The big bull of Indian stock market and ace investor Rakesh Jhunjhunwala remains unhappy with the current state of the market.
In an exclusive interview with CNBC-TV18, he said the liquidity crisis in the non-banking financial companies and the current fiscal situation have led to a short-term slowdown. “The economy is going to rebound for sure, the indices are going to rebound, the smallcaps and midcaps will rebound, but the question is when,” Jhunjhunwala noted.
"Every bank is shy to lend corporates. This reluctance can be overcome by capitalising banks and flushing the system with liquidity," he opined.
Edited excerpts from the interview: Let me start by asking you about the rather philosophical note that you struck at the Motilal Oswal Conference a few days ago where you said, “gloom and doom is to market what sadness and happiness is to our life”. What mood is Rakesh Jhunjhunwala in currently when it comes to the market?
Rakesh Jhunjhunwala is also a human, he follows the markets. However, the markets being in the state that they are, I cannot be happy about it, but we have to accept reality as it is rather than what we would like it to be. So it is okay, it’s part of life. Life is not linear; there are good times, there are bad times. So they do come and they will go.
Do you believe that we are close to the bottom, do you expect a rebound for the economy as well as for the market in the second half of the year?
The question is like “I asked my dad for wealth; he said all yours but the question was when”. The economy is going to rebound for sure, the indices are going to rebound, the smallcaps and midcaps will rebound, but the question is when. Before we ask ourselves when it is going to rebound, we need to dig deeper into the reasons for this situation.
One can see a few reasons. The first one is a short-term reason: With every election, there is a slowdown in economic activity, this time the slowing is more severe because of fiscal situation. Second, there was always a monetary tightness in the economy and reluctance to lend and an ambition to invest, but this was again accentuated by the NBFC crisis. So once we had a slowdown in expenditure because of the elections, one’s reluctance to lend got accentuated by the NBFC crisis. These are short-term reasons. The election expenditure has past us and the resumption will be felt in the next 2-3 months. Third, reluctance to lend can be ended by capitalising the banks and by injecting a lot of liquidity into the economy and by supporting the weak NBFCs. I think this government is making an effort and I am sure we already have 1.5 lakh crore of everyday liquidity surplus in the banking system and the RBI will not only reduce interest rates, they will also ensure there is adequate liquidity.
Let me pickup on each of those points one by one. Let us start by talking about the RBI, as you pointed out that liquidity at this point in time is surplus. So that hopefully is not going to be an issue, the ability of banks to lend, recapitalisation at least, as far as public sector banks are concerned. We are given to understand the first tranche should go in post September. Do you believe that with the rate cycle easing further, we are going to see a pickup in credit offtake as well?
Absolutely. Credit offtake is up 10-12 percent and when banks have so much surplus liquidity – today they get 5.2 percent with RBI, then RBI will make it 4.75 percent, they will be forced to lend or otherwise they will be required to put money with the RBI at 4.75 percent. With constant push by the government and the fact that the NBFC crisis is also going to be cured with time, I personally feel this liquidity problem will ease eventually.
But specifically on the banks’ side, there seems to be a crisis of confidence. So it is not just a rate factor but there is also a crisis of confidence factor that inhibited banks from lending further?
But that will ease with time. I personally feel it will, with the push by the government and the RBI and with banks being in surplus liquidity. In fact, I think now every bank is shy to lend to corporates. In fact, if I was a banker I would look for good corporates to lend to. Why did the NPA cycle arise? It started because of unprecedented capital expenditure boom from 2009 to 2013, indiscriminate lending followed by demonetisation and GST. Now none of this is going to recur. We are not getting NPAs on loans given after 2014.
But if you look at what the banks are reporting, if you look at State Bank of India’s numbers and if you look at the slippages that SBI has reported….
But these are all loans offered prior to 2013-14-15.
We have heard this story and the argument that perhaps the NPA cycle, we have seen the worst and we have passed that; But do you truly believe that, given the fact that we are in the midst of a slowdown and we do not know how long this will last?
