On the eve of the ET Global Business Summit, Rakesh Jhunjhunwala , Rare Enterprises, gives his views on LTCG tax, PSU banks, his investing paradigm and why he does not invest in start-ups.

Edited excerpts:

What should one do now — invest or go for profit-booking?
This stock market is like a buffet! There are so many dishes to eat. But do not do that. I would not advise anybody who is not a professional investor to try and invest himself. The best way to invest is through mutual funds. Investing is a complex procedure and requires a lot of professional help and monitoring. The best way is to use mutual funds via SIPs. It may sound very boring because India is basically on a bull run, the economy itself. If you invest all the time, you will invest at an average point.

I think this bull market in India and Indian stocks is going to continue but I do not know for how many decades! The basic reasoning is the economy is growing at 7%-8%, at any given time. Once India’s economy grows in double digits and we have 4-5% inflation with 15% nominal growth, I cannot say the equity valuations will not ride at 15% to 18%. Somewhere., it may be more and somewhere, it may be less. You should invest for extended periods of time.

Everyone talks about the winners. No one talks about the losers, right?
Some things are best kept quiet.

On interest rates, your view is it is likely to rise and combined with that, there is this long term capital gains (LTCG) tax which has been introduced. Both are potential deflators of equity valuations?
I do not agree that long term capital gains tax is a deflator because all the alternative sources of investment have a higher tax rate. . LTCG tax is capital gains plus STT. The company that has got 20% debt is fully taxed. So the person who is investing in equities, comparatively, is not at a disadvantage. Of course, I would have liked it very much if he had not imposed it. I will be a large payer of the taxes but the tax is not death, it is only trouble. It is not going to deter any serious local money. Foreigners, I do not know. It could deter them because a lot of them are used to not paying taxes. Interest rates in India are likely to hover around where they are. Internationally, I do not anticipate more than three rate rises in America which is expected and I do not think we will see much inflation.

Another concern is around the whole private investment and capital expenditure issue. It is often said that while government is investing, private sector is not investing. What is your view and how are you seeing that impact growth?
The increase in private investment is a process. It is a journey, not a destination. In 2002-2003, the total private sector investment in the economy to GDP was about 27%. It went to as high as 34-35% in 2008. Today is it at 27-28%. For the next three-four years, this will improve and reach 35% and it is not going to happen in a year, it is going to happen slowly.

We made a lot of mis-investment and over investment between 2010 and 2014. Investment is coming in steel, commercial vehicles, chemical units now.

If demand comes back, I do not think capital will be a constraint. The process of regeneration of private sector investment has already started. How fast it grows is a matter of opinion. Tata Steel has recently announced investment in expansion of 5 million tonnes, Volvo is talking about expanding its vehicle capacity. Chemical capacity in India is doubling. I do not see why it is going to be slow. You cannot keep an economy like India at 27% of GDP for long. It is 46% of GDP in China and that is continuing for 15 years. Affordable housing likely will give a big boost to investment in India and will give a boost to cement, steel and other industries. The government is really making efforts to see that the affordable houses are meant both for political gains and for actual economic ones.

“We Should Not Have More than 3 or 4 PSU Banks”

Another key issue is the banking sector. It is the development activity driver and with recent developments in this sector, what has changed?
Banks are “of the people, by the people and for the people”. But it has become more for Nirav Modi and little is left for us. I feel it was unfortunate that we had Mrs Gandhi as the prime minister. She institutionalised corruption. Till Shastriji’s time, corruption was looked down upon as a taint. She institutionalised it. She nationalised our banks, insurance and the coal industry. Just just one week ago, the government has undone the nationalisation of the coal industry, not by selling Coal India but by allowing the private sector to come into this sector.

Sooner or later, as long as we have the political will and we will get the political will after what has happened in these two scams; there is also a wave of public opinion that the public sector banks should be sold. Now nobody is going to buy them in the present state. The aviation minister just said: “I am surprised that there is no bakra (patsy) to buy Air India! That is how he described it, a guy who buys Air India will be a bakra . That is what your aviation minister has said, not me!

So there is likely to be no buyers for those banks today. Unless you consolidate the PSU banks into just four banks, I do not know what sense it makes. You have to consolidate all the PSU banks into three or four banks and you will have to sell all of them. According to me this is going to happen, in the next five years.

There is no dearth of capital for good projects. Tata Steel does not have a problem in borrowing money. It is good that these scams have come out and the NCLT is a very good mechanism. Earlier, these banks would charge 18% interest to Bhushan Steel; Bhushan Steel would say give me the money to pay the interest and they charge the interest. This continuous process will stop and better days will come for banks. As an Indian, I can only hope so.

Jhunjhunwala: What do I look for while investing?

