind of reforms that you speak about?
A: I think so. Over a period of time all long-term investors will.
Q: What is the market pricing in in your eyes from the Budget this time around?
A: Maybe it is pricing out a lot of the disillusion or the alarm or the sheer fright of what could happen in the world economically then commodity prices have picked up that has bee priced in. I think also people are expecting dollar weakness that is reading to money in emerging markets. I think there is some paint-up demand and I think there is a lot of selling in panic. Mr Ramesh Damani’s father used to say, “In a bull phase, shares zameen mein chale jaate hai aur bear phase mein zameen se aajate hai.” So the buyer is there, he is invisible, we don’t know who he is and I don’t think that all the qualified institutional placements (QIPs) will go through and I don’t think that QIPs are ultimately going to lead to sensible money being lifted out of the markets.
Q: You don’t think all the real estate companies will manage to raise how much they want to raise?
A: I don’t know about the real estate companies or infrastructure companies or whatever companies. I don’t think that all the QIPs that have come out for money, are going to go through despite wherever the market is.
Q: How would the market take that if some of those QIPs bombed?
A: Fair enough. I would be happy. I have 20,000 market cap I want to raise Rs 5,000 crore. You haven’t earned Rs 2,000 crore in your life, you want to raise Rs 5,000 crore. The cumulative profit in life is not exceeded Rs 2,000 crore.
Q: Do you think there will be any tweak with the general capital markets taxation structure in this Budget, long-term capital, short-term capital or even STT for traders is likely in your eyes?
A: I don’t think that STT is entirely unjustified tax. I think the fair thing – I don’t think to reduce the rate marginally, bring it to more reasonable levels and to allow people who are not investors but business traders to allow that as an advance tax payment. I think that is the more fair thing. I don’t demand evolution of STT.
Q: But no change in the capital gains tax structure?
A: That is linked to STT. You impose the STT as an alternative to the capital gains which is a far better and an easier system then you make the rate reasonable for STT, continue it and allow the people who treat it as business income to treat it as an advance tax payment and make that system. So that when a person initiates that trade, he can say whether it is a capital gain trade or it is a business trade and you cannot change it, one entity can have only one or if he does it, he has to specify before that takes place.
Q: You don’t think all the real estate companies will manage to raise how much they want to raise?
A: I don’t know about the real estate companies or infrastructure companies or whatever companies. I don’t think that all the QIPs that have come out for money, are going to go through despite wherever the market is.
Q: How would the market take that if some of those QIPs bombed?
A: Fair enough. I would be happy. I have 20,000 market cap I want to raise Rs 5,000 crore. You haven’t earned Rs 2,000 crore in your life, you want to raise Rs 5,000 crore. The cumulative profit in life is not exceeded Rs 2,000 crore.
Q: Do you think there will be any tweak with the general capital markets taxation structure in this Budget, long-term capital, short-term capital or even STT for traders is likely in your eyes?
A: I don’t think that STT is entirely unjustified tax. I think the fair thing – I don’t think to reduce the rate marginally, bring it to more reasonable levels and to allow people who are not investors but business traders to allow that as an advance tax payment. I think that is the more fair thing. I don’t demand evolution of STT.
Q: But no change in the capital gains tax structure?
A: That is linked to STT. You impose the STT as an alternative to the capital gains which is a far better and an easier system then you make the rate reasonable for STT, continue it and allow the people who treat it as business income to treat it as an advance tax payment and make that system. So that when a person initiates that trade, he can say whether it is a capital gain trade or it is a business trade and you cannot change it, one entity can have only one or if he does it, he has to specify before that takes place.
Q: You track Indian Oil etc for a long time though you don’t own them; do you think there will be change in the policy this time around or unlikely?
A: My personal judgement is it is unlikely.
Q: Why do you say that?
A: Because it will require immediate raise in prices of petrol and diesel and no government wants to give a message in its first three months of power but they may change it. If I was there to decide, I would do it tomorrow because we never realize one thing, whether I pay and you pay, it is the government of India pays and I think this kerosene subject is incredulous I don’t know who is using this kerosene and we are entitled to all of this. So at least they should reduce - all of these subsidies should be below the poverty line. I think petrol pricing - at least they should free it, why do you want a control on petrol prices.
Q: But you are saying even that he may not do?
A: He may do that, there must be some tweaking, he may do that – I think petrol and Liquefied Petroleum Gas (LPG) should be decontrolled immediately. Liquefied Petroleum Gas (LGP) all are using it. I think for diesel – they can offer a subsidiary of Rs 1-3/liter and for kerosene – I don’t think they will do it but if I were to decide to raise it tomorrow, it should be done today. Q: You know he won’t do it?A: We don’t know.
Q: Do you think the optimism post the electoral result is justified on infrastructure sector?
A: Over a period of time surely the optimism is justified and I am an interested party. Similarly there will be tremendous build up in Indian infrastructure - you cannot have the companies tomorrow which can build this infrastructure because there is prequalification, there is experience, capital requirement lot of barriers and volumes will surely give them very good profitability. And also a lot of Chinese companies and all come to India, they complete failed. I am told that Indian companies are doing well internationally also. So I don’t think this performance was unjustified.
Q: Do you think valuations today are also pricing in too much of optimism for infrastructure?
A: I don’t think so because some of them were beaten very badly. Largecaps like Larsen & Toubro (L&T) and all have fancy valuations but the other stocks were beaten up very badly. Nagarjuna Constructions has gone from Rs 375 to Rs 38.
Q: Quadrupled from there or trebled?
A: I still think it is 1/3rd from Rs 375.
Q: Is that the right way to look at the sector?
A: It is not the right way but it is also not the right way to look at it from Rs 38.
Q: In absolute terms do you think valuations are run ahead of fundamentals or they justify current price?
A: Who knows who justifies value and valuation? Is there any mathematics professor who can give me a formula that this is the right valuation? I don’t want to comment on the valuation of any sector. If you feel so, don’t invest.
Q: What about real estate? You have not been very bullish on that space, has that view changed over the last six months or so?
A: I am not bullish.
Q: Why do you not like the sector at all, they have started cutting the prices, balance sheets have been repaired?
A: Because even if they have to sell all their projects at their projected prices, the current market caps and the debt more than justify it and the present land prices cannot replace that. I am a real estate company, I have 10,000 acres of land acquired twenty years ago, then to bring into my valuation, I am selling 2,000 acres every year, you priced it in. Acquire that 10,000 acres land again at the same price and show me.
This is not Hong Kong where government is giving land every year 500 acres, 200 acres. I have no investment in real estate space and it is too volatile also.
Q: Are you generally worried about where valuations have reached or you think that is not necessarily the case at this point?
A: In midcaps the valuations are still not anything which is a whack out of the world and we cannot look at valuation isolation – when I initially came into the markets, if the price to book was very high, I was worried - for example a company like Hindustan Lever. But the fact is that I have seen so many studies when return on equity (RoEs) are high, price to book is very high. So I just cannot look at this company has 20 P/E and it is very expensive this company has 8 P/E and it is not expensive.
Q: But the fact that so many companies are rushing in to raise capital, does it worry you?
A: But a lot of them are on the verge of bankruptcy. They have no option and of course there are some good ones – if you had gone to some of the companies, for example if the company’s price was Rs 250 at 2007, they wanted Rs 375. Now if the price is Rs 90, it would be at Rs 85. So they are doing it because they don’t have choice and some are having old habits, money is available, take it, ambitions have no limits.
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