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PSU divestment is the right approach, private sector uses capital more efficiently, says Jhunjhunwala — Read the transcript here

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The big bull of Indian stock market and ace investor Rakesh Jhunjhunwala remains optimistic about the current state of the Indian economy and the stock market.

The big bull of Indian stock market and ace investor Rakesh Jhunjhunwala remains optimistic about the current state of the Indian economy and the stock market.
In an exclusive interview with CNBC-TV18, he said the consumption will come back in a big way. “As far as Diwali sales go, in the last 2-3 days, I am hearing that sales have picked up, festive sales are good. So I think there are three aspects -- one is consumption, one is investment, one is exports. I think consumption will come back in a big way in a short period of time. Investments will take time and exports will take more time,” he pointed out.
“There is a lot of disillusionment around and the press is making it out as if it’s the end of the world. Kabhi Khush Kabhi Gham, this also shall pass,” the top investor said philosophically.
"I don’t think things are as bad as people are making out and in the last 10 days the market is technically saying that it has bottomed out. I feel that the path is upwards; but it’s a slow and crawling path," he added.
Jhunjhunwala believes around 11,000 would be a reasonable bottom to work with for the market. “Market is a discounting mechanism, maybe a good recovery is 6-9 months ahead of us but market always recognises things in advance,” he opined.
As far as tax cuts go, he said there is always scope to do more in a country like India. "One is what the government has done and one is what the government is talking about. There are structural flaws which have surfaced over time in the Indian economy. The first aspect is about electricity; every electricity board is broke, they don’t pay BHEL, they don’t pay discoms, they don’t recover money from the consumers. Right now the government is talking sense; they say that they will refuse to supply electricity to boards unless they pay and the boards cannot pay unless they recover money from consumers. These are the steps which are required to be taken,” he observed.
According to Jhunjhunwala, a pickup in consumption is crucial. “Private capex will pick up as soon as consumption goes up; if steel consumption goes up, steel plants will come up. If cement consumption goes up, cement plants will come up. So it is mainly linked to consumption. I don’t think capex is not picking up because capital is not available or loans are not available or equity is not available. I think capex is not picking up because there is excess capacity in the system. So, capex is going to come when consumption goes up. This is a vicious circle. Moreover, I think the government’s ability to incur capital expenditure has been severely curtailed because of subsidy schemes by various state governments. This is competitive populism,” he stated.
The investor says the country is at the tail-end of corporate defaults. “Fifty percent of retail loans are home loans. So I do not think there is any risk in 50 percent loans. I hate to say this but the NPAs have risen largely where money has been misused, where there are integrity issues. So wherever people have run business straight, there have been no NPAs. So go into the reasons of NPAs. I don’t think that position should come in personal loans or housing loans or auto loans,” he said.
Commenting on market becoming bipolar and all the money moving into three banks, Jhunjhunwala says it is an opportunity. “It is flight to quality. That is the way markets are. Two years back they were crazy about midcaps. Will strong become stronger? I don’t see this trend continuing. I think there will a levelling of field, it may take time but valuations will level off,” he added.
 
Edited excerpts from the interview
Are you feeling a lot more bullish this Diwali? A lot of things are going on for us this morning, the country's ease of doing business ranking has improved by 14 spots. Is that a big positive?
There is a lot of disillusionment around and the press is making it out as if it’s the end of the world. Kabhi Khushi Kabhi Gham, this also shall pass.
I don’t think things are as bad as people are making it out and suddenly in the last 10 days the market is technically saying that it has bottomed out. I for one feel that the path is upwards but should be a slow and crawling path. I don’t expect a big rise in a very short time.
So the bottom has moved up. The 10,700 panic bottom that we saw, after that we had a corporate tax cut -- after that the market gave up some ground, went to around 11,100-11,200 and has again bounced back. So do you think 10,700 or 11,200 -- what would be a reasonable bottom to work with for the market?
I would say around 11,000. Market is a discounting mechanism, so maybe a good recovery is 6-9 months ahead of us but market always recognises things in advance. As far as Diwali sales go in the last 2-3 days, I am hearing that sales have picked up, festive sales are good. So I personally think there are three aspects - one is consumption, one is investment, one is exports. I think consumption will come back in a big way in a short period of time. Investments will take time and exports will take more time.
The last time we chatted with you, you said the government is doing a lot but needs to do a lot more, this was before the corporate tax cut came through since then a lot has been announced, do you think this is enough or more needs to be done because now there is so much talk of perhaps a personal income tax rate cut?
In a country like India – there is always scope to do more. One is what the government has done and one is what the government is talking about. There are structural flaws which have surfaced over a period of time in Indian economy. I think the first aspect is about electricity; every electricity board is broke, they don’t pay BHEL, they don’t pay the Discoms, they don’t recover money from the consumers. Right now government is talking sense. They are saying ‘we will not supply electricity to you unless you pay us and you cannot pay unless you recover from consumers’. So these are the steps which are required to be taken.
