Investment Philosophy: Mr. Rakesh Jhunjhunwala

CIO: Thank you for giving us this opportunity to be with you today. Could you begin by giving us an insight into your investment philosophy?

Investing is a process of discovery

Rakesh Jhunjhunwala: I think that the first thing we need to realize as investors is that we know the price of everything but the value of nothing. Investing is a process of discovery. We are constantly trying to determine where the price is far lower than our perceived value. When we believe that we have found such a security, we invest in it. But like I said, while we know the price of the security we don't know its value for certain.

As far as investment philosophy goes, I think I am still very young, have made a lot of mistakes and still require a lot of maturity. I haven't really developed any philosophy. I believe that the hallmark of modern society is its ability to anticipate change, prepare for it, accept it and benefit from it. So I think in today's times an investment philosophy has to evolve with time. Nevertheless, there are certain economic principles that I apply to my investments. Let me share those with you.

The three gems - external opportunity, competitive ability & scalability

When I analyze a company, I first look at its external opportunity. Infosys may not have been such a great company had it not been for the explosive growth in information technology. So, the first thing that one needs to examine is the possible market for the product that the company makes. The second important aspect is the competitive ability of the company to tap the market opportunity. Third is scalability & integrity. I think scalability is very important because companies do not necessarily grow when they get bigger.

Go bargain hunting as a buyer

Once one has examined the above three aspects of the business and one has found probable avenues to invest in, one needs to decide whether or not to invest. For that one needs to look at valuation. Valuations could be absolute or relative. When most of us invest, we tend to go into absolute valuations rather than relative valuations. While it is necessary to go into absolute valuations, one should look at relative valuations also and pick the most attractive stocks.

Don't wait for a greater fool as a seller

Similarly, in a bull-phase when most stocks begin to appear overvalued in absolute terms, we do not sell. During such times, we begin to look at relative valuations thereby justifying our holding the stocks. That I believe is again a mistake. See when we buy a stock, we do so because it is cheap. By the same logic we should sell a stock when it becomes overvalued. Yes, while buying we may look for cheaper stocks within the set of cheap stocks. But when the stocks that we possess become overvalued there is little logic in holding on to them because on a relative basis they appear cheaper than others that we do not necessarily possess.

These are a few things that I have learnt about investing by trial and error. Let me add once again that I make a lot of mistakes and I am still evolving.

CIO: Would you like to share with us your thoughts on the way the markets are headed?

There are problems galore

Rakesh Jhunjhunwala: We have never really had a bullish phase in India. By bullish phase, I mean year-on-year market gains for a period of at least five years. We have not had that in India because I think that our economy is not really growing. We might have been the second fastest growing economy in the last decade but that is not the kind of growth that potentially matters. Liberalization has put companies in the wrong spots. They are subject to competition. There is excess capacity everywhere. Infrastructure development has not kept in pace with the competitive requirements.

But I am optimistic

However, I remain eternally bullish on the Indian economy and therefore on the equity markets. I believe that a society grows for three reasons. One is skills, not resources. Two, no society has been able to grow unless it is democratic. Three, we need some kind of a take-off point - an inflection point. You look at any society in the world that is prosperous today. Most of them don't have any extraordinary resources, only extraordinary skills. Look at Japan. Look at Germany. Look at America.

We have the skills, a democracy but await an inflection point

India is among the few countries in the world that has developed the nuclear bomb. We have developed the ICBM without stealing technology from anybody. Not that it is such a big achievement but it demonstrates the high level of our skills. Also, whatever, others might say, we have a good working democracy. What we need is an inflection point. I am still waiting for that but I hope to see it in the next 3-4 years. Once that happens, the real bull phase will start in India.

I think that Indian companies are relatively cheaply priced. If you take a longer-term point of view, India is going to be a vast market. When this market explodes, you cannot have new companies come in and take away business tomorrow. Only those companies that have established proper distribution channels, have strong brands and have developed a sound understanding of the Indian markets are really going to benefit. I therefore remain eternally bullish.

CIO: As you said, we have the skills and a working democracy. All we need is an inflection point. What in your opinion could be that inflection point or the factors that lead to that inflection point?

Second-generation reforms to lead to inflection point

Rakesh Jhunjhunwala: I can't say what the inflection point will be. But I think what we need is the development of infrastructure, reforms in the electricity sector, the downsizing of the government - simply put we need second-generation reforms.

CIO: Do you see any first signs of this happening?

