The recently concluded domestic follow-on offer of ICICI Bank Ltd attracted close to Rs1 trillion against an issue size of about Rs9,000 crore

by Rachna Monga - HT Mint

Big Bull Rakesh Jhunjhunwala is raising concerns about the short-term direction of the Indian stock market. Addressing an audience of about 200 brokers here on Tuesday, Jhunjhunwala said, “I am circumspect and rather careful about the market for the next six months.” He says he is concerned about the way Indian initial public offerings (IPOs) are getting huge subscriptions not only in India, but globally.

Jhunjhunwala was talking at the launch of India’s Leading Equity Broking Houses 2007, a publication of Dun & Bradstreet, a business information providing firm. The recently concluded domestic follow-on offer of ICICI Bank Ltd attracted close to Rs1 trillion against an issue size of about Rs9,000 crore.

In mid-June, New Delhi-based realty firm DLF Ltd’s Rs9,500 crore IPO was subscribed three-and-a-half times. Dozens more IPOs, including those in real estate, are on the cards. In early 2005, when India’s benchmark stock market index Sensex was hovering around 6,000 point levels, Jhunjhunwala surprised investors by predicting that it will go up to 25,000 by 2009. Two years since that prediction, the benchmark index has been hovering around 14,500 levels. It reached its lifetime high of 14,723.88 on 9 February.

Over the past month, the 30-stock Sensex has risen marginally from 14,397 points to close at 14,43.06 on Wednesday. The broad-based 50-stock S&P CNX Nifty has risen from 4,256 levels to 4,263 during this time. Despite being cautious in the near-term, Jhunjhunwala’s speech had its usual bullish undertone as well.

“It’s not that the market is going to fall from a cliff tomorrow. After an year from now, we will once again enter a long-term bull phase.” Jhunjhunwala, who runs Rare Enterprises, an investment firm here, says he’s surprised that many investors who come to him tend to focus on the negative aspect of the Indian growth story.

Ramesh Damani, a member of the Bombay Stock Exchange and a well-known markets commentator, is also worried about the money being thrown in the recent IPOs. “I think it’s time to get scared,” he said. “After four years of strong double-digit returns, we are likely to see consolidation in this year. Sensex could be seen in the range of 12,500-15,000,” he added. However, Damani still thinks that there are stocks available at great valuations and investors just need to focus on picking individual stocks instead of chasing the market movements. Manish Chokhani, director and CEO, Enam Securities Ltd, foresees the market entering into a consolidation phase in the next six months. “In last two weeks, three Indian companies have raised around $9 billion from domestic and global markets,” he noted. “This shows the huge appetite of investors for Indian papers. But the secondary markets still haven’t taken off in a big way.” However, not all market pundits who have huge investor followers are bearish in the near term.

For instance, Raamdeo Agrawal, managing director, Motilal Oswal Securities, is comfortable with the current state of markets and he doesn’tsee any dangers in the nearfuture. “There is a clear distinction between performers and non-performers,” he said.

“Sectors which have not performed well have been decimated or severely punished by investors. But the ones which have performed well have been more than adequately rewarded,” Agrawal added.

by Amit Bhandari - ET BB

Six sigma has been made famous by the dabbawaalas of Mumbai, but for investors, it means days when the market drops as if its bottom has fallen off. All investors dread those days — and there have been enough of those in the current rally — such as the period after the general elections in May ’04, the correction of May ’06 and the more recent (and milder) one in February.

Things would be a lot simpler without six sigma events, which trigger sharp and unexpected market fluctuations, but since they have become a part of life, we can at least attempt to minimise the ensuing damage. ET Intelligence Group has tried to work out a strategy for retail investors to minimise the disruption caused by sharp market fluctuations.

While these extreme fluctuations cannot be predicted, it is seen they often follow close together. This has happened five times since ’00. On four of these occasions, the market witnessed corrections ranging from 11-15% in the month following the second event. In the fifth case, the correction was on a much smaller scale.

