Market’s ‘Big Bull’ Rakesh Jhunjhunwala is confident that an economic recovery is at India’s doorstep on the back of several factors including a slew of government’s initiatives and a good monsoon. Consumer demand is reviving and the inflation is low, Jhunjhunwala said. India will have an 8 percent GDP growth as the new normal and slowly the country will inch towards 10 percent over time, he added. Jhunjhunwala shared his outlook on the market and economy in CNBC-TV18’s Diwali special series Samvat 2073. Spelling out some market statistics the legendary investor said since 2013, when the Nifty bottomed at 5,700, the market has gained about 16-17 percent on a compounded basis. Even though the pace of change or growth in Indian economy has been slower than anticipated, Jhunjhunwala believes the Indian economy today is in a situation like 2002-04 and may be on the cusp of a major turnaround. During 2002-03, the rate of saving was 26 percent, rate of investment to GDP was 25 percent and rate of corporate profits to GDP was 2.2 percent, he said adding that the numbers went up to 37 percent, 35 percent and 7 percent, respectively. This change was mainly led by investment boom caused by lower inflation, he said. He expects a disproportionate gain in percentage of corporate profit to GDP and therefore, a disproportionate rise in corporate profit growth, going ahead. Maybe Indian economy today is in a situation like 2002-04. Indian economy may be on the cusp of a major turnaround, he said. Below is the verbatim transcript of Rakesh Jhunjhunwala’s interview to Udayan Mukherjee on CNBC-TV18. Q: Let me start by wishing you a very Happy Diwali. It has been a very momentous year for you in many regards I hear. You have crossed very important milestones with your own portfolio and more importantly you have just taken a very big step of giving away a very large part of your wealth and I congratulate you from the bottom of my heart for that gesture. In your own eyes, how would you sum up the year that has gone by between last Diwali and this one? Are you happy with how it has turned out or would you have expected more? A: Let me start by wishing you and all the viewers and all Indians very Happy Diwali and a prosperous new year. I would like to clarify that I have not given away anything, at the moment I do Rs 25 crore of charity every year. I have pledged that when I turn 60 on July 5 2020 I will give away 25 percent of my portfolio or Rs 5,000 crore whichever is less. So, it is a pledge and I hope god gives me the strength to fulfill it. As far as the year goes by, I think financially it was a good year, nothing to complain of. Also it has been personally — I had prolonged period of bed rest and have reflected on life and I think I have matured far more as a person in the last one year than I have had in many years. I think I am trying to find new purpose in life. Q: I was just looking at the numbers between 2014 Diwali to this Diwali, 2014 to 2015 the market was flat and between last year Diwali and today, this Diwali is up about 8-9 percent. These are not staggering returns, do you think it is because the market is realising that the pace of economic recovery is probably a bit more sluggish than what it had anticipated, what could be the reason that the last two years have been pedestrian as far as the index goes by the market standards? A: If you ignore 2014, you look at 2013, 2013 August the Nifty bottomed at 5,700. So, if you look at 2013 to 2016, in three years we had a gain of 16-17 percent compounded. However, having said that, I agree with you that the pace of change or growth in the economy has been slower than anticipated. However, having said that I was just looking at some figures, in 2002-2003 our rate of savings was around 26 percent, our rate of investment to gross domestic product was 25 percent and rate of corporate profit to GDP was 2.2 percent. Now, this went to as high as 37 percent savings, 35 percent investment to GDP and 7 percent profits to GDP. This was mainly led by an investment boom which was caused by lower inflation. So, I think maybe the Indian economy today is in a situation as India was in 2002-2003, 2003-2004. I am not saying about the stock market, the stock market from 2003 to 2008 went up four times, I am not saying the market is going to go up four times in the six years but as far as the economy is concerned, I think we may be on the cusp of a major turnaround. Today, corporate profit to GDP is 4 percent, inflation is 4-5 percent, investment to GDP is 29 percent, savings is 33 percent, so, in my opinion savings is going to go up, savings rates are going to go up, investment to GDP is going to go up, inflation is low, consumer demand is reviving. So, I am very hopeful that this year India will grow at 7-8 percent; I think India is going to have 8 percent as a new normal level of growth in my opinion. I think we will slowly inch towards 10 percent as far as economic profits go. I think there will be a disproportionate gain in percentage of corporate profits to GDP therefore there will be a disproportionate rise in corporate profit growth. Q: Starting when that’s the point you are right this is going to happen, but we hav talking about this U-shaped growth and every couple of quarters we are just pushing this back. We are still not seeing that kind of investment growth that you are talking about it is inevitable it will happen, but do you think you can time it or it may go on to stretch people’s patience as it has already over the last year, year and a half? A: See market don’t let you make money easily. You gone to have faith, everybody’s patience and conviction is tested then only can you make the money, but the fact remains that for 2 years we had bad monsoons. The government has taken a lot of effective steps those steps are taking time to fructify. I for one think it is at our doorstep now and will be the story of a boy who cried wolf. I am seeing some of the companies I have contact with. In metro we are seeing good revival of consumer demand. We had bumper crops, so I think there will be both revival of consumer demand and revival of investment. One thing which is keeping it afloat is, we are not able to recognised fully and attack this