What bear market? We are consolidating: Jhunjhunwala

50-60% of the excesses in the midcaps has been corrected. There is still way to go but you are going to see very big rises very fast, says big bull 65101704

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Rakesh Jhunjhunwala, Partner, Rare Enterprises, in an exclusive interview with Nikunj Dalmia of ET Now.Edited excerpts:Looking at the state of the market, do you think we are in a bear market?I do not agree that we are in a bear market. In any market, at any stage, some stocks are going to underperform and some are going to outperform. The index went up from 4700-4800 to 11000. Today also it is around 11,000, peak of 11,300. Now, the market according to me, is consolidating to make the second phase of a rise. There is polarisation in the market, that polarisation will correct itself but there were a lot of excesses in the midcaps, matlab 40 PE kya hota hai (What is 40 PE)? It is that kind of PE that quality companies should carry. The nature of their business, their corporate governance, their cash profile, deserves that kind of PE. I was shouting from the rooftop that boss this is not going to last! I do not think we are in any kind of bear market and even in the midcaps you have had tremendous rises, stocks have gone up five times from 100 to 500 and they have given away 40% of that and still the rise is tremendous. I do not agree we are in any kind of bear market. We are in a state of correction and consolidation.Plunge, tumble, decline, these are the words financial media is using to describe midcap market. When I met you in Feb you were of the view that a time wise and a price wise correction in midcap was coming. The price-wise correction has kicked in. Do you think time-wise correction for mid and smallcap stocks will kick in?First the stocks have to stop going down. How will you know that a bottom has been made, that a stock will make a range? Some of the stocks had gone from 100 to 500, then it comes back to 300. I am giving you random examples. After touching 300, it will spend time between 300 and 350-360 and then it will make higher bottoms and higher tops. After that, it will rise again. Time-wise correction is sometime away, but as an investor, I never see the increase in my portfolio and I never know what my performance is. And other than my wife Rekha, I don’t have any other partner to whom I have to show my performance. Why should I show it to anybody? I had a 70% rise in 2017! It was never going to last. I knew that. So, maturity is in understanding and not getting unnecessarily excited about the game. Similarly, when stocks fall, they fall beyond a point which is reasonable. But that fall is temporary and I can always be right and wrong. We need a more mature outlook and we need to filter the reality from the noise. Let me buy midcaps as everybody else is buying it and making money is not the right approach. I think the Indian economy is going into an upturn, capital investment is reviving, demand is reviving. There are a lot of idle assets where the NCLT process will come into effect. The silent changes which are taking place in India by the NCLT process credit discipline in this country will improve. Aaj main telco ka supplier hun, telco mujhe payment nahin deta hai to I bear, kal mera bank account hi band kar dega to main to teleco ko jaake bologna yah to mujhe paisa de ya dhandha band kar (If I am a supplier to a telco and don’t get payment from them, my own bank account may be closed tomorrow. So, I will tell the telco to either pay me or close shop). Eventually, people will no longer misbehave with assets. Basically, you do not have very high corporate profits, you are seeing an upturn in the economy, the reform measures benefits are going to kick in. I see by no means that this market has reversed. Only thing is internationally, a) the euro is not going to last. Whether it breaks in one year, two years, three years or five years, we do not know. B) I do not know what really happened to China because China has extremely high levels of debt. These are two things which can internationally upset India. Otherwise, there is nothing internationally also. In markets, prices go up and down and then reasons follow. People are saying that midcaps have fallen because of additional surveillance measures (ASM) and normalisation of mutual funds. Is that the reason why midcaps have fallen? Those falls can be temporary. Woh ho sakta hai ki temporary fall ho but bhaav saccha hai na toh buyer kyo nahi aata hai? (The fall can be temporary but the sentiment is true. Otherwise, why won’t the buyer come? If you are a good leverage player, you still get leverage here. I get leverage at 8.3%. The price is real. Some say prices fell because somebody sold the share. The issue here is why didn’t somebody else buy it? Let us believe that the prices are real and that they have been excessive on the midcap side. Price induces its own buying and selling. So, the midcap fall, though it is excessive, is