I think we have reached the peak. The bulk of the corporate NPAs have come where there has been an explosion of capital expenditure without adequate liquidity, where integrity is under question. I see very few organisations now who have not gone down with all these characteristics. So I for one feel that the peak of the NPA cycle recognition has passed us, maybe it will take six months, one year maybe one-and-a-half year to provide for it annually.
Do you see value in banks today whether it is public sector or private sector?
I am bullish on banks.
You are bullish on both private as well as public sector banks?
Yes, maybe. We do not know.
Let me talk about NBFCs now and I go back to the conversation that you and I had, this was just before Muhurat trading last year and at that point in time you continued to believe very strongly that DHFL would not see a default situation. You know where we are today. What is your take as far as NBFCs are concerned? You have said three times already that you believe that the NBFC situation will ease with time. What is time going to be able to do when it comes to dealing with the NBFCs?
When I do something wrong I will never do it again. So today there is so much caution, there is extra caution and apart from DHFL or one or two other NBFCs, most of them are able to raise money now. So they will deploy money. What is the cure? If things which led to NBFC crisis are not going to recur, they are going to correct with time.
When you say what the cure is, do you believe that any further interventions specific for NBFCs is required beyond what is already been announced by both the RBI as well as the government?
The government announced in the budget that they will make one lakh crore window for NBFC financing but the rules are not out as yet. So we need a sense of urgency.
Is time running out?
I do not think time is running out. Don’t worry, India is not in the ICU. I think the fear that people are having, when does a market bottom? I do not think things are as bad as people are making it.
You said that India is not in the ICU. I go back again to the comments that you made at the Motilal Oswal event where you said that you gave the analogy of a cancer patient and you said that chemotherapy is administered to a cancer patient.
Let me go to the other reasons first. Other than the banking crisis and the election results. The reason why I think we have this problem is that we are correcting a lot of wrongs. We are in the process of correcting incorrect business models, right? Now this is a process, it is a journey but it is something which is going to do very good to our economy and to our society but that involves pain. So it is like a cancer patient when given chemotherapy. So we have to bear that pain.
You used the cancer analogy, so let me continue with that. It is important to follow the protocol, the sequencing, to get the potency of the chemotherapy right, do you believe that while we have been well-intentioned, the government and the regulators have been well-intentioned, perhaps the sequencing and the execution plan has not been ----
I disagree with you. All this has not come out by design, it has come out by accident. All this correction and organisations, which are not doing well and we did not follow correct practices, all this correction is not taking place by design. It is a process. However, the sequencing, whatever pain we have to bear, has to be corrected and the longer-term benefits to India as a country, India as an economy and India as a society are unbelievable.
Let me talk about these specific factors. How much of a factor is this foreign portfolio investors (FPIs) surcharge, do you attribute this as one of the severe factors?
No, the FPI surcharge has nothing to do with what I am saying. Let us not jump to the FPI surcharge. What I am saying today is that we are in the process of correcting and punishing some incorrect activities, right? We have promoters without integrity, and they are losing their companies. Corrections are taking place, it is a process. The people with integrity are winning. Now it is unfurling and a price has to be paid. One of the prices is that the economy will slow down, the animal spirits will be affected. I think that is reason number two.
I think the price that we are paying – any price we pay is too small for the correctness that it will bring and the good it will bring to our society not just morally but economically also because assets will be used more efficiently.
Point number three according to me is the fact that we are a society which has been constantly abusing the economy. If Rakesh Jhunjhunwala constantly abuses his body, one day it will give way. Look at the power sector issue, you give free power, there is 15-20 percent power loss. It is not politically involved. People are doing power theft in collaboration with others. You are giving free power to people who cannot afford. You are not paying the electricity plants. You are supplying power at Rs 15 a unit at Nariman Point, elsewhere power has been stolen, this is one of the examples that is damaging the Indian economy. You keep funding the public sector, these are things which have constantly damaged our economy.
Do you believe that we will continue to pay the price at least on some of the issues that you talked about?
Rakesh Jhunjhunwala had a dream and could write down on a piece of stamp paper three years ago that India will have 10 percent plus industrial growth. If these things are not corrected, Rakesh Jhunjhunwala no longer has a feeling that India can have 10 percent volume growth whatever its value is.