For instance, take the market correction of May ’06. On May 15, the Nifty fell by a little over 4% — more than three times the standard deviation. Two days later, the stock market gained 3.2%, which was high, but not exactly where it should have been. On May 18, the market tanked 6.77% — an extreme event which triggered the massive fall witnessed in the market subsequently. The Nifty dropped around 15% over the next month.

However, just because the market behaved in a certain manner in the past doesn’t mean the pattern will recur. Also, there is no guarantee that these events will continue to happen with any regularity — that’s a call the investor has to take. We have tried to identify some possible courses of action for an investor based on this premise.

Unlike the passive strategy of ‘buying for the long term’, these require the investor to track the market and act accordingly. We suggest that you liquidate your portfolio on the day of the second fall and re-enter after a month — either in index funds or in the stocks that have fallen the most. Keep part of holdings in cash and go short on the market after the second fall.

The risk-averse

Two sharp movements in quick succession may indicate a market correction. Recent market movements show that these corrections came in the form of a few sharp falls, rather than gradual declines.

Risk-averse investors can liquidate their holdings on the day of the second movement, or immediately afterwards. Hang on to cash for a month — that seems to be the worst period — and then invest again. The re-investment can either be in an index fund or in the stocks that have fallen more than the index.

During the May ’06 correction, stocks of companies such as Oriental Bank of Commerce, Jet Airways and ONGC fell by 25-30% after the second day, against an index fall of 15%. The cornerstone of this strategy is to stay out of the market during the correction.

The stocks that suffered the sharpest falls during the earlier market corrections are identified in the table below. The downside here is limited. But you may miss out on the upside if instead of tanking, the market goes up.

The risk-taker

The second extreme event indicates that the stock market is in the correction mode. Liquidate your holdings and if you feel adventurous, you could even short Nifty and exit after a month. Shorting the index after two sharp falls may seem counter-intuitive, but in the past, this has indicated a market correction. This is inherently riskier than the other approach because your downside isn’t limited and you can lose your shirt, literally.

As ‘smart’ money keeps taking money away from ‘dumb’ money, the current equilibrium will not be sustainable in the long run; however, quantifying the timeframe for this is problematic: the current global economic status quo may last for two years, five years, or 10 years. It is anybody’s guess. A shock that frightens away the ‘dumb’ money is the most likely candidate to end the current equilibrium. An outbreak of a contagious disease on a global scale, exposure of a massive financial fraud, unrest among the under privileged could upset the applecart.

It’s been an amazing three-four months for the market. Global markets are in the midst of a spellbinding run. Since the Budget, the markets have seen one big fall after which, the Nifty went on to achieve new highs.

Rakesh Jhunjhunwala shares his perspective on what has happened over last four months and what the road looks like from here for the next three-four quarters and the next three-four years. He says that it would be healthy for the markets to consolidate at this range, which will prepare the ground for a dramatic rise.

He also thinks interest rates have peaked off and he doesn't see a further rise in rates.

Excerpts from an exclusive interview with Rakesh Jhunjhunwala:

Q: We will talk about the fundamentals, but you spent a lot of time watching the screen. What is the screen telling you for the moment?

A: Surely in the last two-three days, the market has exhibited weakness, but I am not sure that we are going to see a major movement, either way. Maybe in the next one-two months we are going to see range bound markets with some amount of consolidation rather than a major move, either way.

Q: How would you classify that - a major move? You are saying that more then a 10% Index move is unlikely over the next one-two months?

A: I would think so.

Q: Either way?

A: Either way.

Q: So essentially are we going through a consolidation phase?

A: I would think so.

Q: But are you a bit surprised that the Sensex has not gone on to make new highs or the Nifty did not stick at new highs for a very long time?

A: I am not surprised, because in the last four years, we have had a path-breaking rise from 3,000 to nearly 15,000. As a long-term investor, I would be happier if the market consolidates at this range and makes the ground for real dramatic rise. We have had fantastic returns over the last four years. As long as the market doesn’t lose much, I am not concerned at all.

Q: But you think this consolidation phase will be short-lived or could it be an extended one?

A: I think it could extend to six to nine months to a year and I would think that’s healthy for the market.

Q: But what are global markets telling you now, because almost every market has rallied so significantly?

