Stock Market

Will be surprised if Nifty re-tests 7200: Rakesh Jhunjhunwala

In a broad-ranging interview with CNBC-TV18, Rakesh Jhunjhunwala, Partner at Rare Enterprises, said markets have been looking up of late. But they have mellowed somewhat from the time Narendra Modi took over as the prime minister.

“It is a good thing that optimism has come down from high levels. Now, there will be growth,” he said, speaking to CNBC-TV18.
The ace investor is positive that India is set to grow at 9 percent. The country is ready for the next leap, he said.

He added that he will be surprised if Nifty re-tests 7200 levels.


His main worries included Brexit, but now he believes the chances of the English walking out of the 26-member European Union are slim.


He is bullish on pharma.


International markets can’t go into a bear hug unless there is a crisis of confidence or banks fail.


On rupee, he said, the Indian currency will appreciate because of the inflation difference between America and India. For this year, he estimates the rupee ranging in 66-69 to the US dollar.


If inflation stays at current levels, there will be 50-75 basis point rate cut, he added.


He is bullish on real estate stocks, which he believes are cheaper.


He doesn’t bat for debt-ridden public sector banks but is all for select private sector banks.


He expects earnings growth to be 15 percent for this fiscal year.

Below is the transcript of Rakesh Jhunjhunwala’s interview with CNBC-TV18’s Udayan Mukherjee.

Q: We haven’t spoken for many months and a lot has happened in these last six months. The market has taken a deep dive and has come right back, almost to 8000, how are you feeling about it, do you reckon this is the big thing, we have turned the corner  and we are firmly on our way up once again?

A: Let me recount the last two years. Once Narendra Modi came to power we all got very bullish, we were very expectant  and the market shared our views and we moved from 6000 to 9000. I think that was a moment of over expectation, we had problems in the economy and correctly  I realised that in the beginning of last year may be January-February and I felt at that time that market will correct. Then market did correct and it has been a tremendous come back, non-stop come back from 6800 to say 7900.

I felt things have really changed for the good and I think we have seen a move and I think we are sitting on the foothills of what is going to be a very large move. I feel so because the expectations have mellowed. It is not that the government has not done things, government has done things but in India it is very difficult to change anything, it takes time.

Also the Indian economy is on an uptick. This uptick has been done without doing any excess. It is not that we have tremendously reduced interest rates or fiscal deficit has been blow out of proportion. We have inherently strong economy and we have gone through a cycle and the path is upward. The earnings path is upward, the interest rate path is downwards. The path of the market is up, how much and when only time will say.

Q: What is your own feeling, how much up this year you think. Do you think the market has enough steam to make a new high, an all-time high above  9000-9100 in this calendar?

A: I feel that the dream that India is going to have double digit growth or going to have 8-9 percent growth I think we are on the threshold of that. We have had relatively very poor inflows for the last three years.

There are lot of changes in India which are actually structural in nature. The way things are correcting, the way systematic changes are taking place, the way the democracy is getting deep rooted, the way people who are doing right things are succeeding, so I think India is now ready for its next leap, that is my personal opinion. The leap is going to be slow initially and then it is going to catch speed and the market is smelling and recognising that.

I also want to tell you I have learnt from experience that when markets take a course every event which is uncertain is in favour of the course market has taken. So, if the market has taken a bullish call, you will see the rains will be good. I feel extremely bullish. I reserve the right to be wrong.

Q: You think that 6800 on Budget day was a bottom, you would be very surprised if we retested that during the course of the year?

A: I would be very surprised if retested 7200-7000. Very difficult to say about figures but we have made a bottom which is going to hold for a long time to come. In normal circumstances I don’t think we are going to go there.

Expectations have mellowed, the economy is in an upturn, the results are better than expected and the change which the government is making, the real effect is going to come up on us now.

If you look at what China did to defence industry, if India is going to do that to the defence industry, what a difference it is going to make to this economy. You are going to have Rs 60000-70000 crore worth of goods being made in India just for the defence industry. India is going to become a big exporter of arms.

You have to invest Rs 1 lakh crore in roads, first of all you will have kick to GDP because of that investment and the kick to GDP because of the efficiency that comes about. So, we are absolutely on right path. In fact I feel that the optimism that we had when Narendra Modi was elected got corrected but there is reason for us to believe that optimism was correct but not as high as it was then. It has to be mellowed. However even that mellowed optimism I think can lead to really  good growth.

Q: When we spoke last time a large part of our discussion centred around the global piece and what impact that would have on India’s performance or the performance of any market in the world. Are you breathing easy on that front or does that still top your list of worries?

A: One thing I was worried about was Brexit because if the English vote to walk out of the EU, I think the EU itself will collapse. However now the reports are that Brexit is going to be favourable, they are not going to exit the EU and it is reflected in the value of the pound. The dollar is losing value, the DXY is at nearly a two year low. If the dollar loses then all emerging market assets will come in favour.