So the genesis of this growth also lies in the long-term imbalanced economic policies that we have and the biggest challenge is politically they are the acceptable policies. After all we are a democracy, we have to have the policies that people want. Everybody wants free power, nobody wants to pay the taxes properly. So there is a recognition in the government that this has to be corrected. We are distorting every part of the economy.
Given the fact that you are also trying to figure out how to address the slowdown, let me ask you in the short-term, do you believe that there is need for fiscal intervention on the part of the government, do you believe that there has to be some relief that the government has to give because that is what the market is now factoring in?
No, I think there has to be a relief all through. First of all, there has to be short-term intervention. Secondly, we have to see that the process of correction which is taking place in business models, in business units is flawless and should be done quickly and fairly. Thirdly, we got to reassure the business community that the change that is taking place is for the good and is inevitable.
Fourth, if you look at the electricity matter, this cannot be done in a day. But we have to understand that unless we address these matters, we will not be able to have double digit growth.
So let me you ask you because you talked about difficult fiscal situation, there are quarters from industry, quarters from even within government, some suggesting that there should be fiscal expansion at this point in time, do you believe that that is required?
I think in the short-term it is needed.
What kind of fiscal deficit deviation?
3.4 and 3.7 percent are not going to make much of a difference, especially the fact that inflation is so benign worldwide, interest rates are so low but I think we can have it for a year. The implementation of a rule-based society is a process and needed, whatever is the price we have to pay.
Second thing is we have got to take corrective measures about electricity and administrative expenditure and interest rates. We have some of highest interest rates in the world because of small savings and old citizens must be given 8-8.5 percent. What kind of protected mechanism is this, we are all suffering, we have to reverse it.
So you are telling there is a need for short-term intervention, you believe there is need for fiscal intervention outside of what is already been announced by the MPC. What is the expectation built up by the market in terms of what specific measures the government should be doing? For instance people are talking about there should be a GST cut for the auto sector?
What they can do is they can make purchase of vehicle 100 percent tax deductible for the next one year. For next one year if you say you buy a vehicle, you will get 80 percent deduction in income tax because if you remove GST, then what will happen to vehicles which have already paid GST? If I buy a car today for Rs 5 lakh, I get depreciation of Rs 50,000. So let the depreciation be Rs 2 lakh, so on Rs 2 lakh I will save Rs 60,000 tax. Saving tax means people will buy more vehicles. So this kind of fiscal intervention. There can be more expenditure on infrastructure, faster expenditure.
Is that a bit of a disappointment because it is always the case ahead of elections, there is lock down of infrastructure spending. But is there a sense of disappointment that perhaps even public capex is not picking up as per expectation?
It is not picking up now but it is a process, it takes time, it will pick up in 2-3 months, it will be in full flow. Even liquidity position will correct itself. The animal spirit for the banks to lend will need a little push.
Also, do not forget that up to last September-October everybody predicted that India was going to be Japan. And when India’s spirits are down India is going to be Zimbabwe. So the question is that we flow in extremes. What I feel is that also, from October the base will be low. I cannot believe that India is not going to grow 6-7 percent but to grow beyond that we will have to take long-term corrective measures. These measures are politically sensitive, economically difficult, and we will take them as a society – maybe today, maybe six months later, maybe one year later.
We haven’t touched the global factors. Even the global picture is clouded with uncertainty at this point in time, both if you look at what is happening with trade tensions, with what is happening with the currency tensions as well. How much of that is likely to add to the worries domestically?
The trade war is not a trade war, it is a geo-political war, it is not going to end and I think it is going to be in India’s advantage. Second point is I don’t think we have any problem with inflation and currency. India’s export sensitiveness is very low, so the global slowdown is not really going to hit India and reduction in interest rates will be advantageous to us. I think if we take the steps to really become investor friendly and able to attract investment, we can get trillions of dollars.
What more needs to be done to make India more investor friendly?
The rule of law.