A: Economic growth in Europe has surprised positively, there is a lot of positive news out of Japan, economies in Asia are doing well. Not only is economy doing well, but the percentage of profits that corporates are getting out of GDP, are at all time highs. Now the worry could be that these percentages may not be maintained, but the fact remains that today the percentage of corporate profit of GDPs is that it stays high. Interest rates worldwide are not at very high levels, but inflation is surely a matter of concern, which is why markets are doing what they are doing. But to my mind, the uniform increase in asset value of all classes is something that could be troubling.

Q: What troubles you the most about the extent of the breadth of the rallies that you have seen in commodities, bond, stocks, gold, oil, everything?

A: Sometimes I feel that too much wealth has been made very easily. But maybe out of prejudice, I have all my assets in Indian equity. I feel India equity, as an asset class, will standout.

Q: Do interest rates bother you, because that’s been the fear for the last few days globally that they might start inching up and denting the case for equities?

A: The markets are not discounting the fact that interest rates will inch up. There were expectations that interest rates in America will come down and in the last four-five days, after the economic news and Mr. Bernanke’s statement. The feeling now is that interest rates may not decline in America. As far as India goes, liquidity is abundant; inflation is below 5%, it's not expected to go above the 5% figure. You have seen some slowdown in the auto industry, so the monetary authorities can feel that they have achieved partly what they set out to do by easing interest rates. I see no reason why in India interest rate should not come down.

Q: Do you think they will go up before they come down?

A: I do not think so.

Q: It's completely peaked off you think?

A: I think so, absolutely.

Q: You do not think because of the ample liquidity right now the Reserve Bank may make another tightening move?

A: I do not think the government is necessarily interested in hurting growth. Government is interested that you have growth with controled inflation and I think, it's very difficult for inflation to go above 5% in the next five-six months. In India, we don't have more then 2% owned houses, we are at an initial stage of consumption; why should any government want to limit consumption?

I personally feel interest rates should come down and industry will be lobbying now that inflation is under control. If you do not have elevated inflation, next four-five weeks, we can expect some softening in the July policy.

Q: As early as that?

A: Why not? Whether the Reserve Bank softens or not, if liquidity is what it is now, it will soften by itself.

Q: So you wouldn’t be terribly pessimistic about some of the rate sensitive sectors any more?

A: Not at all.

Q: That would include public sector banks?

A: Yes, I would think so.

Q: Did you get bearish on public sector banks when rates were going up?

A: I have no investment in public sector banks and as far as my investment in the banking sector goes, I do not go by quarters because they don’t affect my investment over a period of time. Especially, State Bank of India is 30% of Indian banking; I think if State Bank can get its act together, it can be a really fine investment.

Q: Why do you steer clear of public sector banks? You do not like their business morals?

A: I get a secular return in my investments on a multiple return if there is a secular profit growth, but no public sector bank in India produces secular profit growth. There are fundamental problems like ratio of cost to income. These banks income can explode, if the ratio of cost does not increase in proportion to income and I think that could happen in State Bank now.

Q: You are more optimistic on some of the private sector banking space?

A: Yes because I think, there is going to be consolidation in Indian banking, it's not more then three-four years away. Most old private sector banks today quote between 1-1.5 times book and I think, consolidation will not take place at less than 2.5-3 times book and their profits are growing at about 20-25%. In fact, I have an investment in Karur Vysya Bank which I made in around 1993. I never sold that investment until today and if I am not wrong, Rs 150 investment today - one share became 10, 10 became 30, 30 became 90, 90 became 270 - so Rs 150 investment is Rs 80,000 today. I have never sold that investment and there is a natural growth in banking.

Q: Do you think these are the banks, which will go first. The Karur Vysya Bank, the regional older private sector bank or the new ones like Yes Bank and DCB?

A: I don't know. I think, you are already pricing in into DCB and Yes Bank the prices at they will be consolidated. So whether they will go or not, nothing's left on the investor’s plate. I don't think there the return can exceed profit growth, while in the other banks, there is going to be a valuation kicker plus there is a profit growth.

Q: You said three-four years - you don't think it will happen as soon as the doors are open in 2009?