Realization in political circles evident

Rakesh Jhunjhunwala: Yes. Even the political circles, whether it is the Communist Party or any other, have begun to realize that the second-generation reforms are absolutely necessary. It is just that our system has not produced governments that have the necessary majority to carry out these reforms. My feeling is that strong political will or financial bankruptcy will ultimately force these reforms to come about. If we do not reform, we will approach bankruptcy in the next 12-24 months. Look at the chief ministers. They understand. Mr Anthony, who is the chief minister of Kerala says, "What ism are you talking about. We don't have money to pay our salaries". So, I am very hopeful that second-generation reforms will come.

CIO: What are some of the changes in the Indian environment that you are playing on right now?

Rakesh Jhunjhunwala: As far as the manufacturing sector goes, my observation is that Indian companies have never had it so bad. There is overcapacity in each industry. Whether you take cement, whether you take steel, whether you take automobiles, or any other sector. We have liberalized our licensing, we have liberalized capacity creation, but we have not changed labor laws. We have not developed infrastructure.

Compared to China, we have higher rates of taxes and we don't have infrastructure. Indian companies have done lot of internal restructuring to meet these difficult times but the external factors have not been in their favor at all. We sold lesser commercial vehicles than we did in 1992-93. Unbelievable. So, the biggest change that has to come about in the Indian environment is that demand has to grow at much faster levels. With demand growing, companies restructuring and capacities not coming up, I think Indian companies will hit a jackpot in a year or two.

CIO: You're saying wait for 2-3 years and let the demand grow. How do you see this coming about?

Rakesh Jhunjhunwala: India has been growing at 6% in the last eight years. Once the second-generation reforms go through, India will begin to grow at 12%. That's what I sincerely believe.

CIO: What are the pre-requisites for that?

Rakesh Jhunjhunwala: I think the main pre-requisite is second generation reforms and infrastructure investment.

CIO: Do you see that happening in the near future?

Bankruptcy will drive change

Rakesh Jhunjhunwala: If you remember when Narasimha Rao came into power, was the change that came about within a month ever envisaged? When it happens, it will happen quickly. I talked about Mr AK Anthony's latest interview after he was elected earlier. He says that it is pointless talking about isms. State governments don't have money to pay salaries. Their checks are dishonored. So, I think the change will be driven more by the sheer bankruptcy of the governments than anything else.

Today Indian banks have to meet international capital norms. Otherwise their letters of credit will not be honored. Where is the capital to be involved? Mr. Manmohan Singh will say that no, don't allow private sector or foreign participation in banks. But if he were the finance minister and had to go through the realities, he would suggest it himself. So I think the changes that have to come are sound decision making in infrastructure investment, public sector divestment, downsizing of government and better targeting of government expenditure.

The single biggest loss in India is in electricity transmission. That's why we have this trouble with Enron today. That's why we cannot get any fresh investments. This will have to change. I am very hopeful that this will happen. In 1987-88 Rajiv Gandhi tried to change things about communication and today every village in India has got a phone. My driver's wife calls him from Bihar today. I think same thing is going to happen in other infrastructure facilities.

CIO: Coming back to the conditions that you outlined for selecting a company to invest in, you said that there should be an external opportunity. You should have a company that you think is positioned to tap that opportunity. It should have the skills or the competitive ability to tap that external opportunity. Finally, you need scalability and integrity. Could you give us a few examples where one of these conditions was missing and hence you did not pick up that stock?

Rakesh Jhunjhunwala: The above criteria need to be combined with valuation. Today if you look at the valuations of some of the software education firms, I think certain companies are being valued below their cash holdings. However, what puts me off is the question of integrity.

CIO: Could you give some examples?

Rakesh Jhunjhunwala: Well, I think I will not. Instead, let's look at Larsen and Toubro. One reason why I don't want to invest in it is that I don't trust the management. There is an external opportunity. It is India's largest player in the infrastructure sector. It is technically very competent but there is no integrity in its financial restructuring and ambition.

CIO: Why do you say that? Isn't L&T a professionally managed company?

The management's aim should be higher return on capital

Rakesh Jhunjhunwala: I think integrity is also related to the fact that the aim of the management should be return on capital, not expansion. What I find in Larsen and Toubro is just an idea to expand rather than generating higher return on capital to shareholders.

CIO: You look at external opportunity. You want a company that can tap that opportunity, that is scalable and that has integrity. While these are necessary conditions, are there any additional conditions that you look for in a company?