What are the three things most critical to you when you decide on an investment?
The most critical decision is price, value because while it is important what we buy, it is more important at what price we buy. In 1999, I bought 55% of United Spirits and United Breweries for Rs 6 crore. If I had held those shares today, the value of that investment would be Rs 2000 crore. Everybody told me, you cannot make any money with Vijay Mallya, he is a thief, his companies have never earned money! But I thought I am getting 55% of India’s liquor industry at a valuation of Rs 100 crore that means the entire liquor industry in India was being valued at Rs 200 crore. I thought it was ridiculous and I made money, I made at least 15 times my money in three years.

So, the most important thing is not what you buy it is at what valuation you buy. What I look at first is size of the opportunity. You can grow only as much as your opportunity. Infosys could become such a large company only because of the advent of the internet and humungous application of software. When Infosys was formed, the internet was never there. So the opportunity for Infosys expanded multifold.

Colgate can grow as much as the demand for toothpaste in India. So, what is very important is the size of the opportunity. Then in any capitalist society, any company has to have a competitive advantage to be able to tap that opportunity. Mastek and Infosys were born on the same day, they had the same advantages, the availability of engineers in India. Look at where Infosys is and what Mastek is today. You have to look at the competitive ability and for every entrepreneur here, there is one very important word — scalability.

A friend of mine asked me whether I should invest in the large-caps of the small-caps, I said I will invest in the small-caps, which will become the large-caps and the biggest problem in scalability is opportunity and capital, the fact that entrepreneurs do not want to give up power and the nature of the business model.

You know what is the working capital cycle, what is the capital intensity and then the integrity of the people. And you know I do not over-analyse. I decide on an investment in one hour and if I think it is good value and there is liquidity, I invest. When I invest, I am very uncertain, there is nothing sure.

A lot of investments test your patience and you doubt whether you have made a wrong investment. I made a very large investment in Escorts over a period of two years. I made the investment at Rs 125 and everybody would ask ” why Escorts? Oh, those thieves! Forget about them. That company is going downhill. I bought the shares at Rs 125 and today the price is Rs 850. But for two, two and a half agonising years, because I was the only buyer and everybody doubted my decision. It is a matter of conviction, patience and luck and that is very important.

“Entrepreneurship Is Too Popular to be Profitable”

You have seen a lot of great businesses being built. A lot of new entrepreneurs are coming up. Do you see those businesses being threatened by what is happening? Do you see that those businesses adapting?
I have very negative views, so please do not mind them. I do not see those businesses being threatened. I am worried about emotional entrepreneurs. Entrepreneurship is too popular and what is too popular is good to be with but not always very profitable. I get so many proposals for investments, but where is the differentiator? Second, most of these ventures start with “father-in-law’s” money. I start with a loss but the greater the loss, the greater the valuation! ,I do not know what kind of mathematics is this. I cannot understand anything and it is also a matter of attitude.

When I start with the idea that I incur a loss and build a business, where are the economic efficiencies? Do I go with the idea that I must create efficiency first and remember that the world’s great businesses have never been built with investors money? I do not believe so. I have the right to be wrong. I do not believe valuation of any Uber or any stock because I do not know that economic model. When I keep incurring a loss of $15 billion or $10 billion a year, that means I am subsidising my customer. I will know my true consumer when I charge the true price. I am living in a capitalist society. So I don’t believe this whole scheme of entrepreneurship with two ideas and father-in-law’s money.

An entrepreneur is someone who would do something which the world says is not possible. I am an entrepreneur. When I came to the stock market in 1985, my father said you will be back in two years and my mother said who will marry you? Societies need entrepreneurs and societies can only develop with entrepreneurship. But while you have to dream with the head held high, your feet should be on the ground. I do not invest in startups. When Flipkart was available seven years-eight years ago, I did not understand these companies. Forget what Flipkart will need to do to become profitable, the question is if he increases the prices, will the customer remain? So I do not know the business model.

Look at D-Mart. When Mr Damani started it, it was profitable at first. Right now, the prediction is he will die and Flipkart will succeed. I do not understand but entrepreneurship is a great idea where you have to have your feet on the ground and head held high. You should yourself understand that and not do anything that is me-too. I will give you one advice. Do not invest in any B2C companies. You want to invest, invest in B2B because B2B can be scaled up. Invest in some parallel technology which is very difficult in India. Look at Cisco, there is a culture to acquire companies ther. In India, there is no such culture.

“Do Not Carry Leverage Beyond A Point ”

You have a trading book and an investing book. With regards to the investing book, two related questions are at any point in time if you look back and average about how many holdings do you have? Also, when you choose to eventually eliminate from the investment book, usually what might be the reason that you would choose to eliminate it — valuation or something else?
The first answer is that I carry leverage but I do not carry leverage beyond a point. So, if for any reason, I need to bring down my leverage, I might sell. Second, if I have a better investment opportunity and need capital, I might sell. These are the primary two reasons why I will sell. If I feel that an investment is horribly overvalued — and you know investments are like children you do not feel like that easily — then only, I sell.

At the moment I think in the unlisted book — three investments will be 80% out of maybe 15 investments I have made. And in the listed book, may be five investments will total 60%, and total number of investments would be 20-25.

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