correct. We have had a four-year long bull market in the mid and smallcap stocks. The PE multiples reached north of largecap stocks. Historically by definition, midcaps should trade at a discount to largecap stocks. If I go by that definition, the scope of correction could be still large? It is not that all midcaps should necessarily trade at discount to largecaps. It depends on the nature of the business. There are some midcaps which are doing some very good businesses. My personal judgement at these levels is that at least 50-60% of the excesses in the midcaps has been corrected. There is still way to go but you are going to see very big rises very fast. You will have a period of correction and consolidation. If I look at the profile of largecaps or rather megacaps, India’s biggest IT company, energy company, FMCG, private bank — all are at all-time highs. It looks like a concentration of 8 or 10 stocks, But if you see the start, I will tell you Titan. It went to Rs 1000. Is it not a gain? There are so many stocks. After a stock goes up three time, it is going to rest. Look at Avanti Feeds. It may have gone from Rs 2,000 to Rs 1,000 but it went from Rs 60 to Rs 2,000. How do you say it has not gained? You bought it at Rs 2,000 that is your problem. But if you look at the longer term gain, it is unbelievable! Even in my portfolio, I have 70% rise. I know that 70% is not going to last but 40-50% of that rise will last. Everybody who has invested prudently, who has not got excited unnecessarily, will be okay. Pretty girls may excite you but you pay a very heavy price! The stock market may excite you but you pay a very heavy price! You mentioned that the earnings revival is round the corner. High frequency data is selectively bullish. We got a good commentary from HUL, a decent commentary from Zee. In 2017, 95% of the markets went higher. Will the markets start differentiating this earning season or the next? Will good quality midcap stocks start regaining momentum? You can label everything with the same. It depends on stock to stock. There are certain midcap stocks which have not corrected at all. We have to look at the quality. The madness has corrected itself and that madness will not come easily before two-three years. Matlab samay lagega logo ko bhulne ko, jo chot lagi hai us pe thora malam lagane ko (It will take people time to forget the beating they got). But good quality stocks will do well. I would say broadly I will invest. In the beginning of the year, your second prediction was that the dollar will strengthen, rupee would weaken and IT stocks will make a comeback. IT sector has surprised us. IT stocks have made a comeback. I think now they are well valued. At that time, I thought there was lot of opportunity in them but now are well valued. Largecap Indian IT which is throwing a lot of cash, buybacks are at play. The growth in US economy is also making a comeback. What should be the long-term PE band? I cannot say Infosys spread should be 10 to 20 because market’s PE changes, sector’s PE changes. But selectively markets have gone up. If largecap market cap have gone up Rs 40, earnings growth has also doubled from 10% to 20%. In my opinion, largecap IT is well priced. Dollar could gain and rupee could go below these levels, so then they could appreciate more. IT companies are doing the right things by giving cash back to shareholders. Two buybacks have been announced by TCS. Hopefully, more will come from Infosys and others? It is a business strategy of each company. What do you do with cash? Either you acquire or you give back. If they do not want to acquire because they do not want to take a risk to your business models, then giving back cash is the best. Time to Buy Bank Stocks with 5-yr ViewI like to draw your attention to the banking sector. Do you think markets have recovered from the shock of the PNB news?I do not know all that but I feel it is a time to buy bank stocks with a five-year angle. You will get multiple returns.On one side, you have got retail-dominated franchise — whether it is retail NBFCs or retail banks at huge price to books. They are trading at multiple highs. No, I do not mean those banks. Banks have a pre-provisioning profit and then they make provisions right. Now the fact is that you go to any country in the world credit growth is 1.25 to 1.5 times nominal GDP growth. Nominal GDP growth in India will not be less than 12%, 7% to 8% growth, 4% to 5% inflation. So credit growth has to be 15% to 18%. There is a big need for these banks. The external opportunity in the demand for their product is unbelievable. It is now going to a lot of NBFCs. The bad loans will be ultimately be over. By 2019 march quarter, most banks other than the worst performing public sector banks, would have adequately provided for themselves and there is no legacy bad debts from 2014, 2015, 2016.Also, the pre-provisioning profits will grow because there will be credit growth and they have all set up networks. So the cost to credit ratio will come down. Today