Commodity prices have bounced back to a level, in pessimism they had gone to such levels, now they have come back to better levels. I personally think there is not much higher to go from this commodity prices but I don’t think that there is much lower to go also. At these level of commodity prices lot of commodity producers will become profitable. So, even on the commodity side there is upside in the market, in terms of the valuations of the commodity companies. Inner feeling I get from all that I hear and see, I think we have really turned this time. We had a post Budget party which Raamdeo Agrawal holds every year post Budget, in 2015 everybody was so bullish, I did not go there because I was bearish and I did not want to spoil their party. This time everybody was asking do you think this is a bottom, you think we will open with a downward gap tomorrow? See what happened. So, see how markets make tops and bottoms, they trick all of us.  

Q: But you spoke about commodities. Is that an investment worthy theme in the stock market out here. Is it worth looking at because we have had a terrific rally in many of the steel companies for example. Do you think those stocks might have bottomed and after the rally that we have already put in do you think there is enough juice left in that kind of a play from an investment perspective, not a trade perspective?

A: You will have to look at companies individually. And they have had a big kickoff. Commodity companies are up 30-40 percent in the last two months. So, whether to buy them or not everybody should do an individual research. But I for one feel that the extreme fall that these commodity stocks had there is space to go up and there may be space to further go up. I have not made a study on many of them so, I would not like to comment.

Q: But I wanted to ask you about pharmaceuticals, because some of your core holdings have been there in that space. Everybody knows you have held Lupin for such a long time and if there is one space which has got into trouble over the last many months, after many years of bull run admittedly, is the pharmaceutical space – how have you read going on in that space, because you don’t seem to have cut down positions in some of your core holdings there yet?

A: Without commenting on Lupin I can tell you I am very bullish on pharma space. India is going to be a world power in pharma. Even if you take Lupin it went from Rs 600 to Rs 2,100 in a space of 18 months. Every rise has to have corrections. It is only a correction in pharma, it is not a reversal.

One thing I am going to tell you then – when you talk about the international matter I don’t think that the international market can really go into bear market unless and until interest rates rise or there is a crisis of confidence or there is a major bank failure. In Europe it is negative, in Japan they are negative. Are you going to put money in the bank, are you going to give the bank money to hold your money.

So, how will asset prices crash, unless and until there is sizes of confidence or there is a big drop in earnings and the dividends others scare. So, I don’t think those markets can go into a bear market unless interest rates go up, or crisis of confidence or a bank fails or there is a major dip in earnings.

Q: The one thing that worries is the tepid performance that we are seeing in large economies like Europe and Japan. A lot of feeling which is gaining ground that central banks are probably not able to reflate economies as they could in the past having spent so much of their fire power. Does it worry you that, that could be the source of the kind of crisis of confidence that you are speaking about?

A: India’s exports are limited. Suppose there is a crisis of confidence abroad, may be India will join the party temporarily. However if India has to grow you will have more money coming here. I don’t see that in face of an international  slowdown India is going to slowdown for all times to come.

All though growth may be tepid, I don’t expect it to be negative or something like 1929 at all.

Q: You spoke about the dollar, do you think the rupee is also sort of  bottomed out around that 68-69 kind of levels, you have seen the worst levels for some time?

A: I think every year the rupee is going to appreciate to the extent of the inflation difference between America and India. If in America inflation is 2 percent, India at 6 percent, you can expect the rupee to depreciate 4 percent. It may happen together, two years depreciation could happen together, it could happen suddenly, it may not happen for some time but for this year I see a range between 66 and 69.

Raghuram Rajan has stated that he would like to build as large as reserve as possible.

Q: You said we have affected some kind of a turnaround in the economy without any dramatic reduction in interest rates. What is your view now from hereon? Do you see an acceleration in the downward  curve for interest rates. Does it make you positive on rate sensitive’s as a cluster therefore?

A: If inflation stays at these levels and the projected inflation is also at sub 5 percent levels, I think you will see at least  50-75 basis further cut in rates in the next 6 months and you will see injunction of liquidity.

Q: The second part of my question about rate sensitive’s. Do you think that is a theme worth playing now?

A: Yes that is good, absolutely. I think interest rates will go down further. First of all slowly the transmission of the interest rate cut itself which has not taken place will take place. The monetary policy has ensured lot of liquidity to the banks. I respect Raghuram Rajan so much, he himself has turned very bullish.

Q: What’s the best way to play it because some people like banks, but the one sector which was forgotten is real estate, any sense looking at that?

A: I am most bullish on the real estate stocks, I don’t know about the real estate sector. I have made commitment and the real estate sector, the one pharma company has more market cap then the entire real estate sector and I can’t believe that India will recover and the real estate sector will not, not in terms of prices even if the inventory and the stock which the real estate companies have if it is sold at 10-20 percent level below prevailing prices, the stocks are still horrendously cheap. I am very bullish on the real estate stocks, the stocks not the real estate itself. They are one of the biggest beneficiaries of reduction in real estates.

