The question bothering the markets still remains - is there more pain left and what is the road ahead? To find out answers to these questions, CNBC-TV18’s Stocks Editor, Udayan Mukherjee caught up with ace investor and market expert Rakesh Jhunjhunwala in a special series called ‘Hunt for the Bottom’.
Jhunjhunwala feels that the markets have seen a bull-run since April 2003 and one cannot have a bull market without corrections. The corrections would be testing the investors’ patience and their sheer belief in the markets, he said. ”All the corrections we have had in the last four years have had been deep but they have not been deep time-wise. I think the real patience and the real belief in the equity and in the market comes when the market tests you time-wise. So I think this is going to be one of the deepest and the longest corrections that we are going to have, in what I believe is going to be a very long bull market,” Jhunjhunwala said.
Excerpts from Udayan Mukherjee’s conversation with Rakesh Jhujhunwala:
Q: Is the worst over, have we seen most of the pain or do you fear that there could be much more pain this time around?
A: We have not four but four-and-a half-years of bull market, which started in April 2003. Whatever be the quality and depth in the length of the bull market, you are not going to have a bull market without corrections, which are not going to test our patience and sheer belief in the market. All the corrections we have had in the last four years have been deep. They have not been deep timewise. The real patience and belief in equity markets comes when the market tests you timewise. This is going to be one of the deepest and longest corrections that we are going to have. However, this is going to be a very long bull market.
Q: In the middle of this phase, you expect to see some rallies which will get sold into as well?
A: Yes. You will surely see rallies and we are in the midst of one. Suppose the markets doesn’t exceed and the index doesn’t go 21,000 and Nifty doesn’t go above 6,200 for the next 18 months, I as an investors won’t bother it at all. I would happily rest with the kind of gain we have had for the last four-and-a half-years.
Q: It could be an 18 months rest you think?
A: Why not.
Q: Six quarters of market not going above the old high?
A: Why not.
Q: Is it a possibility or a probability according to you?
A: It’s both.
Q: You think it’s a highly likely event?
A: I believe in the long-term story. I am going to profit as an equity investor. As an investor, I don’t see a greater rate of return for my capital at any place other than the equity market. I watch the market everyday but I won’t be surprised. I am prepared for it.
Q: But you look at the screen very carefully as well and trade a bit? Is the screen reflecting any strength over the last few days?
A: A good part of the market has already bottomed. It may take time for the market to gain. In the midcap space, a lot of stocks have bottomed. But the price movement tells me that as of now, not much of the market is going to renew those.
Q: Which sectors are still vulnerable to downside? Some sectors had seen massive excesses, but stocks have also fallen 40-50-60%. Do you think enough correction has happened in those sectors or pockets or they may unwind further?
A: That’s a very difficult call to take. We have to play it scrip to scrip. It is difficult to take it sector to sector.
Q: You had concerns about spaces like real estate etc. Do you think they have corrected enough?
A: I have been a real estate stock bear and have been wrong earlier. I still feel there is space to go there.
Q: Any other clear space where lots of excesses have happened?
A: In the infrastructure sector, there is lot of excess valuations. Stocks will take time. It will take time for the excesses to wear off.
Q: You have been a big bull of that space and have had big holdings like Praj, and Punj Lloyd? Do you think there were excesses at the top in those kinds of areas as well?
A: Suddenly the valuations were quite high.
Q: But have they corrected enough after this big fall?
A: They have corrected. But for them to really gain their old highs it will take time.
Q: India has been one of the biggest underperformers in the last three months. Do you think there are local problems as well, which we need to content with over the next one year?
A: The way to tackle inflation is to increase supply. To keep interest rate high in the face of low interest rate worldwide, is a local problem. A friend of mine told me sometime back that the true bottom of this market will be made the day the election is announced, but that has been the history of our markets.
Q: Does politics present a threat to this market?
A: We have seen the worst of whatever the threat could be. I don’t think they are going to impose price controls anywhere. Also, India has grown a lot without the politicians. So, I am not afraid if Mayawati becomes Prime Minister, but I hope she will not. I think politics has done no good. If god were to grant me one wish, I would ask him to let anybody be the Prime Minister of this country, but let not that government be supported by Communists, because if you were to listen to the Communists we were to get everything free and don’t have to work for anything.
Q: Does government policy worry you? We have seen quite a bit of price control etc in the last one-month? Does it worry you significantly?
A: Not at all, because we have been hearing all this for so many years but India has trudged along. Do you think anything has changed in the last 12 years?
Q: What about steel? If I remember correctly, you bought some steel stocks earlier, didn’t you own Tata Steel?
