Reading between lines of what Jhunjhunwala says ...

No one in the market will tell you that stock prices are going to crash. To figure that out, you have to read between the lines when they talk a lot.

In a recent interview published by The Economic Times in middle of June 2011, India’s ace investor Rakesh Jhunjhunwala gave his take on the direction the markets will take and his conclusions are clear: it is headed downwards for now. Nirvana—making money—is only for the long-term.

A close look at some of the things intoned by Jhunjhunwala, reading between lines and decoding them could benefit wider audience. While the newspaper interview focuses a lot on Jhunjhunwala’s own investments in companies like Titan, Lupin, VIP Industries, Relish and Orchid Chemicals, the real message is in the attitude he brings to investing. His message: don’t trade, but invest in the India story.

Here’s what he said (in Bold), and what his words could mean:

Jhunjhunwala: The next three months will be very difficult for the markets. Chances to break down seem greater than the chances to break up.
• The market is headed downwards, if not for a crash. No one knows how the next few months will pan out since we don’t know whether the monsoons will be good and the economy will pick up steam. By August, the market will have a clearer sense of direction. If all things work out positively, the market could pick up. So watch the monsoon and price trends.
The most important thing is inflation because it controls everything, be it interest rates or growth. The second headwind is sheer government inaction….
• This means all depends on governance – of which there is no sign. Inflation will partly depend on the monsoon, but that could be complicated by the Food Security Act, which will need huge amounts of grain to be sold at Rs 2-3 a kg for wheat and rice. It could make inflation worse. As for governance, bureaucrats are already slowing down action for fear of the law. The granaries are full with wheat and rice, but no one is willing to take a call on exports. This means grain will rot partly in the godowns. The 2G scam and investigations are far from over, and governance will not improve till the UPA re-discovers its will to act. Net-net: even after three months, the market could continue its slide.

I am bullish in the longer period – three, five, Ten years. (The golden period for Indian equities) has not even started. The golden period is still ahead.
• What Jhunjhunwala means is that the long-term India story does not depend on government improving things. The economy will grow on its own, given the demographic advantage India has (with a youthful population driving growth and consumption), and the fact that the population is grossly underinvested in equity. At some point, pension and provident funds have to get into equity, and foreign institutional investors have to return. At that point, equity will make a killing. But Jhunjhunwala does not know when that will happen.

The world is undoubtedly slowing. In western societies, the slowdown is due to structural and economic challenges, while in developing economies it is due to governments’ fight against inflation…. If commodity prices correct and we have a good monsoon, we will have a very good year (in 2012-13). It is difficult to predict what will happen in 2013. One worry is that the euro will break. There is no doubt that Greece will default.
• Jhunjhunwala is essentially saying that the real growth risks are outside India, with the US facing a problem of excess debts, Greece about to default, and Japan facing a permanent slowdown due to an ageing population and the aftermath of the nuclear disaster. But in the developing world, the economies have clearly overheated – India and China are now slowing down in order to control inflation and avoid a macroeconomic crisis. Net-net: the prospects for the next one year are not too good, either globally or in India. After that, the jury is out.
I wish I could find the next Titan. I do not see any on the horizon. Titan may get expensive for six months, but that does not change the long-term prospects…
• Jhunjhunwala made a killing by buying Titan shares and says he does not see many more Titans on the horizon for now. But this need not be taken at face value. What he means is that if he finds a Titan, he will invest in it first before he talks. Even if he has invested in it, he will not talk ill of it till he has sold it. Which is why he still says Titan is a good long-term prospect…It means chances of making big money in the short-term in this stock are weak.
I have never liked real estate stocks as they are laden with debt and there is no genuine cash flow. There is no scalability. There will be further distortion in these stocks in the next three months.
• In other words, forget real estate stocks. They should be avoided like the plague. They will not deliver value, and they will destroy further value before they get to become good investments – if ever.

Banking will grow in India but the question is efficiency. If you look at SBI, there is growth every year, but the cost-to-income ratio just does not go down… (But) I would not say yes, I would not say no (to buying public sector bank shares). It depends on the situations…
• Jhunjhunwala is unlikely to buy public sector banks. His own investments are in two old private sector banks – Karur Vysya and Federal Bank, based in Tamil Nadu and Kerala. Public sector banks won’t do well unless they have real autonomy, and become productive by increasing the profits per employee. In short, they have to deliver more before he considers buying them, though there may be exceptions…
I am not as bullish on commodities as other people are…
• High commodity prices are a double-edged sword for India. If it means costlier oil, it means more inflation, and slower growth. If it means costlier steel and cement, it also means higher inflation, but with better profits for big companies like Tata Steel, Hindalco, Grasim and ACC. High commodity prices are not so good for a new oil importer like India. If he is bullish on commodities, he has to be less bullish on India’s medium term prospects.
I don’t think (interest rates in the system have peaked out). We will get further hikes.
• Given high inflation, the RBI will keep raising rates till either (1) growth slows to a crawl, or (2) inflation falls below 5%, or (3) both. This means the short-term scenario for banks is a profit squeeze unless they can manage their costs better. One more reason not to buy public sector bank shares for now.
Equity will give me 15-25% post-tax return. I cannot do any business, any investment, which can give me a higher post-tax return on large volumes.
• This is bad news for India Inc. If equity will always give more returns than manufacturing and services, who will invest in industries that create jobs? Everybody will become a market operator.

Don’t trade is the first thing (I would advice investors). And you should invest in monthly schemes so that you get to invest at all levels in the market. Believe in the India story and you will make money.
• In short, buy only for the long term, and in companies that are well-run and have staying power. In the short run, there may be bad news. But in the long-term, India will deliver.