Billionaire investor Rakesh Jhujhunwala has said Prime Minister Narendra Modi-led National Democratic Alliance would clinch 300-310 seats in the Lok Sabha elections 2019.
Jhujhunwala, who manages his own portfolio as a partner in his asset management firm Rare Enterprises, says the opposition parties have no programme except Modi and are not able to strike a chord with the Indian youth and the Indian aspirations.
The investor thinks the exit polls give a direction. "Market might not give 30 per cent in 2019, but I think the market will be good," Jhunjhunwala said in an exclusive interview with CNBC-TV18.
Excerpts from the interview: The exit polls are out, indicating a clear win for the Bharatiya Janata Party-led NDA under Prime Minister Narendra Modi. Do you believe the exit polls?
I won’t say that I believe the exit polls to the last seat. But I do believe that the exit polls do give us a direction. Seeing the range and the reasonability, I think, on the basis of my own feeling and the exit polls, that it will be 300 seats for the NDA plus or minus 10.
So you are also going with the assumption that 300 will be for the NDA this election?
The market reaction is so immediate. Cumulatively, the market has priced in a 4.5-5 percent move already, working with the assumptions that it is a foregone conclusion that the exit polls will be right. If indeed things play out pretty much as per expectations, what kind of upside potential would it open for the market from here?
In my career, I have tried to predict the direction, not the depth. So I can predict the trend where it will stop, how far it will go. I have no targets. I am not the chartist. There is upside. As things stand today there has been some slowing of the economy from January onwards. There is some kind of apprehension in the debt market. It will depend upon how things play out. I don’t think there can be a slowdown in India for long.
Secondly, I feel the government by itself is not so important, but decisive governments are important. I am particularly a supporter of the Modi government. I think that their coming back is significant and could play an important role in India’s economic evolution over the next 4-5 years.
In the calendar year itself, and I am not trying to push you to give me a number, but just give us the kind of direction that the markets can take forward in reaction to the news that will play out in favourable of the markets?
I would say one thing. After this election result and the uncertainty, the market has already priced in some kind of a dispute between America and China. Another factor is the Iran-American friction, which I think ultimately is going to go nowhere. It is just Trump making a lot of noise, but Iran has been pushed into a corner so I am not sure that there won’t be anything. I think markets made a bottom around 11,000. Now how long will it go, how high will it go, how long will it take? That you can only know in posterity. We can know the direction, we can know an approximate high or bottom but we cannot predict how much it will go, when it will go.
In 2014, the market returned 31 percent which is when the Modi government came in for the first time?
Then it did not return anything for two years. So I don’t think it will return 30 percent this year. But markets are going to be good.
That is as if the results come as per expectations. Now the tricky part of the polls is what we have seen as how it is played out in Australia with Scott Morrison coming back for a second term and the exit polls getting it completely wrong. What is the risk of that?
If the NDA is not to get a majority, that also may not upset the market so much. But if the situation arises where the BJP and its allies are not able to form the government I think that will be very troublesome for the market. I don’t think that is likely.
If the NDA with BJP comes in between 220 and 240 and need some external support, you think that also will be in the realms of expectations?
I think if the NDA gets anything up to 240, they will only form the government. Below 240 or 220-215, then question mark will arise.
That will be okay for the markets?
That won’t be okay. The best scenario is a 300-seats prediction or the NDA in the majority by itself. Second is an NDA short by 20-25 seats. And then, if the NDA is short of 50-60 seats for the majority, things will be dicey.
Is there a support level in your mind?
If NDA gets a clear majority, I think 10,750-11,000 or what.
On the upside, you think?
Who knows? Market may be consolidated, it may not gain much, it may take time. It may play between 11,250 and 11,750. But I think the animal spirits will come out. There will be a lot of confidence locally and I think there is humongous amount of money waiting to be invested in India both in direct investment and in portfolio investment.
I just want to also touch upon the unlikely scenarios, the elephants in the room. Is there any chance of 2019 being a repeat of 2004 and what would that mean? A surprise that the markets have not priced in or not prepared for, a third front for that matter that is the other unlikely scenario?
I don’t think so.
The exit polls are not talking about it?