A: Yes. I bought some steel stocks even lately. They are not going to impose any price controls. SAIL and Tata Steel are placed very well as far as government rules are concerned. If steel prices go up, they benefit because they have captive commodities.
Q: What is essentially different about what is going on now in the market and what you saw in 2001 and 1992?
A: Valuations in these times never got to 1992 levels. In 1992, we were trading at 65 times earnings, 2001 at 35-32 times earnings, and this year we peaked at 21 times maybe 2009 earnings.
Q: In some pockets like infrastructure etc we did go to 30-40 kind of P/E multiples?
A: Yes, maybe but that was not a very large part of the market. After all, the largest part of the market is the Sensex and Nifty. The bull market that started in 2003 cannot end at less than 30-35 earnings or at least 25-30 times for the index.
Q: Let me paint a bearish scenario. The bears say that interest rates go up even from here, which may not be justified. But in our country sometimes we do things which are not justified. GDP growth slows to sub-7%, earnings growth slows to 10-12%, could we have then in that kind of situation a compressed one-two year kind of a bear phase? Is that a likely scenario or even a possible scenario in your eyes?
A: 4,100-4,200 which corresponds to 12,500-13,000 on the Index is a level which we are not going to penetrate on the downward side very easily. 5,300-5,400 upside on the Nifty is a level that we will not penetrate easily. So, we could be in a 4,200 range. The range could be 4,500-5,300 instead of 4,200-5,300. We could pass a year or 18 months.
Q: Is it a good time for investors to buy stocks or do you think they won’t be rewarded in the next one-year or so?
A: I don’t think we as investors should be worried about what rewards we can get in a year. I have made the biggest money by understanding that I get the reward within a time period which is reasonable and one-year is never reasonable. If one gets good stocks at valuations which one thinks are good and feel the ultimate value of the stock will be far higher, one should buy it.
Q: How much damage has been done this time around because in our country because a very narrow section of the population invest in stocks?
A: Everybody’s portfolio is damaged, but my portfolio doubled in one-year. You went from 100-200 then, came back to 140-150 and right now are at 130-135. The increase was very severe and the fall was equally severe. I don’t think the damage has take place with those Charlie’s who came to make a fast buck. The serous investors who invested through the last four-five years have been getting very good returns.
Q: Do you think they will hold the faith, which has been seen so far in the mutual fund portfolio with no major redemptions? Do you think this whole phase will pass without significant mutual fund redemptions?
A: Why do you think these redemptions are not taking place? It’s not an act of defiance according to me. It is because may be it is supports. The amount of money that has to come to India for investing locally is far greater than what we have had. So, some people are withdrawing but every other money is going up. Prosperity is also going up. People who are running businesses are feeling the prosperity. So, may be the redemptions may not take place. It could also be that the kind of money which has come is good genuine money and not some short-term scam money.
Q: Having seen five-years of bull run and then a sharp three-month correction, do you think it is time to re-orient your investment strategy somewhat because a few things have fallen off the cliff? - Is it time to change your horses?
A: I have followed one investment strategy all my life. Good investing gives you good returns. It depends on your investment strategy. My investment methodology and strategies don’t change as markets keep changing. If I have a good stock, then it is going to give returns. One thing which supports the market is the bodyweight of solid liquidity. With these kind of high oil prices, where is all this surplus money with West Asian countries going to go?
Q: But you trade as well, do you sense that different sectors are coming back? IT has had a nice rally after a long time, They were two years out in the cold. Is it possible that some of these losers of the last couple of years could stage a comeback?
A: I am not personally so bullish on IT.
Q: You have not been for a while?
A: Yes, because they are a mature industry, all institutions own them. I think growth is going to be limited there. There are uncertainties in the principal markets. Although I have true respect and true regard for the Infosys management, I think meeting their guidance is going to be a challenge.
Q: Do you think there is a risk out there?
A: I think there is a challenge, because conditions in the US are going to get worse by the day. They are saying they expect the second quarter in the US to be better .
Q: Which is when you think the problems will start dropping in?
A: I think there will be three stages of the problem in America. First is the realisation of the subprime problem. Second, the economy will slowdown as a result. I think defaults would creep into prime housing, into credit cards and auto loans and maybe commercial real estate. I think that will be the second stage. The third stage is going to be a depression.
Q: Have you ever bought an FMCG stock in your life?
A: Yes, I have.
Q: Not Tata Tea?
A: No, not Tata Tea. I have another FMCG stock in which I own more than 5%.
Q: So, a largecap FMCG stock?
A: I won’t say largecap but fairly good company called Agro Tech Foods.
Q: But none of the ones we know like Colgate, Dabur, Marico, and Lever. You have never bought them in your life?
