Q: Before I talk to you about the year ahead, I wanted to understand whether your mood has changed? Since we last spoke in June, which was the time that the pandemic was raging in India, we were also in the midst of the harshest lockdown, you had said then that you were getting a tad frustrated. In light of the developments that have taken place, the reopening of the economy, movement on the reform front the government has undertaken, are you less frustrated today Rakesh Jhunjhunwala?
A: No, I never said in June that I was frustrated. What I had said that time was that I am a tad frustrated by the slow pace of reforms in India. I was very bullish for the market even at that time. And I have no reasons – I think that pace of reform is picking up and in the markets, I remain as bullish as ever. I was extremely bullish in June and I am extremely bullish even today.
Q: You were bullish on the markets even in June but you are right to point out that you were frustrated with the pace of reforms. So let me ask you about whether the manner in which the government has responded to the COVID crisis, we have seen more agricultural reforms, we have seen labour reforms being announced, the Prime Minister (PM) hosting a round table with sovereign wealth funds, pension funds, trying to draw in foreign direct investment (FDI) and foreign portfolio investment (FPI) flows to India. How does the India story stack up on the reform front to you today?
A: We must remember one thing that it is not easy to do any reform in India. The agricultural reform at least if I talk to five agricultural experts and three agricultural companies, everybody is very bullish on them but look at the way the governments in Punjab and Haryana and Maharashtra are reacting. I feel personally that the government is doing extremely good reform and is hell-bent to do the reform regardless of the political opposition whether from within or from the opposition.
So I have to see things in the context. We are in a democracy, we have to carry people with us. I am extremely happy with the kind of reform the government is doing and I think the next one – they are going to pass the bill on electricity reform in parliament which is already. I think that is also a game-changer and I think there is going to be the only strategic sale of public sector undertakings (PSUs).
So I think I am extremely happy now that we are catching up the pace of reforms, we are making efforts to attract capital both foreign and Indian. We Indians must realise that in a democracy like India, it is not easy to have reform and change and there is a vested interest for everything. So rather than June, my frustration is reduced by 80 per cent.
Q: Given where the global economy finds itself with the accommodative monetary policies continuing across the world, bond-buying programmes getting enhanced, what does it mean in terms of liquidity and flows into India? When we last spoke you were talking about how foreign institutional investors (FII) ownership in Nifty50 has halved in the last three years, what do you believe it is going to look like going forward?
A: I think the money is going to come not slowly, not fast but in a tsunami. Because India is one of the last frontiers of markets where there can be substantial growth in the world, the world is awash with liquidity, that liquidity has to find an outflow and the ownership in India now is far lesser than it was three years ago. So I think there is going to be a tsunami of capital into the stock markets both foreign and Indian because I think most Indians and foreigners are still not bullish about Indian economy and the signs of the economy and the reform, according to me, is going to – this year suppose you have 10 per cent negative growth, I think next year we will have 10 per cent positive growth so we will reach levels of 2019-2020 and in 2019-2020 we lost 15 days in March and after that, I believe we are going to grow 6-7-8-9 and 10. So we may need – it is my opinion, it may be right or wrong – we will reach the double-digit figure in five years. We have got uncertainties on our side and I am bullish on India more than anything else for the economic growth that lies ahead for India.
Q: A categorical assertion that you believe that there is a tsunami of capital that will come into India, into the markets and FDI as well. But what will that then mean in terms of sectoral themes that you expect to play out, sectoral bets that you expect to play out?
A: It is a relay race, it is a buffet, and everybody is going to join in. So you believe in the Indian story and choose your stocks. I am bullish that the Indian economy will grow. The fact is that corporate profits to gross domestic product (GDP) in India is at all-time lows. So there is going to be a double-whammy. Percentage of profits to GDP is going to go up and the size of the GDP is going to go up and then I believe with low-interest rates and with low exposure to equity of Indians and in general, a favourable outlook towards emerging markets and especially towards India is going to lead towards a tsunami of money in the markets. I feel India is where we were in 2003.
Q: You talked about how India finds itself poised at where it was in 2003, what is your hypothesis there?