the return on equity is 6%, 8%, pre-provisioning profits where return is 17%-18%. When the pre-provisioning profits grow and the provisions are not there, their profits will shoot up and the return on equity will go back to 17-18% by 2020-2021. In these banks, not only will the benefit price be equal to EPS multiplied by PE. EPS will go up because of credit growth and provisions will be less and cost to income ratio will go down and PE will go up. There are good one or two good public sector banks and those private sector banks which have not performed well and who have well provided I think they will give multiple returns. Would you like to extend that to even old PSU banks or old private banks? Federal Bank came out with numbers which were great. Other than the Kotak Mahindra, Yes Bank and HDFC Bank, the other banks which have not performed, their return on assets are low. Whether Federal or any of those banks, ICICI, anybody do very well in that.Hold On to Bluechips Why are markets paying disproportionate PE multiples to consumer staples? PE multiples are north of 50, 60, 70 times now? Well because of the nature of the business. and the fact that security consumption in India will always go up. These companies have given consistent returns. The market made a bottom six-seven days after September 11, 2001. Right on that day, the prices of Hindustan Lever was Rs 329, 15 months later or in 2004 March, the index was 6,000 and Lever was Rs 150 and Lever did not cross Rs 329 until 2011. For nine years, Lever gave no return. Now it is up and has corrected itself. Markets are giving these kinds of multiples because India has now gone above that $1600 per capita income range where discretionary spending takes off. These are all discretionary spending items. They expect a big growth in consumption and very good margins and very good cash flow payouts and corporate governance. But can these PE multiples sustain on a longer term and can an investor now expect a double digit returns on a five-year period? See whenever you have very high PEs, after may be for a year or two, the shares do not depreciate because the earnings will go up but the PEs will correct. I am not smart enough to predict that now this stock has peaked. If you are holding a good bluechip stock which has given you a return over a period of time, I would hold it. But when the disclosure hits the exchanges that you have reduced your ownership in Titan, everyone will think that Titan has peaked out in terms of return potential? I still own 6 crore 25 lakh shares whose worth today is Rs 5,500 crore. If I lost confidence, I would have sold the balance. I sold a part to make another very large investment. I am investing Rs 2,400 crore in a single unlisted company. I need money and Titan became too disproportionate part of the portfolio. I still believe in Titan very much. I am extremely bullish but I sold because I needed money to make an alternative investment. There are two investment disclosures which have hit exchanges in last 15 days. One that you bought into Dish TV and on Jaiprakash Associates. Disclosures are right. Disclosures are right but the commonality between Jaiprakash Associates and Dish TV is that these companies have debt, they have suffered. You are badly mistaken Jaiprakash has got various businesses. On a consolidated basis. No, consolidated basis mein kya lena dena usko? The promoters cannot bid for Jaiprakash Infrastructure. His debt in Jaiprakash industry is nothing. It is Rs 5,000 crore. He has settled with all the banks. So, I do not agree with you that Jaiprakash Industry has got disproportionate debt. He has got a cement business which is valued more than 5,000 crore. I was looking at a consolidated picture. I know the NCLT issue is still on right now. I have not bought the consolidated companies. Jaiprakash Power has issued equity, there is no minority. He cannot get into Jaiprakash Infrastructure because of NCLT law.Extremely Bullish on Pharma Sector I am getting a sense that markets are no longer over obsessed with the US generic story. Finally, Indian pharma companies are getting valued on other businesses Indian business. Is it the right approach that do not just think of pharma in a generic connection? Indian companies are going to do extremely well in US. It has become very common to say bad things about US generics but I am extremely bullish on the pharma sector. I think it is a time to buy. The IT pecking order has seen changes and disruptive waves, Only three, four, five IT companies have migrated to the next level. Will a similar kind of phenomenon happen in pharma as the wave is changing? Lupin, Sun Pharma they are moving to complex generics. Would the smaller ones be left out? Sun made its biggest money in the skin business. That business lost became worse than the generic situation from here. Then everybody withdrew. It is only a matter of cyclicality.. I am very bullish on the pharma sector. I am holding on.

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