problem of bank NPAs. I think what happen in Axis Bank I like it very much last quarter, because at least now all this is coming to a head and once it comes to a head it will be addressed. Q: You think it is all out there in the open, because one would have thought 2-3 quarters back when the bad news really started coming up out from ICICI Bank and some of these banks that we had seen the worst, but every quarter seems to surprise us that there is more in the closet in terms of skeleton. Do you worry that there could even be more than what we have seen already, because this kitchen sinking is not coming to an end from the corporate banks? A: No, no, I had the opinion last year also that it is not, but now more is known and less is not known and we have put it that way. Last year more was not known and less was known and what is the way out, the problem is they just don’t resolve and I don’t know why they don’t resolve Kingfisher. At least if he is giving Rs 5,000-6,000 crore take that at least. I think we have to resolve the process at a speedier level and we will inevitably have to do it, there is no alternative to it. Q: But clearly the big corporate story of the last one year and it’s come just before Diwali what happen with the Tata Group. I know that you have been shareholder in stocks like Tata Motors and Titan and Rallis, what was your reaction when you read and heard what had just erupted from Bombay House? A: Rather than talking of this incident itself, let us look at what are we dealing with. The House of Tata was formed in 1868. It 148 years, there is one stock in the Dow which has survive for a century, they have faced two World Wars, they built India’s first steel plant, India’s first power plant, India’s first 5-star hotel, India’s first airline, India’s first commercial vehicle, India’s first software company, India’s first large scale jewellery company, India’s most profitable watch company. This is the House of Tatas. It is ultimately owned by charity, so do you think that the way people are reacting that an incident like this can permanently damage the House of Tatas, a house which has survived two World Wars, which is India’s largest industrial house, which is owned by charity, where the primary motive is not personal wealth creation, but wealth creation for society. I am not worried at all. We don’t know the reason but there have to be the cognisant reason why they have done what they have done and I for one know that I know some of the independent directors of Tata Sons and I respect them deeply and they would not have agreed to this course of action unless and until it was justified. I think all these companies controversy will die down. Q: That was one position, because a lot of observers have been stunned by this suggestion that maybe these directors that you speak of, they were actually toeing the Ratan Tata line and they were not independent as the market thought or the corporate circles thought they were. Do you buy that argument? A: Amit Chandra was an independent director he gives 80 percent of his income to charity. That man is not concerned with any post any position and he doesn’t care for any Ratan Tata. He cares for what is right or wrong in his judgement. I respect the independent directors and we don’t know what conspired, so how are we to judge. We are not party to all these facts and I don’t think that the House of Tatas wants to make all the facts public, because it will like throwing mud at themselves. Suppose they felt that there were some questionable decisions taken if they make it public today, it will be throwing mud at themselves, that’s what my judgement say I know nothing. Therefore the Judge anything in this matter in incomplete knowledge is incorrect and I don’t question the intention or the integrity of any of the directors of Tata Sons and I am sure the House of Tatas will rise above this and will continue on its part of prosperity and contribution to society and it has always done. Q: One certainly hopes so it is just that these allegations comes from right from the top and that to from a man who was at the helm for 4 years and for fund managers and the outside who own these Tata Group stocks you can’t blame them for thinking for a moment that is it really that bad inside the group, are they taking decisions at the chairman level which are not based on merit, is their balance sheet a mess as Cyrus Mistry is pointing out in many group companies. Should we be investing in these companies if this is the process of decision making? Surely some nervousness is in order for people who own this stock and actually don’t know what is transpiring within at the group at the board level? A: With due respect to Mr Cyrus Mistry, he should have addressed and told investors this when he was a chairman. If he knew it was a mess what was he doing, why was he keeping quiet. If he knows that Nano production has to be closed he was the chairman of Tata Motors , he should have closed it, whose permission did he need legally and in any group if anybody is going to take 10 decisions one or two decisions are going to be wrong. If Tata Steel bought Corus, Telco (Tata Motors) bought JLR, so I don’t question the integrity of any of the decision that you have taken and as an investor I am not nervous at all. I think the House of Tatas the ethos, the trust, the tradition it will rise above all this petty issues. Q: What I want to ask you is, as a shareholder do you feel anguished or angry in any sense that what has come out of Bombay House and will you contemplate any course of action which can be twin – it is to either vote with your feet with any of the holdings that you have or to actually seek some kind of legal remedy because of the way things have turned out with the erstwhile chairman? Are you contemplating any action? A: I don’t litigate in life. If the stocks go down because of the squabble, I would look at buying not selling. I may or may not, but I will look at buying. I don’t see there is any reason, there should be other reasons for the stocks to go up or down but I don’t think that Cyrus Mistry has been removed and that is why t he stocks should go up or down. Q: You are saying that we are at the doorstep of this recovery that