I was predicting the same before the elections, 245-256 for the BJP. I don’t think that the oppositions has given an alternative. First of all, the BJP has done very good work at the grassroots. Secondly, Opposition has no programme except Modi. I don’t think they are able to strike a chord with the Indian youth and the Indian aspirations. I think the scenario that the NDA does not get the majority is very unlikely. Let us not rule out anything in markets. But I think it is extremely unlikely.
Do you think markets are beyond governments?
India is beyond governments and markets depend on India. India had its tryst with socialism, in 1991 we liberalised. But we have raised our grade of growth in every decades since independence. I think the decade of 2020-30 is going to see the fastest growth in India. India’s potential goes up every year and then we have seen the worst of GST. We have seen the worst of problems of IBC, of all these reforms we have paid the price but we have not seen the fruits. The biggest thing which makes me very bullish is the journey to limit crony capitalism, it is a journey, not a destination. But slowly but surely, crony capitalism is dying in India. Governance is what brings about real growth. The public activism, growth, death of crony capitalism, tax reform, increase in tax to GDP ratio. The only thing which worries me is this competitive populism. We want to give people fish instead of teaching them how to fish. India is sitting on what is going to be the highest level of growth it has seen ever from 2020-2030.
So there will be no scenario in this election outcome come May 23, that can lead to a panic sell-off in the markets?
I don’t say that. In my opinion, it will not be and I can always be wrong.
When Prime Minister Modi came to power in 2014, expectations were sky high. Now the jury is out whether he delivered or not, it is an endless debate, you won’t go into that but what do you expect from his second term if indeed he comes back to power?
I think the expectations in the second term are moderated and the results are going to be far better than the first-term because it is very difficult to change anything in India. India is an elephant. In five years, first of all, he has understood, he has got a team, now I think he will be politically more brave having won elections two times. So I think the second term will be far better than the first because expectations are moderated and I think performance will be better.
What about India’s shortcomings? If I were to ask you today that two, three areas where you think India needs to focus and improve on, what comes to your mind?
I think the biggest thing that limits India’s growth is democracy, but it is needed. We cannot overrule it. Second thing is the bureaucratic system that we have created without blaming any individual but that can only be undone with technology and timing.
What is the ease of doing business? It is unlocking the bureaucracy. So that is where India’s shortcomings are and I think in the political class, people want to create casteism and vote bank. But I think the millennials, their leaning towards casteism is far lower and their aspiration levels are far higher. So India is all bottoms up and it is evolving. I am confident. We are always going to grow below potential because potential is 10-12 percent. But even if you grow at 8-9, is that less?
Eight to nine percent is also turning out to be challenging and I want to touch upon that point. When investors look at emerging markets, there are two factors that drive their investments, one is political stability and second is growth visibility and India has been largely consistent on both those parameters over the last 20 years. But at 7 percent, while India has been the fastest growing economy in the world, with the pressure that is coming in on global growth, there is concern that the number would scale down to 6 percent, maybe 6.5 percent in this current financial year?
I don’t think India’s growth is necessarily linked to global growth, India’s exports are far lower compared to GDP. Japan grew between 1980-90 when America was in recession and world was in recession. So except a financial shock like Europe breaking up or debt crisis in China, which also will be temporary, I don’t see that India’s growth will necessarily come down. It is 7 percent, who says it won’t go to 8 percent, who says it won’t go to 9 percent.
India has had sub-par capital expenditure for the last five years, we had banking crisis, we had to pay the price of demonetisation and the GST introduction and we have paid for all that now. Now look at the way credit culture in India is improving because of IBC, look at the way integrity is coming to the fore. Those people with integrity are the people who are creating the most wealth.
If you look at the underlying lead indicators -- whether it is autos or industrial production numbers -- there is lag in manufacturing activity. Even if it is for the near-term to medium-term that we could scale back a bit before going higher once again?
So markets are always discounting the future. If they are convinced that the growth will come back nothing will happen and I am convinced.
So even if growth was for the very near-term to scale back to 6.5 percent?
I have always told that May is better than April. Don’t forget one thing that last two months have been very low on government expenditure, which has created a lot of liquidity problems and I see no reason why interest should not be brought down.
So you use more support from the RBI?
You have to, why should we not bring down interest rates, we got to create liquidity and I think they will.
So, 75 basis points already in the bag, how much more do you think the RBI should move lower on rates?