Q: What about aviation, I remember that was the one space which you were very bullish about when we spoke around Diwali and that was of course the Indigo initial public offering (IPO) time which went on to do very well and then subsequently corrected. How have you approach that space because has some of that bullishness come off because of the kind of disclosures that we have seen since the date of that IPO and in the last six months?

A: I have not made any disclosure as such or whatsoever in any aviation company, but I feel the sector will do well, only thing is that 20 percent growth should continue. If that growth continues and the oil prices remain where they are or may be even 10 percent higher, 15 percent higher, the companies will do extremely well. The sector as a whole will do very well.

Q: You continue to own them in your portfolio?

A: Why do you want to know about my portfolio, I don’t even tell my wife.

Q: It’s a subject of popular interest as you may well know, but let me ask you about how to play this turn around theme that you are talking about, that earnings have bottomed out, you had a parking on a nice growth cycle in India?

A: If you want to know about your average reader, we are embarking on a very good growth cycle, the best way is chose who the best fund manager is go and buy the mutual fund. That’s the best way to play it.

Q: Let me ask you about a sector which is probably the largest in the market right now, which we have discussed in the past, which is banking. That was in really bad situation when we last spoke, since then lot of disclosures happened, stocks have hit very low levels and have bounced back. Are you feeling a bit more comfortable about this space now?

A: What has happened I will tell you, that there is an infidel wife, the disclosure about infidelity is coming slowly, slowly, slowly. It will be completely disclosed by 31 March 2017. There would be some private sector banks may be which you could buy, for the public sector I would still wait for the complete disclosure to come out. I would still away. Some private sector banks have disclosed and also the private sector banks would be better because in every sector the public sector has lost market share and in banking the same thing is going to happen.

Q: Are you sure the private sector pain has been completely disclosed?

A: It has been substantially disclosed. If I take a name on Yes Bank, the Reserve Bank of India (RBI) has done the inspection. Everything has been done now what is left. So in the banks where the RBI has done complete inspection and may be in some banks, the RBI has also given them time because the balance sheet can’t bear that kind of write-offs. I don’t know which banks they are doing in fact they will not give, but private sector has largely disclosed. ICICI Bank has disclosed Rs 3,000 crore of bad debt is under watch.

Q: You think they make case for an investment right now or during now and 31 March 2017 at some point you will get those opportunities?

A: Absolutely, it depends you study the banks individually and decides, but there is a big opportunity there.

Q: When do we start to see earnings acceleration. In patches, we are seeing good earnings, but we are still not ending quarters where we are seeing massive earnings upgrade which gives us the confidence, okay, we are on our way back to 18-20 percent kind of growth once again. By when do you think that happens?

A: Typically, analysts they for two years they were wrong, so they made the provision for this quarter very, very tepid. Now there has been good outperformance in this quarter. I think we will have 15 percent next year and then 20 percent. I am just hitting out sixer that’s what my estimate is. Like Raamdeo Agrawal I have not done some deep dive analysis or anything.

Q: So what’s the best way to approach this market according to you now? Do you just keep on adding at every kind of decline for global reason? You think you don’t need to worry about the kind of declines that we saw in the month of January and February any longer?

A: In a market, you always need to be worried, but I am worried, but I am confident the worry will turn out to be positive and I have invested whatever I could, whatever prudent, borrowing I could do I have done, I am very bullish. I am fully invested. Now if anybody ask me to buy some stock, I tell them upright for a loan to the father-in-law, he has sanctioned it, but father-in-law’s loan only believe and it is disbursed, not already sanctioned.

Q: If I were to ask you the single most important reason which made you turn so optimistic compare to what you have put in market between even 3-4 months back, what would you say that it is, is it the price action, is it the earnings reports, what has given you the confidence that we have turned the corner. If you were to single out just one key thing?

A: First, I see there is an upsurge of demand, consumer demand is improving. There are green shoots everywhere. Petrol consumption is going up, so the economy was improving and now we are set for an acceleration in the economic growth, especially, with a good monsoon. There is a bit of interval, we will see the animal spirits coming back. Combined with the way that the market has come back and just refused to go down. Imagine we are at 1,200 point rise and the market doesn’t correct more than 150 points. Everybody is worried, so combination of, “boss, we are bullish on India” and Anand Mahindra is very bullish he told me, he thinks thing will improve. See tractors will have 10 percent growth the company has released. In India, people have forgotten growth can be 20 percent, growth can be 25 percent. Look how belied and how minute the expectations are, that’s when the market struck you. I have a one believe the upside this year will surprise people and we will have a good monsoon, we will have a good monsoon, we will have a good monsoon.