A: The doors may open in 2009 or it may take two to five years.

Q: What’s your call on how the rupee has been moving? How do you see the technology space panning out?

A: I have very little exposure to technology.

Q: Aptech must be one of your significant investments?

A: Aptech is in the training space. I don't think, it’s as much a rupee appreciation as it's a dollar depreciation. I do not know much about the currencies, but I am not of the view that rupee can gain more than 2-3% a year. We might have seen the best of the software industry, as far as investors are concerned. At least for the next two-three years, because surely there is going to be wage inflation and if the currency doesn’t appreciate, it will be a double whammy to the balance sheets.

Historically, margins of 30-32% have not been maintained. If there is a slowdown in the US, the first sector which will have a hit in India is the software industry. Now there is a double opinion about that; lot of people say more work will come in, but in the slowdown in 2000-2001 not only work was a challenge, but also the rates were a challenge.

Q: You have not taken any contrarian position in technology after the rupee’s recent rise?

A: No and I don't think you should also, because their PEs today are well priced. So there maybe growth, but if their margins don't expand, then PEs could contract.

Q: The other sector I remember you telling me a few Diwalis back, which you were circumspect about, was telecom. Another sector that has done extremely well. How do you look at valuations and growth in that sector now?

A: Growth will be good and valuations are also good. In a bull market you can always be wrong as long as you don’t go short. So if you don’t buy, everything goes off. So what’s important is you should remain committed.

Q: In the last few weeks since that February fall happened, at any point, where were you significantly short because we have this phenomenon people going short and then the market moving up foreseeing them to cover up. Have you had any such experiences in the last 4-5 months?

A: I don’t think I have made any short positions significant in the last 4 years. I don’t get the feeling internally that markets are going to dip in a big way or markets are valued at such levels that just sell-sell-sell and sell.

Q: Even when the market fell to about 12,000 odd levels, you didn’t consider, because that was a sharp fall?

A: I was caught on the wrong foot in the Budget, I was long on the Budget day and I exited and I did not short anything. I hope I had, but I did not.

Q: How do you read the global cues right now and do you subscribe to that view that the shape of the Indian market in the near term is very tight to what’s happening globally or not quite so?

A: It’s difficult to say. But I don’t think it’s so much tight as people are apprehending because lot of domestic money is going to come. The Indian economy has got one of the lowest international exposures because I don’t think that any international slowdown is really going to affect any exposure of India, other than software. Also, if there is also going to be an international slowdown, commodity prices will come down which for a net importer of commodities like India, it’s going to be a very good factor; interest rates worldwide will come down.

We have a very large domestic economy, which is largely going to remain unaffected by what happens internationally. So even if things internationally slow down in the first leg, India is surely going to be hit both in terms of sentiment and maybe economically. But over a period of time, we will find that India is the economy that will be the most resilient and may therefore attract the largest investments.

Q: How much of this rally in the last few months is being fuelled by pure liquidity because that’s what people keep talking about?

A: I don’t understand what is liquidity/ what’s not liquidity, because I don’t know who is to decide what is value. I think it’s the most transitive word in the English language. History has never been a guide really because history has always been made afresh. So I look upon PE and valuation as an economic performance and the amount of money, which is available to buy that performance. I don’t agree with all that there is liquidity chasing. Do you think analysts know what value and valuations are? They would be the richest people in the world.

Q: You don’t agree that valuations are expensive in India right now?

A: We can’t generalize. Surely there could be pockets of valuations where I won’t buy as an investor or I would exit as an investor, if I have a holding. There are pockets where there is opportunity.

But in general, I don’t think; one of my biggest learning as an investor is that good stocks always remain expensive. So if India is going to perform as a market, we are always going to feel it’s expensive. They (stocks) are not expensive, because expensive, I don’t I think it’s not going to be expressed in terms of valuations until and unless valuations are way-whack out of any reality.

Again ’92, you had SBI Magnum - it was a closed-ended equity fund. At the NSE, it was Rs 50 and the quoted price was Rs 150. Valuations are really expensive when people just want to participate, leverage and markets are rising 10% everyday, and everybody is participating. So it’s more a psychological manner and matter rather than the absolute number.

