By Nikunj Dalmia
The Shapoorji Pallonji Group has gone on record and said we are interesting in selling a family silver. Do you think the Tatas should buy it back and if they buy back where will the money come from?
Well that the Tatas know best but I think they will buy back somehow. They would not have told the court otherwise that they are ready to buy.
If they go ahead with using the cash flow of other Tata Group of companies largely TCS, could that derail the Tata recovery process?
I do not know how, I do not think they are going to buy from the cash flow of Tata. There is a possibility that you can buy it by selling a stake of TCS, but you cannot buy it by using the cash flow of TCS. TCS cannot buy Tata Sons shares because it is a subsidiary of Tata Sons.
Is it just a coincidence that you have taken outsize bets in Tata Group of companies even after Covid — in Tata Comm, Indian Hotels?
It has got nothing to do with what Shapoorji Pallonji is doing. It has to do with the fact of the opportunity of the company, the area it is in, the management changes, the emphasis on cash flows. I have not taken a particular company or bought it because it is a Tata Group company, I have bought it because of the company and because what Tata Sons is doing. The emphasis is on cash flow and the correct business policies.
In 2018, you said that the best thing that has happened to Tatas is that Chandra has taken over and you said you were confident he will deliver. Are you now excited that almost all group companies have turned around?
Well there is still time. We will be surprised by what the Tata Group will do in the next five years. That is my personal opinion and I have the right to be wrong.
So what could happen there?
Nothing the companies will do well, that is what will happen.
In the last AGM of Tata Motors. Chandra said that they are aiming to make Tata Motors debt free. Is it possible to do so?
Of course. Impossible is the word for fools in my dictionary. Mr Chandra would not talk on anything in the AGM unless he has some plans for it.
Large corporate houses like Reliance have deleveraged. Tatas are looking at deleveraging. What does that tell you about the risk appetite of corporate India?
According to me, this is a best time to invest and they are deleveraging where there is excess leverage. But I am sure both Mr Ambani and Mr Tata, if some opportunity comes up which is great, are going to invest.
India on verge of secular, structural bull market; golden years of growth are ahead: Rakesh Jhunjhunwala
Amidst concerns over a surge in the number of Coronavirus cases, declining growth and rising job losses, billionaire investor Rakesh Jhunjhunwala remains optimistic about India’s prospects going ahead. The Big Bull, in an exclusive conversation with ET Now’s Nikunj Dalmia, said that India is on the verge of a secular, structural bull market and that it’s golden years ahead- not just for the markets but for India’s growth as well.
What could be the shape of the Nifty in 2030 because every 10 year it changes?
It will be higher. How much higher I do not know.
I am not talking about the number. I am talking in terms of a sectoral contribution. When you started your career, commodity was a large part of Nifty.
The pharma contribution will increase, IT contribution will increase. Banks will have a very good contribution. Manufacturing also. In India, everything is going to progress.
You have always said in the past that when a bear market bottom happens, a shakeout happens and the leadership changes. But that has not happened in the US market. Is it back to the Apples and the Google’ and the Facebooks of the world?
But where is the bear market? Did we have a bear market? There is only a correction in a bull market I think. There was no reversal of the bull market.
Where do you think those companies are? Are they reaching the end of the climax and if they are, what could be the implications of that?
My personal judgment is that unless their earnings growth reverses — Amazon may correct 20-25% from the top but that is nothing in relation to what Amazon has gained — as long as the earnings growth continues, I do not think there will be any reversal of the bull market,
HCL Tech revised its guidance upwards, Infosys also seems to be saying the same. Have the stars really turned for Indian IT companies or at max they would be early double digit growth companies?
No but even an early double digit growth — say 15% — at this size is not bad and the question is that in the digitalised world that we are in, there is a fair amount of certainty in earnings growth. Also remember one thing that the cash flows of these companies is very high. TCS’s cash flow is as good as its profit because they have to invest very little and that is why they get better prices.
But do you think in terms of the current valuation, they are fairly priced? The price growth and IT companies would be a function of EPS and not PE?
Yes, but if you can get 15% growth in a company whose market cap is Rs 8 lakh crore, there are a lot of buyers in this world.
Rakesh Jhunjhunwala always loves to quote. A very simple example which connects very well with everybody is market price is a function of EPS x PE. Where do you think in this market there is scope for PE expansion and for growth?
If you have a company called x and today you feel the price is very high. Next year it could perform very well but the price may not perform. So in the stock market what happens is buy on the rumour, sell on the news. I feel personally that recovery from Covid is going to be faster than what we are still anticipating.
Second, the Covid damage is not as much as people thought. Third, I feel the recovery is going to be very very strong and that is what the market is thinking and we cannot forget the technical factors of interest rates and still low participation. One million demat accounts opened last month in India. You are going to have 10 million demat accounts opened in the next one year. The reduction in interest rates in India and worldwide is for real. Today effective yield on debt post tax is 4% to 6% . If I can earn 12% to 15% on equity, I am a king.
The IPO markets have picked up globally. Robinhood traders have come in and historically famous investors like you always use IPO market excitement and retail participation as a benchmark which judge the mood. Are are not both these indicators indicating something?
I do not know, The Robinhood traders had a good shake up in two days. I think half of them would have gone home in those two days. I do not see the mass participation of Indians. What happens is the market really booms when people really leverage and they really leverage when they make a lot of money. It is too early in the market and I think those who are believing in the market are in a minority compared to those who are not believing it.