Also I don’t know the reason, I myself am not frightened but there is some kind of fright in the business community. I think the government is now trying to assuage the feeling of the business community. As much as $17 billion have been remitted outside India under the NRI scheme, I don’t know why people are remitting this kind of money outside this country, so we have to take steps.
Do you think the worst of extreme pessimism is behind us? We were speaking to L&T earlier in the day and they mentioned that private capex has not picked up just yet because of whatever reasons. Are there any green shoots that you notice?
Private capex will pick up as soon as consumption goes up; if steel consumption goes up, steel plants will come up. If cement consumption goes up, cement plants will come up. So it is mainly linked to consumption. I don’t think capex is not picking up because capital is not available or loans are not available or equity is not available. I think capex is not picking up because there is excess capacity in the system. So, capex is going to come when consumption goes up. This is all a vicious circle and also I think the government’s ability to incur capital expenditure has been severely curtailed because of this subsidy schemes especially by state governments. This is competitive populism. But I think in democracy self-crediting measures will come.
Let us talk about some broader issues, backbone for our market is the financial system. You are quite confident that the worst of NPA cycle is behind us - now we have had instances like RBL for example and the way that stock has fallen. IndusInd Bank is seeing some fresh problems. Do you see these as company specific, bank specific problems or are we staring at one more round of financial problems?
As of now the NPA problem in the last five years has been in the corporate sector and I still believe we are at the tail-end of NPAs for the corporate sector. Now, we don’t know when the economy slows, the foreigners’ first concept is that there will be retail defaults. As of now banks are cautious, there have not been any retail defaults. But I still hold my opinion that as far as corporate defaults are concerned we are at the absolute tail-end. Which are the corporate that are going to default now? Who had to default, have defaulted?
That is what we thought three years back as well?
Yes, right, but maybe it will be the story of ‘the boy who cried wolf ‘that every time we thought the wolf was there, he was not there. So, I am quite confident that we have reached the absolute tail-end of the corporate NPAs.
As far as the SME and MSMEs concerned, my personal feeling is we are at the tail-end. Now the issue is we have never had large scale retail defaults in India. As of this quarter’s results, it is not indicating in any bank, but if economy gets worse we don’t rule it out but I think the economy will improve, it won’t get worse.
Is that a risk, retail defaults?
See 50 percent of retail loans are home loans. So I do not think there is any risk in 50 percent loans. I think banks like HDFC Bank is a leading lender in personal unsecured market. I think the systems and their method of price appraisal are strong enough.
I hate to say this but the NPAs have arisen largely where money has been misused, where there are integrity issues, where the Supreme Court has cancelled the coal allocation, where gas plants were put up but no gas was available, even in the corporate cycle. So wherever people have run business straight, there have been no NPAs. So go into the reasons of NPAs, I don’t think that position should come in personal loans or housing loans or in the auto loans.
I do want to take this point forward and ask you about real estate lending and whether there still some more accidents left there but before that you mentioned HDFC Bank, one thing we have noticed in this market, it has become so narrow and so bipolar -- all money moving into three banks and everything else seems to be seeing selling pressure?
So it is an opportunity. It is a flight to quality. That is the way markets are, two years back they were crazy about midcaps.
So do you see this trend continue, the strong becomes stronger?
I don’t see this trend continuing. I think there will a leveling of field, it may take time but valuations will level off.
Which is interesting, because for example Bajaj Finance, it trades at crazy valuation, HDFC Bank - do you think there is more opportunity here or is there more opportunities in names like IndusInd Bank or RBL Bank?
I won’t like to talk about individual stocks but I think there is opportunity everywhere. I will tell you one thing, in general the principle is greater quality always lies in the neglected part of the market. That is a general principle.
Which is the neglected part of the market now where there is opportunity for the next one year?
Which is not discussed in your channel, that is the neglected part.
So give us couple of ideas then?
I have no ideas.
Thematically anything that looks interesting?
I think the PSUs will give very good return.
On that do you agree with this strategic divestment part, Bharat Petroleum Corporation Limited, Container Corporation of India, now we are even hearing about Bharat Heavy Electricals Limited, there is one school of thought which believes that this is like selling family jewel?
There are three reason why I think public sector banks will give very good results, public sector units - one is the corporate governance was not up to the mark and that was reflected in the way disinvestment was done. Now once they start disinvesting strategically they will not have to sell Hindustan Petroleum Corporation Limited to Indian Oil Corporation, they will not even sell BPCL to IOC and Oil and Natural Gas Corporation will have to borrow money. Second point is that the biggest beneficiaries of the tax cut is the public sector because they were the highest tax payers. Every public sector company’s earnings have gone up by 15 percent and third is there is great strategic value in these companies.