Let me ask you about this business of FII flows into India and if you are saying this FPI surcharge is a non-event as far as FPI sentiment or mood is concerned, then what is the reason for selling?
Let us examine the tax provisions for all the FIIs and FPIs worldwide and let us be competitive, I think that is a better way of looking at it.
Do you believe we are less competitive today?
I am not the right man to answer.
From market’s perspective we talked a lot about the economy and what you believe is the need of the hour as far as correcting some of the imbalances in the economy, but what about the imbalances that we are seeing in the market. Of course, it’s linked to what is happening in the economy but outside of that specifically from market’s perspective what do you believe is the need of the hour?
Markets are markets, they have their own moods. So markets will take their own time. It’s a process. Even if the market is to bottom, it will take time. It’s not going to bottom tomorrow. It’s not going to bottom today.
Are there some sector where you believe we have seen a bottoming out, if not for the market in general?
I think in pharma we have seen. No single government action is going to let the market recover suddenly. Market is a ‘bhel’, it has so many ingredients. So it’s going to take time.
I know that you got a little emotional on the Titan conference call because of the long-standing association not just with the company but with an individual like Bhaskar Bhat. The consumption story was the big engine of growth that was propelling India forward and over the last few months this has seem to have lost a bit of steam. What is your own take on the consumption story?
I feel consumption will come back in India as soon as liquidity comes, as soon as confidence comes, as soon as government expenditure comes and other corrective measures are taken legally. So consumption will come back.
Do you believe that valuations at this point in time of some of the consumption plays are attractive?
I won’t comment on sectors. Valuations have already been high and they will remain high.
Let me address this issue differently that there are some sectors where we are seeing disruption because of technology, because of the change in the pecking order. Are there some sectors where we are seeing a dislocation which is a very different thing from disruption where structurally and fundamentally the game has changed? What would those sectors be to your mind?
Something like book retailing – all that has happened. I do not think technology is easily going to dislocate or disrupt sectors. The disruptors will become dislocated. I am very bearish on Uber and Ola.
Because of their ability to make money?
Because of their ability to lose money, not because of their ability to make money; the lack of their ability to make money. They are all linear models. Up to when can I keep marketing that, I am going to have taxis in the sky and automatic cars? What about my bottom line? The ultimate value of all these companies are going to be public issues and all the last 2-3 public issues of large companies, which have taken place in America in the so-called unicorns, have not been very good. So it all starts this way.
The economic survey and the budget, the big focus was on creating virtuous cycle of investment, savings and growth. Perhaps it’s yet to fall into place as per the expectations of the government. What would be the key pieces that you believe need to be the building blocks of getting this virtuous cycle to start?
Once demand rebounds, investment will rebound and animal spirit will also rebound. I have learned one thing in the market; its darkest before the dawn and when things change everything change. At the bottom you feel things will never change. At the top you feel this is going to continue till my grandchild’s lifetime. But one fact remains that for the first time in the last 6 months or one year, I started feeling that unless and until we correct the long-term economic measures and have a serious economic reform stage two, we are not going to reach double digit growth but that doesn’t mean that 7-8 percent is not good; 7-8 percent is good enough.
I don’t know if you saw the Reliance Industries Ltd annual general meeting but that of course was one of the big movers in the market. Since we are talking about technology, we are talking about private investment, any thoughts on how the announcement could change?
That is great, $15 billion of investment comes into India. That would be great and if he could successfully transfer the company from an old sunset industry to sunrise industries, it will be a great achievement. Best of luck Mukesh Ambani.
By the end of the year what is the outlook as far as markets are concerned assuming that your case for recovery to set in from around October-November were to come through?
Just before the elections results I was asked what would be my view. I thought 10,750-11,000 was the bottom and I still think that would be the bottom. One thing is a fact. If you look at it as glass half full, we have seen the worst of demonetisation and GST, we have not seen the benefits. We are at the lowest levels of profits to GDP, so there is no way to go other than that. So maybe this is a bottom. You come to know it is a bottom only after it is made, but I won’t be bearish at this level.
No, I have been bearish so many times but never became a messenger of bearishness.
So, you won’t be bearish, that is your DNA?