Q: You don’t sense that euphoria at all right now?

A: I don’t know what you were doing in ’92 - you have not seen ’92. I think we are going to have another ’92 in India and we are going to have in next 3-5 years. That will be the time to sell stocks; like 2001-02 was the time to buy stocks.

Q: Do you see any extreme over-valuation pockets right now in the market like we saw in the hay days of the technology boom, some speak about real estate being one of those examples: do you agree with that?

A: I won’t equate it with the technology bubble. That was not a boom - that was a bubble. I don’t think real estate is valued as the technology stocks were valued. So I don’t see that kind of extreme overvaluation.

Q: Have you invested in the real estate sector at all?

A: I don’t have any investments in real estate.

Q: How is that possible, last one-one and half years they have been some of the biggest multi-baggers? You must have had reasons to look at those opportunities and let them pass?

A: It’s a very dicey subject. None of the real estate companies pay tax. I don’t know how they get their profits. Second thing I also feel that anything, which can be valued as one plus one is equal to eleven; is not what ultimately gives you returns in markets. I don’t know, I have never been into real estate bull in my life and wrongly so.

Q: But you have bought a lot of real estate yourself; how come you don’t buy those stocks?

A: I have not bought any real estate. I bought a house and office.

Q: Commercial real estate you have dabbled in the past, haven’t you?

A: Not at all. That’s not my cup of tea.

Q: So you would not be queuing to buy DLF, would you?

A: No I wouldn’t.

Q: Why - valuations or innate distrust of the business?

A: I would say valuations, more than anything else.

Q: So you have had a look at it?

A: Yes.

Q: You don’t agree with those - slight premium to land bank - those kinds of valuation models at all?

A: Why should I go and buy DLF, I will buy the land only.

Q: Do you think this will have any kind of material impact on the market - the fact that some serious amount of paper is hitting the market over the next 2-3 months?

A: Lot of that paper will be bought by the strategic buyers. ICICI Bank's 10% will be bought by the Government of Singapore. In the international context, this kind of paper is not much, in the Indian context surely, it will have some effect on the market. It's not coming at a valuation, which is very cheap. So nobody is going to today dump markets and buy those issues. There maybe a new class of investors, there are a lot of first time investors. I foresee, by 2010-11, we should have USD 45-50 billion of domestic money coming in. If you have that kind of money coming in, surely USD 15-20 billion of local issues will be easily absorbed.

Q: Why is that money still not coming in? We've had a fantastic run, everybody can see that equities is the place to be, but aside of some mutual funds, NFOs, we are not seeing great participation coming in locally.

A: I beg to differ. Lot of this money is coming into the insurance sector. I am told, last year the investment made by the insurance sector in Indian equities was higher than the investment made by the Indian mutual fund industry.

Q: You are talking about unit-linked plans?

A: Mainly unit-linked plans. In India, pension fund money is not allowed. Only 13% of the Indian labour today has pension and out of that pension, not one paisa comes into equity. All that has to be allowed ultimately. As time passes, market should not lose. If markets gain and don’t lose much, then I think money will flow in. If there is going to earnings growth in India, even if you get 15% return, a lot of money will flow into Indian equity. I am confident that we have ssen nothing yet, as far as domestic flow goes.

Q: Why not directly? Why are we not seeing direct equity participation?

A: The general participation is through insurance and through mutual funds. Maybe we require more penetration into smaller towns and now I am told, lot of money in the mutual funds, insurance companies is coming from smaller towns. Also there is a distrust in equity, because people lost money in ’92, people lost money in 2000. But I am confident that lot of money is going to flow from the domestic side.

Q: You made an interesting point that volatility and sharp falls drive people away. You don’t see the prospect of that later in 2007, because when the market falls 20% in a small period, people don’t come in for 6-7 months?

A: You have to see corrections from not only what value it corrects, but what time period it corrects. If we do not have earnings damage, which we cannot rule out, I don’t see any way by which we should go below 11,500-12,000. But if the index is to earn Rs 840-850 next year, at 12,000 you are 13-14 times earnings. The index has historically never traded below those levels even in bear markets.

