Lessons from Jhunjhunwala’s once-in-a-lifetime bullish turn

Maverick investor Rakesh Jhunjhunwala.
Maverick investor Rakesh Jhunjhunwala.

Summary

  • Mint explores whether the market guru’s reasons for his shock decision stand the test of time.

In early 2002, maverick investor Rakesh Jhunjhunwala took a decision that sent shock waves reverberating across the stock trading community. The legendary investor, who is no more, turned bullish on India at a time when most traders had a bearish outlook. In June that year, the Sensex was precariously hovering around the 3,300 level, far below the 5,700 level seen during the dot-com bubble bust of February 2000 or even the market’s 1992 peak of around 3,600. Anyone investing at the height of the Harshad Mehta bull market would have seen a virtually zero-return decade by 2002. So, it came as a big surprise that Jhunjhunwala took a massively bullish stance then. He built up positions in stocks that would create the majority of his fortune over the next two decades —Titan, Crisil and Lupin. So what exactly drove him to be bullish? Jhunjhunwala advanced seven main reasons for his bullish thesis on India’s stock market.

Economic consolidation

The foremost among the reasons that he put forward was economic consolidation while the market stagnated. “Structural and secular bull markets arise only after there has been structural change in the economy and corporate sector. The change has to be irreversible. Such irreversibility cannot be brought about without a long cycle of resistance to change, acceptance of its inevitability, acting upon it and finally benefiting from it. This process invariably consumes years. Indian corporates who started this after liberalisation in 1991 are close to reaping the rewards of such change," he wrote in an article that expounded his views in The Economic Times dated 13 June 2002.

Jhunjhunwala also mentioned the constant price to earnings (P-E) downgrades that happened in the stock market even as this consolidation was taking place. The second reason was the country’s economic reform process in which the customer had become the king, efficiency had become the byword and capital was being allocated by the market. The third reason he gave was that corporate profits are ‘set to explode’.

Is this reason valid today?

No. Market returns have been robust over the past decade.

The reform process

Jhunjhunwala created a table outlining the stages of economic reforms. He said that the reforms had made substantial progress in areas like telecom, petroleum and the financials sector. Ground work was pending in areas like power, airports and fiscal responsibility. Privatization had just taken off and reforms were lagging in areas like labour, ports and government staff reduction. In the following two decades, economic reforms accelerated. Public sector firms like Air India have been privatized or have gone for an initial public offer (IPO) as in the case of the Life Insurance Corporation of India. Jhunjhunwala said that over the next 24-36 months, the reform process of democratic India would reach critical mass and the skills of the Indian people being the best in the world will come home to roost.

Is this reason valid today?

Yes. Political parties that have formed governments with a majority mandate continue to pursue reforms aggressively.

(Graphic: Mint)
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(Graphic: Mint)

Corporate profit expansion

According to Jhunjhunwala, Indian companies had mindlessly expanded capacity when the 1991 reforms were initially announced but subsequently started cutting costs. This had laid the groundwork for profits to rebound. This would be coupled with a ‘demand explosion’ due to India’s favourable demographics and enhanced lifestyle aspirations due to exposure to television and other media. Alongside this, interest rates would come down.

Is this reason valid today?

Maybe. Corporate profits are growing and balance sheets are healthy. Interest rates may come down if the US Federal Reserve cuts rates as well.

Future P-E expansion

The fourth reason that Rakesh Jhunjhunwala proffered was P-E expansion—the stock market would get re-rated. Indian corporates had become more efficient, their return on capital employed, or ROCE, had gone up. Their disclosure and transparency had also improved. In 2002, the trailing P-E of the Sensex was just 12. It is currently at around 25. Jhunjhunwala contrasted the interest rate of 1992 (18%) and the P-E of 1992 (50 times earnings) with the decline in rates to 11.5% in 2002 and P-E of just 12 times.

Is this reason valid today?

No. P-E has already expanded from historic levels and India trades at a premium to other emerging markets.

(Graphic: Mint)
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(Graphic: Mint)

More money entering stocks

The fifth reason that Jhunjhunwala offered was the increase in fund flows to the Indian stock market. He noted that the total flow in mutual funds (MFs) in 2001 was just about 2,000 crore, compared to the 30,000 crore that flowed into them during the IPO boom in the mid 1990s.He also noted that the development of India’s MF industry is set to explode after its release from ‘strangulation by UTI and other public sector MFs.’ Jhunjhunwala was also anticipating support to the market from pension and provident funds that did not invest in equities at the time.

Is this reason valid today?

Yes. In January this year, the monthly (not annual) flow into systematic investment plans alone crossed 18,000 crore. Today, India has about 45 asset management companies, most of them in the private sector. India’s EPFO (employee provident fund organization) now invests about 15% of its incremental corpus in equity. In the National Pension System, non-government subscribers can allocate up to 75% to equities. Still, there is a long way to go for Indian households to build a substantial equity allocation. MFs currently account for just around 8% of household financial assets and about 4% of all household assets.

The Indian trading system

In 2002, Jhunjhunwala wrote that the trading system had changed—brokers were no longer taking percentages but basis points. Physical trading had been replaced by ‘glass screens’ computerization. Badla, a stock market term, had been replaced by derivatives and dematerialization had been achieved at an extremely fast pace.

Is this reason valid today?

Yes. All the trends mentioned by Jhunjhunwala continued to gather momentum over the next two decades. Trading facility is now offered for free by many discount brokers (only futures and options, or F&O, is charged). Many investors place orders over their mobile apps, while the time for settlement of trades has been reduced by market regulator Sebi to T+0, with an optional instantaneous settlement also being made available. Ease of investment continues to play out. Issues like cumbersome KYC (know your customer) procedures may also get ironed out over time.

Broader markets outperforming

Jhunjhunwala also advanced a sixth reason— the nature of the rally since the 9 September 2001 low. He argued this was a robust rally with broader markets outperforming the benchmark Sensex, stocks hitting new highs far more than stocks hitting new lows, resilience of the market in the face of negative news like India-Pakistan geopolitical tensions, selling by foreign institutional investors, the Gujarat riots and UTI fiasco.

Is this reason valid today?

Yes. Negative news like Russia-Ukraine war, US Federal Reserve rate hikes and other reasons have not halted the rally. The same bullishness is present today with every dip being bought into.

Summing up

Jhunjhunwala concluded his piece by saying that India has a ‘Sachin Tendulkar copybook’ kind of shot—a prolonged decade-long bear market, capitulation, ray of hope, rebound with tremendous market internals, evidence of structurally improved fundamentals, compelling valuations and doubt or aversion in the mind of investors.

Some of these factors are missing in 2024, particularly a prolonged bear market or compelling valuations. However, others such as improving fundamentals are arguably present. He also dismissed concerns about the market being driven by manipulators or operators. People forget that in a supposedly corrupt nation like India, the companies having the largest market cap are Infosys, Wipro and Hindustan Lever, companies with the finest financial performances and highest perceived integrity. This largely remains true in today’s India.

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