Is divestment the right approach then, the way it has been done?
Absolutely, there is no business for a government to be in business. Look what happened to Hindustan Zinc after Anil Agarwal took it. Look at the value created. I see no reason and once a public sector unit is there, there is various kinds of political pressure to use it for political purposes. Every party tends to do it, it is not about party, and it is about politics. Worldwide capital is used much more efficiently by the private sector.
In that sense do you think it is a bit of a mistake the overnight decision to again revive MTNL and BSNL? You think we are throwing more good money after the bad?
But the question is what do you do, either you close them down or nobody is going to buy them in this state. But I think the VRS is very good. First they do the VRS, the losses will be over. So although the VRS is very expensive, for one at least will substantially or totally stem the need to feed money to them constantly.
So PSU is the big theme and divestment candidate that is out of the way. The other two pieces that I want to stitch together, one you said that consumption is picking up something that you have noticed and two is that you are ready to pay any kind of valuations if the company is of course delivering.
I am not ready to pay. The market is paying.
The market is ready to pay. So putting that together one space that we are seeing very high valuations but a pick-up is FMCG. Whether you talk about Jubilant FoodWorks, Hindustan Unilever or even a Titan for that matter. You think some of these stocks will continue to move higher despite the steep valuations?
We will see; it is not only the growth, it is also the business models. Of course considered everything they are very well valued, but there are factors that India is going to be a big consumer story, these companies cannot be dislodged. They are still having 15-25 percent earnings growth, quality of earnings is very good, governance is very good and cash flows are extreme. So these are the reasons why market is… and don’t forget one thing that Hindustan Unilever was Rs 324 on September 20, 2001 and retained that price again only in 2010. For nine years Hindustan Unilever gave no return. So that could happen again.
However, I for one feel the PEs may compress, but the earnings growth of these companies will not compress. So you may have had maybe two years this stocks may go nowhere but for the kind of return they are giving to shareholders, I think shareholders will win.
So you said two things together corporate governance and strong earnings.
The business models, entry barriers, dominations, cash flows, everything matters.
You have that in the FMCG space. One other company which has both of that is Infosys. I know you do not want to talk about individual stocks, but I have to ask you, when a company which is a best in breed company has this whole whistleblower controversy, as an investor how do you approach it?
I think this is highly incorrect. According to me no complaint should be entertained without the name of the person who is making that complaint. Second, even if that is done, nothing should be made public and it cannot be made public until an investigation is done. This is trial by media and highly incorrect and I think this happened in the case of MCX, and on that day 48 lakh shares of MCX were traded with 2 lakh delivery and the share fell from Rs 990 to Rs 840.
So, I think this is highly incorrect and I for one suspect that this has been done purposely and it has been done by manipulators. I think SEBI should not only enquire into the complaint, SEBI should also enquire all the trades which have taken place 10 days prior and 10 days later to the complaint. I feel very strongly for this and I think high scale manipulation is going on with this.
I know that you are passionate about MCX, you made this point, it was hit a lot and then it reclaimed that high very soon. But Infosys is a much bigger company and much bigger outstanding floating stock as well. Do you see this as an opportunity to accumulate Infosys?
I do not want to make any comments on any individual scrip. Only I am saying is please do not entertain any complaints without the name of the complainant. You may not make the name of the complainant public. So you have a right to interview him, to ask him that how do you know this, how do you know it is right, what prompted you to make a complain. You can only allow responsible complaints. You cannot allow irresponsible complaining.
Let us discuss a bit more about the broader market. The market so far has been narrow, it is Nifty which has been moving up, midcaps and smallcaps in parts, they have started to move over the last fortnight, but they have not participated as much. The midcap index is still down 10 percent.
But that is all a process. Look at ICICI Securities, it is up 15 percent; look at IRB, it is up 20 percent. So it will spread.
Do you see this as a flash in the pan or do you see this as a start of a fresh bull market in the broader market?
The fall started in February of 2018. Enough yaar, 18 years of a bear market in India is…
The reason I ask that is because a lot of retail money is in the midcaps and smallcaps.
I disagree with you. When 60 percent of the market capitalisation is in the Nifty and most of the money is coming through SIPs, which is all been invested in ETFs and all that, I do not know why you will feel – I think a lot of the retail active investor, the backbone of the market is a passive investor who puts in money. He is not the guy who comes in the morning at 9:15, watches CNBC-TV18, the backbone is a silent investor. So, I do not agree that the money of the small man is small. You have to understand that investment requires professional advice. It is very exciting that my sisters’ brother-in-law is working in this company and he has told me I should buy, but it is not profitable.