A: My hypothesis is that India is going to – 2003-2009 we grew 8-9 per cent. I think the next 4-5 years we are going to get there. The second thing is there is probably disbelief in the markets, market have unbelievable strength. Worldwide I think there is going to be very low-interest rates at least for the next 3-4 years, there are a lot of reforms that has taking place, corporate profit to GDP are at all-time low and I think GDP is going to go up, percentage of corporate profits to GDP is going to go up, Indian companies are – I mean at their best efficiencies as they ever have been. We have got a clean system, lot of rouge entrepreneurs have been removed. So I think all these factors – I think India is going to enter a period of very high growth. I see a different India than most Indians.
I see growth and prosperity coming, I could be wrong and that coupled with the platforms to garner equity into this country, both local and foreign. I think we are in a market which will surprise everybody on the upside.
Q: Let us talk about your big calls now and I want to start by talking to you about pharma because when we last spoke this is what you said to me on pharma, you said it has hit 30-40 runs at the moment, it will hit a double century. It has been a rank outperformer – whether it is on account of COVID, whether it is on account of China plus one strategy – this is a sector that clearly as seen a fair degree of interest. Do you believe that there is more steam here?
A: Last time I told you 30-40 runs, this time I will tell you 40-42 runs.
Q: So you will continue to place bets here?
A: No sector is going to have linear growth, after a rise every sector is going to stop for some time, consolidate and then make the next move. So I am not smart enough to know that now this sector has gone up, it is going to consolidate for some time so let me sell and buy the other sector, then the other sector after three months will peak out, then I should buy back the pharma sector- I am not so smart to know when this will happen. I know that it is going to go up, there are going to be periods of consolidation and correction and I don’t attempt to time it so thinly.
Q: You said that you believe this market is going to surprise us, where do you believe this surprise is going to come in from and I will try and link this to what you told me previously. You said some of the biggest winners will be found in the most beaten sectors. So the surprise element – where do you see that coming in from? Give me some of the spaces?
A: In most battered stocks, it could be metals, it could be the public sector. Metals, the public sector, other areas of battered stocks, other areas where there has been total disbelief in the market over years, I think that is where the highest returns will come.
Q: Since you talked about the public sector and one of the themes that you were hoping will take off finally is the strategic disinvestment theme. In fact, I was speaking with the Economic Affairs Secretary and he was very clear that the impediments are there, they acknowledge them for companies like BPCL, Container Corporation, etc. but they still feel that they will move ahead. Do you believe that this is going to be a big theme that will be revisited this time around?
A: No ma’am, see there are two parts for the public sector. One is the strategic disinvestment but how do you handle other valuations. Today you see HPCL, BPCL so many stocks, maybe Cochin Shipyard – I don’t want to name too many stocks and I don’t own any of them, maybe small ownership in HPCL. The question is – one is you have got to realise value by strategic disinvestment. When you are going to realise value? When the owner treats his share better. Buyback by HPCL is the first indicator that the government of India now wants to be careful and strive to work to enhance the valuation of its assets. That is one medium by which I think the value of the public sector stocks will go up. A basic change in attitude by the government of India to treat its own assets better – not just do things like sell HPCL to IOC, sell REC to PFC, but do things in a more thoughtful manner which will create shareholder value and the first indicator is the buyback by HPCL and I don’t think this has happened without the knowledge and consent at the highest levels of government, that is my guess.
That is one way by which public sector stocks will gain value and second, of course, is a strategic investment and third is asset monetisation and they have – I am told they are promised there will be no ETFs, as far as possible they will be no sale except strategic disinvestment and they will treat that asset better and not disinvest them in a haphazard manner. I think that could lead to re-rating and re-evaluation of the public sectors stocks in a massive manner. So strategic sales is ultimate, but there are other factors which will lead to better valuations.
Q: So you anticipate a re-rating if of course this coherent strategy not just on strategic disinvestment, but enhancing shareholder value for the public sector stocks plays itself out?
A: The first indication is the buyback by HPCL and it makes eminent sense. I think this buyback by HPCL means they are going to do this in a lot more companies, in a various manner by no haphazard disinvestment, by buybacks, by whatever way. But the owner of these assets mainly which the government of India has now realised that we must work with governance and with legitimate methods to enhance the value of their assets. The buyback in HPCL is not only important for HPCL it is important for what it is indicated, but I also have no information this is my judgement from what has happened. Realising that there is a lot of room for evaluation in public sector stocks and that was not happening because the government was doing in a haphazard manner. Now the government is going to manage the assets better that is what HPCL buyback indicates.
