‘We are learning to live with Covid. India on verge of a structural bull market’

I do not think the Covid crisis has caused the PE expansion or the EPS expansion in pharma. It was overdue. I have been shouting for two years, says Rakesh Jhunjhunwala, Partner, Rare Enterprises.


Do you think markets right now have normalised or have we extended ourselves?
There is only worry and there is a lot of disbelief in the market. We have gone through the classical birth of a bull market where there is a sharp fall and there is a sharp recovery and everybody is dumbfounded and nobody believes in the rise. Any people I meet and talk to, nobody believes in this market.

In 2002, I wrote an article in The Economic Times that India is on the verge of a structural secular bull market. I feel like writing that article again. This bull market is not only going to be about the stock market, it is going to be about India. People are going to be surprised at the way Indian growth is going to recover and how it is going to sustain and further recover. That is my personal opinion. I defer from most Indians on it and I reserve the right to be wrong.

But suddenly nobody is worried about the rising Covid cases both locally and globally rise but markets are not focussing on it.
See the markets are valuing what the earnings are going to be in the immediate future. If I have a company which I think (and which could be wrong) is going to do extremely well in 21-22 — and is going to earn 13% next year or 15% or 12%, surely the dire predictions of Covid are behind us. The Covid is getting milder and also people are learning to treat it better and the percentages of deaths are coming down. It is like something like smallpox, polio. It will pass us. We are learning to live with it. After all what is it, it is a flu, it’s not a cancer. It is not that Covid is going to impede the progress of humanity. It is not as much a changing event as it was being predicted, according to me.

So what according to you will be the shape of the recovery? Will it be a broad- based recovery, will it be a nuanced recovery?
The sectors which have been hit the most are hospitality and restaurants. The recovery could be gradual but I can predict that a lot of restaurants will close but a lot more will open. Those industries may open a little later. Others will return to normalcy quite fast and with vengeance.

Do you think this crisis is going to leave scars and marks which would be permanent in nature?
Where are the scars and marks? It is not a war, it has no victors, it only has survivors. But it is going to leave us with a lot of learnings. First learning is you have to invest more in healthcare. Second is we cannot take these things lightly. These were the two lessons we have to learn.

The government in the last two weeks has done two reforms – one on labour and second on APMC. Nobody is talking about it.
Well that is good. People are not realising the consequences. I think it is very significant when the government is talking of the electricity reforms or about auction in 38 coal mines without any usage norms. Everything, IBC, GST, RERA, labour reforms, recent agricultural reforms, selling of public sector units have been path breaking. All this will add up. What India needs is ease of doing business and inherent faith in the ability of Indians to catch an opportunity.

You create an ease of doing business and you look at it this way. Software exports in India will grow at least 10% to 12% a year the way the world is getting digitised and it is too late for any country to challenge Indian in this. Whether Accenture does it or Infosys does it, what is important is it should be done in India and so the value added is high.

Second, India is going to be one of the farmers’ capital of the world. I have no doubt about it. I think agriculture reforms are path breaking. Are you aware that milk is a Rs 8 lakh crore crop, greater than all cereals put together and there is no restriction on who can buy, where he can buy, where he can transport, whom he can sell to? Same things apply to agriculture.

Lots of people say it is the 1991 movement for agriculture. Then has manufacturing not come to India? The import duty is a barrier for a person who wants to import. We have very flexible labour laws now. Every state government is ready to give land, electricity is not a problem, there is no shortage, there is abundance of workers, there is hire and fire. Then why has manufacturing not come? The reforms have come cumulatively and that is what the market is recognising. Once all this comes together, it will explode and then the path is only upward and as an Indian I am proud that for the first time we have shown some aggression towards China and we have captured a very vital point.

I envisage India in the next three to five years or in the next 30 to 50 years will be far different. I am an optimist by nature and I reserve the right to be wrong.

Do you think the agricultural reform is going to change the dynamics of the entire supply chain, cold storage, rural income, everything?
Why will it not? As a company or as an individual, I want a large wicket. Today the farmers in West Bengal get Rs 4 per kilo of potatoes and we pay Rs 40. So if they get Rs 10 and we pay Rs 24, it is eminently possible. In value-added products, India is among the lowest in the world. There is too much wastage. It is going to take time but it is surely going to happen and the combination of all these events are going to lead to the boosting of growth and that is what I think markets are silently recognising.

Do you think the Indian government has done the right thing by banning the Chinese apps? It is a fight of tech or intellectual property rights that is happening everywhere now?
I do not know what should be done or what should not be done but I know we should show some aggression against China.