I will not be wrong in saying that with each passing day, the numbers of non-believers are only increasing that a 52-week high is being made every day?
Right. If we do not believe, we do not participate, We have gone from 7,500 to 11,200. Somehow, the market mix ranged between 10,500 and 12,000 for the next six months.
One global company which has surprised everybody is Tesla. Are markets telling you that EV is the future or is that euphoria which is happening there?
I think there are a lot of technical bull situations there. I do not think Tesla can last but that does not mean I am going to short it.
But you remain optimistic that EV will come but in India it is still far away?
EV will come and it will come at a faster pace because a lot of people worry about what will happen to this earth. I think very broadly that two challenges are a) we cannot go on consuming the resources of the earth as we are given the population growth and consumption and b) is climate change. Both will be corrected because may be in 25-30 years, we will be using only clean fuels. But I do not feel that the entire market will belong to Tesla. Mercedes or Volkswagen or JLR are competent enough to make electrical vehicles and sell them and they have a far better network than Tesla to sell.
When we spoke in June, you mentioned two bombed-out sectors. These were hotels and infrastructure. Are they still bombed out?
Yes I am investing there. I think there is a great opportunity.
Everybody is saying value investing is dead — be it PSUs, ITC, SBI. Is it true?
No. I personally feel that all these stocks will really gain in the second stage of the bull market when the valuation difference will become outlandish. The problem with PSU is the government does not have a very well defined disinvestment programme. Hindustan Aeronautics is a great stock, The government today owns 85%, every year they come and sell 5%, 7%, 8%. How will the stock gain?
Second, they sold HPCL to ONGC and all these things are not liked by the market and therefore there is uncertainty. So ownership is the prime reason for the discount in the public sector.
Commodities are also bombed out. Is there a mean reversion….
But they are recovering now and the fact is the commodity earnings do fluctuate. If I look at Lever’s earnings, they are linear. If I look at Vedanta’s earnings, they are not linear.
Do you think a silent time-wise correction has started in FMCG stocks? 10-12% of these stocks are down from their highs?
But if you gain 60% and down 10%, what is it? Nothing can be absolutely linear in price, There has to be a resting point. But I think they are fundamentally in a bull market and they will remain in the bull market because good quality companies in India are very few. Those with cash and whose managements are sharing it with shareholders and those which have a good competitive position in a large market are the ones which are rising.
We spoke about defence manufacturing in 2014 and at that time you said you were betting on Indian defence manufacturing to become a large sector and India could actually start exporting defence. Is that an idea which you would be pursuing?
No there are not many private companies and I do not want to invest in the public sector ones. But India will become a big hub of defence manufacturing.
What are the data points which you are tracking right now which if they reverse will change your view?
Sentiment or the Covid turns out to be far, far, worse than what we think. Like Mr Buffett says it is not profitable to bet against America. It will not be easy to reverse India’s growth, that is my belief.
Hypothetically, let’s say we do not have a breakthrough on the vaccine front. If the vaccine is delayed by another year and distribution is delayed, will the market lose patience?
It is difficult to predict but I do not think the markets are dependent only on vaccines. I personally think after March, things will be normal because there is a very good chance you develop herd immunity, you will get a treatment where it will be treated like a flu. Do not forget 25 lakh Indians have the flu every day. Therefore various factors can play out. A medicine can come. The ability to treat this disease has vastly improved over a period of time.
Looking at the government finances. Right now, an investor is better off not buying into government dominated sectors, infrastructure, road construction because there is no money. Do you agree?
But the number of players have also come down like anything and earlier people took contracts on the basis that the government will pay. Now they do not take the contracts only and so the government will have to pay.
You have been making a point that in India per capita is going to go higher and binge spending is going to come, Our per capita is still stuck at $2,000, $2,200.
Yes. but it can improve dramatically. Why can’t India be a $10,000 per capita country?
But to reach there, don’t you think something massive has to happen on the ground?
No in India nothing massive is going to happen. Everything is going to trickle. What I am saying trickle, trickle now is becoming big and massive.
When do you think pricing and discipline will come back to the telecom sector?
Please go and ask the three players.
I know you have invested in the telecom sector. What is your view?
I have no idea. Difficult to predict.
Do you think in general equity investing is not that lucrative because of tax? There is tax on dividend, long-term tax, short-term tax. A couple of years ago, it was not there.
It remains lucrative in spite of the tax. The alternatives are also fully taxed. Dividend is fully taxed now. Capital gains is still concessional but to that extent it is okay.
You have been making a point that you should buy real estate if you want to live in a house, do not invest in real estate. Is that a bombed out space you would like to go to now?
I personally think real estate will also bottom out in India but I am not very bullish on prices, Frankly I never apply my mind to investing in gold or real estate. But my intuitive feeling is real estate prices have bottomed out except in the highest luxury segments and I am very bullish on gold.
Are you bullish on gold because of low interest rates or anything else?
A combination of factors. The biggest bullishness is that a lot of the emerging world like China, Russia have large financial reserves and they want to limit their dollar exposure. So the percentage of gold in their reserves is going to go up constantly. Secondly, it is the best hedge in an uncertain world and a lot of people suspect that this low interest regime will turn people to gold. I do not think the lure of gold is going to go away.