I am not an economist but they should move lower, let them decide. I have only one place to invest and that is India, I don’t invest anything outside India. I tell everyone that when the food at home is so good why look outside and maybe it may take 3-6 months, I have confidence that India’s growth will bounce back at a rate which will surprise people.
I just want to understand because people are just waiting and watching for political risk to get out of the way. Once it does, you think the trajectory would be to 8-9 percent that you are calling as long-term. Would it come by post FY20, FY21 onwards?
FY20 or FY21, I can’t say, I can predict a direction, I cannot predict the exact time. See we have had five years of banking crisis, we have had sub-par capital expenditure, we have had introduction of GST, demonetisation, we are now having improvement in credit culture we are having integrity come to the fore. The government is promoting ease of doing business. The US-China trade spat is a great opportunity for India. So I don’t see any reason why growth in India will not come back with a bang.
Another risk and another issue that I get asked very often is that the number one concern when investors are watching the growth trends in India is joblessness here because of a leaked report. The issue has hit the headlines because the jobless rate came at a 45-year high.
It is because politicians want to raise some topic. Was it lower under the Congress rule, has anyone measured it correctly? So, I don’t say that it will not be there, but I do not agree that it is necessarily there. Let me tell you one thing, foreign investors in the FDI are very important to me in India, I don’t think they are very important in the stock market and if they are important it is only the long-term investors. Don’t forget what Marc Faber said, ‘locals know best’
I want to talk about markets and because we have addressed the top down approach and the top down view for India, let us go bottom up because that is where the opportunities are. Underlying earnings which have been a lag for the last 5 years, do you think they will finally catch up? Do you think there will be a major momentum that will push earnings higher?
A lot of the banking sector was dragging down earnings. State Bank of India, all the public sector banks, some of the private sector banks, ICICI Bank, I think they will do very well in terms of earnings and that will lead to earnings growth.
Also I think as the economy improves, the general companies will do well and I do not look at earnings growth in cumulative. One thing I can tell you is, we are at the bottom-most point of corporate profits to GDP, we are at 3.5-4 percent we had gone to as high as 8 percent. So there is no way to go but up unless and until there is some disruption in the world.
So peak earnings were about 18-19 percent in the previous cycle.
Yes, but they were 8 percent of GDP, now we are at 4 percent of GDP.
Do you think we can go back to those levels and when will we do it?
We will, but it is a process. We are not going to go back in a year, may be it will take 3-4 years.
What would that mean for market valuations because price to earnings are at 18-19 times. I know I am breaking it down to the very basic but do you think that investors will have to wait….
India is an expensive market and it will get more expensive.
So, even 21-22 times, investors will still flood India, they will still find it compelling?
In the Nifty there are companies with 5 PE and there are companies with 60 PE.
Does the polarisation worry you?
All polarisations have been followed by huge rises. When markets improve, the money goes below and the difference in the valuations will narrow. That is history, it is not an opinion.
What about the health of Indian businesses and I will sight examples. What has happened with the ADAG Group, Jet Airways, Zee Group, how do you look at these episodes?
How does it matter, how much percentage are they of the entire market? I am unhappy if any individual loses money or companies go bankrupt. But I am happy, the inefficient should die, that is the Darwinian theory.
Sometimes retail investors get trapped on the down side?
This is a stock market, buyers beware. Investors are investors – there are no small investors and big investors.
Aviation is a big growth story. There are literally only two or three airlines which are not bankrupt – IndiGo, SpiceJet and the Tata Group. I am told that Vistara has lost Rs 2,000-2,500 crore to reach where it is and it will need further investment of Rs 2,500 crore. So, you are not going to have anybody come invest Rs 5,000 crore in India to create new airline. So, you are not going to have new airlines, the market is going to grow, there are going to be three group of solvent players and one insolvent player in Air India. So, I am extremely bullish on the airline industry and I have an investment in SpiceJet.
Two sectors I am going to focus on, one is banks and NBFCs because they form 40 percent of the index, and aviation. Let me start with aviation because we have seen something very interesting happen there, the Jet Airways saga has played out, now you have had IndiGo having a promoter dispute, Air India is bleeding, the sector is really dwindling. However, your investment in SpiceJet, which is a low-cost carrier, has actually done well for you. What is your thinking about aviation as an investment sector?