Rakesh Jhunjhunwala: “Demonetization is history. If you have money, be bullish and put it in stocks now.”

Contrary to most analysts who have been bearish on market’s performance due to demonetization, India’s very own Warren Buffet, Rakesh Jhunjhunwala advises investors to invest in stocks. He, in an ET Interview, shows confidence on the fact that demonetization-induced situation will normalize sooner than expected and that selling by FIIs is likely to reverse. He also quotes, “Demonetization is history. If you have money, be bullish and put it in stocks.” which shows his bullishness towards Indian equities. Enjoy the Edited excerpts:

Let’s discuss alternate assets. The alternates are not doing good. Real estate is not going anywhere. Gold prices have collapsed. In case of fixed deposits, if you are a senior citizen, you get higher rate of return. Otherwise, the returns post tax are nothing. Do you think an average Indian who has not looked at equity should now be really looking at equity as an asset class because we know the benefits of investing in equities?
The process to shorten or to remove the shadow economy is a journey not destination. The process of getting Indians to invest in equity is a journey, it is not a destination and every year it is going up and in turn you have the Sensex, Nifty go 15% in two years. Alternate asset classes are becoming unviable. This is a very big reason why money should come into equity and it is actually coming. I am told SIP now has Rs 4000 crore of money and mutual funds are attracting about Rs 10,000 crore a month. That is how market has survived. It has absorbed $2 billion of foreigner selling.

So is that the new normal now that we should stop getting obsessed by FII flows or inflows or outflows because domestic flows are strong. November for example you said I mean it was a bad month, it was a tricky month, yet the domestic money saved the market from a free fall.
I always had a feeling that the local money will overtake the FII money and that is slowly starting now. So I am sure that local money will come.

Ultimately bull markets want earnings. Earnings will come when there is resurgence in demand. How far are we away from resurgence in demand because right now demand is a question mark?
There is investment and there is consumption and there are exports. In the consumption side, it is not so bad. The problem is we are not able to revive investment. Investment is say 31-32% of GDP, we have to take it to 37-38% level. That is going to give the real kicker to growth and part of it is the legacies or a bureaucracy, part of it is the legacy of the bad loans, part of it is the fact that a lot of entrepreneurs have taken wrong advantage of the system and that has blocked a lot of things. We as Indians and as a society are responsible plus I am not blaming anybody because the investment cycle is not going up but we got to take steps to revive the investment cycle. That is what the government is trying to do.

Six months ago when we chatted, you said that consumer stocks were expensive. They are great companies. It is time to relook at cyclical and some domestic or inward looking businesses. But now consumption stocks have also corrected and an Asian Paint has come down from 1100 to about 800. Is there a good entry point in consumer names now?
Well I do not want to give any example but if you ask me, it is a time to buy. I would not say what. But I feel bullish because there are all indicators. I think the primary reason for FII selling will reverse. I think lot of local money will come. The markets are very bearish about the demonetization. The revival in demand will be far, far faster and fourth thing I feel is that market has shown technically, having rebounded from 7900 levels, if you have the money, buy now.

Now the index has been flat for last two years. 2015 was flat, 2016 was flat. Do you think 2017 could be the good year for index because macro and markets they rarely go together, markets could go up and macros could be poor?
I think if we have good monsoon and there is some revival of investment demand, then I think surely we should do well.

Why? Do you think markets can make a new high in next 12 to 18 months?
Well I will be disappointed if they do not.

But can we go higher with this kind of earnings backdrop? I again come back to that broad question because we have been anticipating revival in earnings and that has not happened and that may not happen for another two-three quarters?
Well I do not know why it should not happen for the next two-three quarters right. Before demonetization everybody was very bullish, the second quarter results were very good and I do not think demonetization is going to give such a bad effect or lasting effect to the economy.

You have always said that look at the mega trends and the mega trend would be the impact of demonetization on the financial sector per se. Now a lot of sectors will get rerated within the financial sector. Do you think there is a case for PSU banks to get rerated? Suddenly they have deposits, their CASA is going higher, their ability to lend will go higher?
The problems are deeper than the opportunities there. Unless the and until the NPA situation is solved, I would stay away.

So you still feel that the NPA problem for banks is not over?
It is not fully known. First we should fully know the situation. I know so many of corporates who are not going to pay and they are not classified as bad. There could be opportunity but I as an investor would wait.

You have liked HFCs in the past . Now there is a commitment towards push for low cost housing, interest rates will come down, real estate prices will not go higher, yet HFC stocks have corrected. So is this market giving opportunity there?
I am an interested party but they are well valued. As a sector, HFC is very bullish and that is one sector which is going to grow and the biggest credit cost there is the lowest. I can’t say which individual company to buy or not to buy but. as a sector that should do well.

Eventually because of digitisation and the impact on the financial sector, where do you think the change will take place within the financial sector?
The change will happen across the entire sector.