Now the government has really unleashed the Atmanirbhar campaign and there are specific pockets which are getting addressed. How do you think this could be different from the Made in India campaign which was launched just five, six years ago?
I am more interested in the reforms and the ease of doing business than Made in India and Atmanirbhar. What we need is ease of doing business. We are well placed in pharma and in software. A lot of people do not know that agriculture is one of the largest value-added exports out of India. In exports, what is important is value added. If I import a Rs 80 diamond and sell it for Rs 100, the export will be worth Rs 100 but the value added is Rs 20.

In agricultural goods, if I export Rs 100 worth, my import is not even Rs 5. What actually contributes to the economy of our country is Rs 95. So I can say I am like a parrot but whatever goes into my mind, does not come out easily. And things do not go into mind easily.

I feel we are underestimating ourselves. I realise as Indians we have not done well, we could have done better but I think the golden years are ahead of us. And I am not talking about the stock market only, I am talking about Indian growth as well.

Everybody is optimistic about the way things are turning up. Companies are indicating that the pre Covid demand levels are almost normalised for autos and FMCG companies. But banks are getting completely smashed and they are a play on the economy?
Because the markets do not like uncertainty and the kind of bad debts that will be needed will be only known after the moratorium period is over and the time to pay the moratorium interest is over and the time to restructure is over. I think markets may be anticipating the worst. So they want clarity on that I think and that is the main reason. Once that clarity comes, I think banks will come back.

Do you think this kind of a gap between let us say retail banks and corporate banks which has got created, could exist earlier?
There are certain problems with public sector banks. People do not believe in the government ownership of assets. I think SBI is enviable and I do not think the difference is justified. There has to be a difference because HDFC Bank is the leader and has shown consistent growth. But the variance is very high and I would say a lot of difference is because of government ownership in case of SBI.

We have seen the first wave of shake out or consolidation in the banking sector where private banks gained and PSU banks lost market share. Is there a possibility of a second round of shake out where the old banks like a Federal Bank, Karur Vysya will lose market share to the big banks?
My personal opinion is that when the economy does well, anybody who has a deposit franchise will survive and grow because how can you lend if you do not have a deposit franchise? Therefore I feel some of the PSU banks also will do well because they have got deposit franchises. Only those who can garner deposits can lend. So, I do not think those banks are going to easily give up. Consolidation is a natural process of economic evolution and growth. So that may happen but not necessarily they will lose market share.

What role would technology play? Uday Kotak tweeted that the future of the world is with fintech and banks which have technology and platforms. Should we brace ourselves for that?
Most banks are already using technology which fintechs are using. Today I can open a bank account without going to anybody from my house. I can get a loan sanctioned from a bank sitting at my home and so I do not know how fintech is different from a bank, please ask Mr Kotak.

Pharma is the only sector where we have seen a EPS expansion and a PE expansion. Is it a coincidence that it has only happened after the Covid crisis?
I do not think the Covid crisis has caused the PE expansion or the EPS expansion. It was overdue. I have been shouting for two years.

If I give a food analogy, for somebody who has to understand the pharma rally, are we right now in the starter mode? Have we reached the main course or are we approaching desserts?
We are just finishing drinks. After it will come dinner and dessert and then some brandy and cigar. Here we are just having our first drink. It is going to be a big rally. I could be wrong but I am very bullish.

What are the data points which are convincing you that we are in a structural bull market?
The fact that India’s growth will go up and there is underexposure of equity in India. When you compare India to America, remember the percentage of profits to GDP is very low in India and has gone down from 8.5% to 4%. In America, it is at the highest ever. In American household wealth, 30-32% is equity. In India, it is not even 5-7% and we have a huge pool of savings. We have created the institution and regulated the institution through which we can tap these savings. And that makes me bullish.

In pharma, you have got API, you have got generics, you have got speciality chemical, where do you think the growth in pharma is going to be the highest?
I think highest growth will be in India. But that said, the section of the companies which are catering to India are now very well valued while the companies which are doing the API and the generics, will have both earnings expansion and PE expansion. But the companies focussed on India will see earnings expansion but there is scope for limited PE expansion.

How will this pharma rally be different from what we saw seven, eight years ago?
Well I do not think it will last much longer.

In the last decade, only a handful of companies have become good and great — Bajaj Finance, D-Mart, Indigo. Why is that?
Because they have outstanding promoters who understand business and who understand that cost control is the key to markets and competence and then honesty, integrity and straightforward approach.

There are a lot of innovations and good companies are coming up. Do you think even though India will grow, innovation will happen in the private market and as a result public investors will find it difficult to make money?
Not at all. There is always scope to make money after a company matures. For people who are investing in the private companies or unlisted companies or start-ups, far greater effort is involved. I spend far more time on my unlisted portfolio than I spend on my listed portfolio. Second, even after they are listed, you will be able to find good investments.