A: I may have bought some stocks like Colgate and sold it. I bought some shares in Lever in 2004 and sold it in 2005. I have made good money there.
Q: Have you ever been a big pharmaceutical investor?
A: I have a large investment in Lupin and made good money in Matrix. I made some small investments in Ranbaxy.
Q: Do you subscribe to the theory that capital goods or power is a sector, which was such a big leader, is on the wane and will not lead to the next rally?
A: Wane is about P/Es. Pharma P/Es are set to go up. That’s one sector which will not dip if we get a prolonged correction. If you look at some of the P/E e ratios of pharma companies, they are certainly attractive. Everybody has been so ebullient about capital goods and that’s why P/E’s are high. It will take time for earnings to catch up.
Q: What are your thoughts on oil and gas as a space? You just spoke about crude; do you think there is an oil and gas play in India from a stock market perspective?
A: Well I would Reliance is a big oil and gas play. There could be some interesting plays in the smallcaps and the midcaps.
Q: Exploration?
A: Yes, exploration.
Q: You were once a bull on Indian Oil Corporation. You lost your hope in them?
A: I will never buy them, I promise. Wherever government is involved I am going to be very careful.
Q: That's surprising coming from you because you made a lot of money from PSU companies like BEML and Bharat Electronics?
A: But at what valuations? I started buying Bharat Electronics at Rs 32, BEML at Rs 30. Also what I realized and why I sold this is that for companies to really gain at these valuations, one has got have that plus-plus. The investor has to have faith that these companies are innovative, they are going to do something new. They are going to do something different. I don't find that in the public sector. They are constrained. Indian Oil--I read Rs 450 crore is what we are losing on fuel everyday. But there are interesting opportunities in exploration. I have some investment in that sector.
Q: But they are small and midcap companies?
A: Yes.
Q: What are the chances that in 2009 you go to something much beyond the old high that you saw on the index? Do you think it is conceivable? What needs to fall into place for that to pan out?
A: America needs to go for present tense. It is important that Infosys achieves this guidance it has given. What is important to the Indian economy is the value-add that software brings. If Infosys adds 25,000 employees, it translates into 25,000 cars and 25,000 homes. Then, that in turn leads to cement and steel. It is not any small value-add. If the US grows at 4%, Indian software will grow at 40%. The sentiment of investors worldwide will be extremely bullish. If you achieve earnings of say 1,030-1,040 in March 2009, then you go to 1,200 by March 2010. So, maybe in May 2009 you are going to see a very good rise.
Q: Are you looking at 25-30 P/E multiples?
A: For that we are still 4-5 years away. We will get there.
Q: We didn’t pass it in December last year?
A: That is why the top of the bull market was not made. The top of the bull market will be made when the value of the Indian Embassy in Japan is greater than the land in Delhi. If we had continued with the real estate led bull market in December 2007 we would have reached those levels.
Q: Do you sometimes feel apprehensive with your view today that 4,200 is a bottom worst case scenario can be violated and you may be surprised?
A: If it is violated, I would surely be surprised. But welcome this correction. I don’t think it is a bear market. It is a correction because had we continued at that pace we might have reached a level where we would have damaged that market beyond repair. It will still go much further. For that to happen, we have got to have this correction.
Q: How will you approach this phase if it pans out like you expected, one year of essentially rangebound movements. From your trading and investment perspective, how will you approach it?
A: I will limit my trading extremely. My trading levels will come to 10-20% of that level. We need a rangebound markets. I don’t buy anything at one price but buy at stages.
Q: What will you trade more in the next one year the Nifty or individual stocks? Where will the opportunities be?
A: Nowadays,, I tend to trade in the Nifty more because I find it very liquid.
Q: From an investment perspective?
A: I will see whatever opportunity comes. I am making investments. I made some investments in April, March, and February.
Q: Will you consider paring down some money and moving to cash in the next one-year?
A: I essentially have no debt or very little debt. So, I can always take debt if I find investments to be adequate. If I feel that I have such a great opportunity that I must invest and I don’t have the capital, I may sell some of my investments and interchange.
Q: So, your convinced that this is just a long painful correction in a bull market. It is not a bear market that you are seeing for the last three-months?
A: That’s what I think.
Q: Convinced?
A: Yes, 100%. Once America bottoms because the greater surprise is going to come from the World Cup markets. There is so much to come from India once this gas comes. More the power, more investment is needed. This will itself be such a big trigger. I cannot believe that the bull story, which is linked to India’s economy with 5-6% of Indian’s savings coming into equity and with the kind of Indian sprit and entrepreneurship, can die. If this is the end of the bull market then India really has incurred god’s wrath. But it may be long and painful.
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