one has been talking about or an acceleration in the recovery that we have been anticipating for some time now. You are saying that between this Diwali and the next Diwali, you will be surprised if we didn’t see a meaningful takeoff or acceleration in profits and therefore in the stock market? A: At the moment the market is consolidating having risen from 6800 levels to present levels with upward bias. Markets are not going to go up in a hurry nor are they going to go down more. They are going to play around these levels and as events play themselves out and I am hopeful of a better corporate earnings growth in the second half, I think markets will take off ultimately. Also I feel international factors will play a role. The world was being stimulated with monetary policy, I feel interest rates in America may rise marginally but that is not going to bring down the attractiveness of equity investment worldwide. Now there is a lot of talk of fiscal stimulation in the western world. I think that could be a bullish reason, people are saying that America will spend USD 2.5 trillion on infrastructure, monetise it and spend it over the next 10 years I just read in Chris Woods article, Europe may do it. So, that would be a bullish factor. Only one thing which I would like to keep my eyes open is the Euro and the euro zone. I think some threats can emanate from there. Italy is going to have a referendum and essentially I think the euro is a unstable currency and a unstable union. I would anticipate risks, we should keep our eyes open to that risk. Q: You don’t see the US elections as a meaningful risk to the market? You don’t think it is such a market moving event? A: Do you think Donald Trump is going to be President? It is a joke. I think the American people are wiser than to elect Donald Trump as a President. When Hillary is President she is great in maintaining the status quo, she is the ultimate politician. Q: In the next couple of months before this calendar is out, do you t think we have a shot at making a new top or since you suggested that this market will not go up in a hurry, you think in 2016 calendar it is unlikely that we take out that 9100 top? A: I think we will make a new high between 2016 and 2017 Samvat. I am not afraid of what will economically happen if Donald Trump becomes President, I am more afraid if he is going to have the nuclear button under him. I fear for my life not for my money if he is elected President. Q: What is the floor to this market you think? In the event of a correction led by any of these factors that you suggested – Europe or US interest rates going up, do you see the market going below 8000, the Nifty, at all anytime in the foreseeable future? A: The future is uncertain but it should not break that level. I think the first blockade is 8500 itself. Q: What about midcaps? You are primarily a midcap investor, you portfolio is full of them, midcaps have outperformed the Sensex handsomely over the last one year, last two years. Do you worry at all with some pockets of valuations in midcaps that they are running ahead of fundamental reality or do you think that this process of rerating is absolutely justified? A: They are being valued partly because the public wants to play in stocks which are more speculative or more volatile. Surely there are pockets of extreme overvaluation but there are also pockets of opportunities. Also lot of stocks have been priced to perfection, so what could happen is that when the actual earnings come through the gain in the stocks will not be there. Q: You also own some midcap IT stocks, I don’t want to discuss them specifically but the IT index is down 10 percent between last Diwali and this Diwali. It is unusual that a sector like IT does so much worse than the market. Do you sense that the market is too pessimistic or is something going on in the IT space which investors should be quite cautious about? A: I own no midcap IT stock, I used to own Geometric and has been taken over by HCL Tech . There will be an opportunity to invest in IT stocks but I still think there is way to go. Q: What are you looking at these days? In terms of adding sectors or flavours or themes to your portfolio, you have a lot of financials, you have a lot of consumption plays, do you want to add infrastructure or capex as a theme at this point or would you rather wait out because that is a call which a lot of people are dithering to take, is it too early in the game to press the button or should they do it now before it is too late? A: I am fully invested and now as age is progressing I don’t want to, I am not a risk taker that I used to be. I have lot of investment in infrastructure, I am well invested in all over the area. So I am not looking at any fresh investment for the simple reason I have no money. If I make some money in trading then I will think about it. Q: Last Diwali when we spoke, we were talking about how equities is by default the only game in town for local investors because real estate is not delivering, gold had lost its lustre but this year gold has come back in a big way. Do you see it in a sort of a stealth bull market given the world problems or do you think it was a flash in the pan this years outperformance of gold? A: I am very bullish on gold although I don’t invest in gold. Every Indian has 5-10 percent of his wealth in gold. However the way the currencies are getting debased and the fact that you are thinking of lowest interest rates, you did monetisation and now you don’t want to do monetisation in fiscal policy, so some amount of your assets should be in gold. I don’t invest in gold, my wife does. Q: So, what is the big local risk? You spoke about Euro being a biggest global risk according to you, locally what is the biggest risk according to you? A: I always say Pakistan nuclear bomb because you have a nuclear bomb with a failed state. Maybe Indo-Pak relations, I don’t see any other risk locally. We have a stable government, we have had a good monsoon. Q: What tops your list of resolutions between this Diwali and next one? A: I want to lose 10 kilogram of weight. As far as my portfolio goes, I have underperformed this year because my top three investments have not performed, Lupin , Titan and Crisil .