You will know. You have been both a successful investor and a trader, both are possible – holding stocks and making money and watching CNBC-TV18, listening to stocks and making money both are possible.
Absolutely, anything can be possible.
The reason I was asking is that we have had an equity cult shift in this country, so much domestic savings moving into equities post demonetisation – because of this midcap correction, there was a risk that this will take a hit. You don’t think that will happen?
What are the alternatives to investment? It has the lowest tax and it is far superior to insurance. Today when I buy insurance I am paying 10 percent commission, I buy mutual fund and I am paying 2 percent commission – that is the starting point of my superior returns in mutual funds and there is so much savings in this country – what are the alternatives. Nothing; this is not even the trailer of money which --- 30 percent of household wealth in America is equity, 3-4 percent of household wealth in India is equity. Pension fund money is not there, provident fund money is not there, all has to come ultimately; we have to build a modern society. You think much is much. I think it’s very little.
When we started this conversation we were talking about how the corporate tax cut has been a game changer for the market so to speak, at least it has picked up a lot since then. What else are you wishing for?
The government has removed the criminal charges in most of the companies and sections. This is a business friendly attitude. Nobody likes to pay tax, let me be frank, and nothing that regenerates you more than lowering of taxes. So it’s good and I personally feel personal rate of tax will be brought down.
But there is not much fiscal space for you. Do you think instead would the government make something on land….
But was there a fiscal space for corporate rate tax. These tax cuts and the personal rate tax cut may lead to a larger deficit this year and next year but then the economic growth that will come and the compliance that will come, will pay for itself.
In fact a lot of people think fiscal deficit is overrated and at least in this environment 1 or 2 year of fiscal loosening, let the economy get on track, let the consumption grow?
Yes, and India needs 4-5 percent inflation also. This year nominal GDP growth will be - say 8-9 percent or maximum 10 percent. India has never seen nominal GDP growth lower than 13-14 percent – that’s why sales growth is lower in most companies.
Do you like industrials as a theme because you briefly mentioned IRB Infra, I am just catching on to that. L&T is the other one that has delivered good numbers.
You are saying they are not participating. I am saying they are participating. I have never bought a share of IRB Infra in my life. The question is we are sector agnostic. The only rule is there are no rules. I do not want to discuss what I invest, why I invest because if today I will tell you to buy something, tomorrow I will sell it. I do not know who is listening and who has bought it because of me.
What about commodities. They are trading at multiyear lows in terms of valuations.
I am very bullish on gold and oil is in the range $50-60 per barrel. Other commodities, I do not think you are going to see high prices because I do not think that Chinese consumption can come back to the levels it was. I have one basic intuitive feeling and therefore I feel for the prices to go above where they are or where they were is very difficult.
You are bullish on gold but normally gold and equities do not move together.
I am bullish on gold for 2 reasons. First, Japan, Russia and China together cumulatively got about 4 trillion reserves. They want to strategically, geopolitically reduce their exposure to dollar. What is the alternative? Gold is the best alternative; they don’t want to buy yen, they don’t want to buy euro. Second thing I feel is that today about 25 percent of the bonds in the world are on negative interest rates and negative interest rates will spread to America. Third thing is, until now banks were absorbing negative interest rates and now Credit Suisse, UBS, I read in the press, they are all passing on the negative interest rates to the customer. So I feel in a regime of negative interest rates, gold is going to surely thrive; I mean the bank will ask you to keep the money. So it will be cheaper to keep gold.
We have prepared a short set of rapid-fire questions for you. You have to pick only one of the two. So starting with - aviation or oil marketing companies?
At the moment oil marketing companies.
Titan or Lupin?
Both.
Money or health?
Health undoubtedly. I have enough of the first (money) so need the second (health).
But you need the second to rescue you from that?
I have enough of first. More than I need.
Priyanka Chopra or Katrina Kaif?
None of the two.
Who is your current favourite?
My all-time favourite is Sharmila Tagore.
Cautiously optimistic or a raging bull?
Cautiously optimistic.
12,000 on Nifty first or 11,000?
How does it matter? I would say 12,000 first.
The last time we chatted there was a lot of pessimism, there was extreme pessimism actually in the market. Do you think the worst of that phase is now behind us?
I firmly believe the bottom is in place and now market is technically showing it and a move from 10,700 to 11,700 – 1,000 point move will take time to absorb it and I have no doubts that this government’s action is required and this government will proactively act and I have no doubt that India will grow 9-10 percent in the times to come. It maybe three years away. I think next year also maybe subdued but ‘21-22 onwards we should have very good growth – that’s my expectation and I deserve the right to be wrong.
So that 1.25 lakh of Nifty projection….
Absolutely. I stand by it. The only thing I hope is I live to see it.