Q: That to your mind, is the flow for valuation?

A: If the earnings are 850, I think 11,500-12,000 would be the flow.

Q: You are reasonably certain of delivering Rs 840-850 this year?

A: It should come through; I don’t see any reasons why it should not, at least not of now.

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• Original link is here.

Source: Moneycontrol.com

Well known investor, Rakesh Jhunjhunwala, speaking at The Nadkarni Lectures, India Investment Show 2007, organized by myiris.com, in association with ICICI Direct, said that his decision to remain more than 100% invested in Indian equity, against a background of unprecedented growth prospects for the India economy, and the vast under-exposure to stocks of various investor classes, was the key determinant to his success.

Speaking about his investment approach, Jhunjhunwala said his investment goal is to earn absolute returns, that factor in inflation and risk-adjusted post-tax returns, as against relative returns. According to him, the five elements constituting good investments are: efficient asset allocation, correct stock selection, exit horizon, disciplined leveraging and consistent review.

Jhunjhunwala illustrated the importance of asset allocation with the example of an investor, who bought gold in 1970, bought Nikkei stock in1981, and then bought Nasdaq stock in 1991, raking in returns in excess of 25% per annum, compounded for three decades.

Jhunjhunwala said that while selecting stock, he looks at the business model, understands the reasons and circumstances that will give rise to profits rather than forecasting profits. He gave the example of Praj Industries, which identified opportunities in the ethanol space early, indicating a future growth in value, making it a profitable investment.

It is not only enough to make a good investment, but also crucial to exit the investment at the favorable time and price, he added.

Jhunjhunwala said he believes in the magic of emotionless and disciplined leveraging. While most large equity investors are averse to taking debt for investing, the truth is, leverage allows the investor to magnify the investments and earn meaningful returns.

Jhunjhunwala himself always ensures leverage only to the extent of his ability to service interest cost and principal repayment. He emphasized the need of consistent review to make necessary changes in the portfolio at appropriate time.

Amongst the attributes of the successful investor that Jhunjhunwala listed, are optimism, realism, avoidance of a herd mentality, assessment of risk, an open mind and understanding of the larger picture.

by Rajesh Bhayani - Business Standard

Rakesh Jhunjhunwala of RARE Enterprises, a high-profile investor, talks to Rajesh Bhayani on the state of the secondary market and the hype around IPOs.

What is the market outlook at current levels?

The economy is growing at a good pace. GDP growth is at 19 year high despite government taking hard measures to curb inflation. And remember, hardly 1 per cent of our population invest in equities. As the investing population rises, more money will flow into the market.

What about the risks of a strong rupee and rising crude price?

A rising rupee may put pressure on IT margins, but rising volumes will offset negatives. Crude oil prices were high last year also but the dollar was 45 then, which is 40.5 today... consider that also. The world has managed to absorb high crude oil prices.

Aren't valuations looking stretched?

Who decides the valuations and who can say which level is reasonable? I think, if stocks are giving better returns compared with competitive investment avenues then why I should withdraw my investment from equity. Yes, earnings may moderate from their higher levels.

So you don't see a big correction happening?

I am not worried about corrections. We have seen the market growing from 3000 points to 14500 points in the last four years. Certainly, Sensex will not be 60000 by 2010. It cannot. I think these type of doubts [that valuations are stretched] are in mind and they not in reality.

But there are risk factors...

The India story is irreversible. Whatever the risks, they can at most cause delays. I think nothing can change India's growth prospects. If the market has managed to rise from 3000 to 14500, what is wrong if it remains in the range of 12000 to 15000 for a year?

What about other investment avenues such as commodities and real estate? Is real estate turning into a bubble?

If one wants to invest in commodities he can invest in commodity shares. I don't see a bubble in real estate. Again, who decides what is reasonable and what high level is? But, real estate prices may see some correction.

How is the IPO mart shaping up?

Money is there in the market. Mega issues will also get absorbed. But if you look at issues listed in the near past, most of them are trading at a discount to their issue price. This may result in a reasonable pricing of IPOs.