So private players will become better, NBFCs will become stronger and PSUs will become weaker?
I do not say PSUs will...but that has happened everywhere whenever the government has announced privatisation, a lot of private parties and all have benefited as a industry whether telecom, whether airlines, the private sector has taken market share.

So you see the same kind of phenomena will obviously happen in the financial sector per se which already is happening.
Happening.

Do you think this market is lacking any kind of an leadership pattern because every bull market has a distinct leader it was IT to a large extent in 2000, it was cement in 1992-1993, it was infrastructure in 2003-2008. Right now, there is no clear leadership or defined leadership in this market?
Well the NBFCs were leading earlier. The midcaps in general had gone to stratospheric valuations so I think leadership will emerge with time. Some of the public sector stocks were doing very well.

I do not see it as good that you have that kind of leadership where the stock gets to absorb valuations and then you have a big fall. The real froth in the market is in the new issues. People forget that Polaris is a good company, its issue came at Rs 400 - the price became Rs 2800 and then it was Rs 70. I don’t believe in the kind of valuation some of these new issues are getting and I do not know how funds are buying them. There is going to be disaster here.

We had a conversation in 2010. At that time you said the valuations are mouth-watering, "itna sasta mil raha hai aisa lag raha hai chori ka maal mil raha hai", what is your take on the aggregate?
I do not think valuations are so cheap. You got to be very careful in what you buy.

So you are confident that demand will come back and that will lead to an EPS growth. You are not making a case that there could be scope for the further PE expansion for the market?
See low interest rates, earnings growth is always followed by PE expansion. Let the earnings growth come, PE expansion will come.

But PSU stocks if I look at ONGC, HPCL, BPCL to a large extent EIL, PFC PSU stocks are suddenly showing leadership patterns some of the stocks are at a 52-week high. Is this an endorsement that Government of India will have a better balance sheet, they will be the winner in demonetization and time to align with PSU stocks again?
I do not think that demonetization and PSU stocks have got anything to do with each other. I mean the fact is that the real performance have been HPCL and BPCL right because government have allowed them complete subsidy unlike the past so it is difficult to say about individual stocks.

To understand the broader take on metals, metals index for 2016 give a stunning comeback of 52% do you think that is just mean reversion or a new cycle has started in commodities?
I do not think I think it is only a correction or fall in the bear market. Last year, I have been wrong but I am not bullish on commodities at all. I do not think Chinese demand can come but I think at these level of pricing or even pricing 20-25% below this lot, it is extremely profitable to produce commodities. I am not bullish on commodities.

If at all, you think commodity prices will freeze on the higher level rather than?
Not only freeze, they will correct also.

Even crude?
Crude I see may be it may go to 60 but I do not think anything beyond that.

You have made a point last time that IT companies are going through a cyclical slowdown it is not a structural slowdown but in this financial year Infosys has cut its guidance twice, NASSCOM has cut the aggregate picture if I talk to every company publicly and privately they are trying to adjust to the new normal they do not know how digitization would move so is IT now a sector which will struggle for growth?
Well cyclicality can last for a year or two years if you have had 15-20 years of continuous growth. Cyclicality can slow you down for a year or two. If there is going to be automation everything involves software and I have confidence in Indian entrepreneurs that they will be able to adjust to the new normals.

Do you think Indian IT entrepreneurs should take higher risk now? They have a lot of cash on their books that is denting their return on equity, return on capital. They are not going and acquiring small small businesses, they are not buying growth, they are not becoming very aggressive in terms of their approach do you think they need to change that?
They are very successful. I do advice them but if you ask me that would be a good idea to use cash on the balance sheet and acquire and try and go fast.

Last time when you mentioned pharma you said that there was a cultural problem which is getting sorted but I am getting a sense that the FDA problem is becoming company specific. Sun Pharma no problem, there are still problem at Halol; Lupin has come out clean so do you think within pharma it is very divided now?
You must go to the point where these problem started. These problems are not new for Sun Pharma. For two years, three years when this branches were being run and the people thought chalta hai….jugaad kar lenge (everything goes). But it does not and companies have realised you have got to be very careful.So a cultural change has come which means every company is far more vigilant of how it is, how far it is following the rules of FDA and very careful that they do no violate it.

So what is that Lupin is doing so correctly and others are doing incorrectly because Lupin was the last company under USFDA scanner and the first one to come out?
Well I do not know you will have to ask the management. I am the last shareholder but I do not know what they did may be they are doing it with more emphasis, with more seriousness. I know they have a internal team which goes in and inspects all the plants on surprise.

Will it be negative for a company like Delta I mean you will not use your credit card to gamble?
I am told Delta is getting a lot of collection. People in the western world gamble with the credit card only.

So you think the business model or the core proposition for Delta Corp despite demonetisation is still intact?
Bar and casinos, you open and the public comes.

(This article was published in the ET (source) on January 2nd, 2016)

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