Rakesh Jhunjhunwala: Let me point out one thing. Sometimes I invest even when all the three conditions are not present. I got McDowell at Rs20. I think there was a great external opportunity. Liquor consumption in India is growing. They have the competitive ability and they have domination. But in my opinion, there is no integrity. Yet, looking at the valuation if you traded off I think it was worthwhile. So, at times we could trade off all these parameters for valuation. Infosys matches all the first three parameters. But think of the man who bought Infosys at Rs14,000. Where did he go? I think it's not only what you buy that is important but also at what price you buy.

CIO: So, would you say that only necessary condition is valuation? Everything else is a sufficient condition that merely strengthens your case for investment.

Valuation comes before everything else

Rakesh Jhunjhunwala: Absolutely, I think valuation comes first before everything else. It's not what you buy. It's at what price you buy.

CIO: In your opinion, can valuation be both a necessary and sufficient condition?

Rakesh Jhunjhunwala: Yes, it could be both. It's a necessary and sufficient condition.

CIO: Could you also tell us how your investment philosophy has changed over the last 5-10 years?

Rakesh Jhunjhunwala: Well, I have become less of a risk taker. I have invested in a large number of companies. Today, I have investments in say 50 to 60 companies. I have decided to compress the number of investments that I have. I have evolved to trust people less. I used to believe that people will change but I have realized with time that people don't. Besides these, there aren't many ways in which I have changed.

Buy when there is sufficient margin of safety

I still want to buy when I feel that there is a substantial margin of safety. I don't put too much importance on growth. Growth is not the only parameter of valuation. It is just one in the several parameters of valuation. I tend to look at greater margins of safety, not only in respect of growth but also in respect of absolute assets and absolute sustainability/survival of the company. Like I said, I evolve every day. I have made lot of mistakes, far more than people know. But the only comfort I have is that I learn.

CIO: Interestingly, you said that for you value is more important than growth. Since you are a leveraged investor, should we say that you basically look at value stocks rather than growth stocks?

The premium placed on growth will fall

Rakesh Jhunjhunwala: Well, there is only one company in the world that has grown at the rate of 15% for 10 years. That is Microsoft. Besides, growth is dependent on many external factors. If you look at our own experience in India, up to a year ago everybody used to think that Indian software companies, especially Infosys, is going to grow at 100%. If I had said that Infosys would grow by 30% at that time, I would have been lynched. So, a number of young analysts extrapolated the extraordinarily high growth rates into their valuation models. Now, I think that the premium placed on growth is going to come down. There is empirical and electoral evidence to that effect.

CIO: Would you say that from here on, the perceived growth stocks would underperform the perceived value stocks?

Value stocks have given better returns

Rakesh Jhunjhunwala: Well, I am not saying that is what will necessarily happen. But look at what has happened in the last 12-24 months. I bought Shipping Corporation last year at Rs16. I got Rs4.50 as dividend and it sells at double the price today. For somebody who may have bought Infosys last year, his capital has halved. There is no question that value stocks have given better returns.

CIO: What are your investment objectives in terms of the risk and return elements? What kind of returns would you expect from your investment and what kind of risks would you be willing to tolerate?

Safety of capital - the prime objective

Rakesh Jhunjhunwala: I want safety of capital. That is my only holy objective. As regards the possible rewards, see I don't count the good things of life. I don't go by any mathematical formulations. I look at an investment opportunity where I feel my capital is safe and the possible upside is very large. I keep reviewing my investment decisions continuously and sell when I feel that the time is ripe. So, I have no fixed targets.

CIO: So rather than checking up base return targets, you look for companies that can potentially give you a huge upside…

Rakesh Jhunjhunwala: Yes. I look for huge upsides with sufficient margins of safety and where my capital is adequately protected.

CIO: Do you have restrictions on the percentage of your capital that you would allocate to a particular company or sector?

Rakesh Jhunjhunwala: I don't allocate that way. I have a hugely diversified portfolio. I have investments in a hospital, in a bank, in a tea company, in a brewery, in a media company. I have investments in all sorts of things - I mean in all aspects of the Indian economy.

CIO: Do you also hold non-equities?

Rakesh Jhunjhunwala: Well, I never lend money but I borrow to invest. I am a risk taker by nature and am bullish on the Indian stock market. I am always in debt and I pay interest.

CIO: One hears that you have large investments in private equities. Would you like to comment on the state of these investments?

Rakesh Jhunjhunwala: Yes, I have some investment in private equity, nothing very large - may be about 10% of my portfolio value. That too, I have made by booking large gains on my software portfolio. It has not been a very profitable experience so far. But I am confident that I am eventually going to gain.

CIO: What are some of the lessons that you have learnt about investing in private equity?

When investing in private equity, size matters

Rakesh Jhunjhunwala: From investing in private equity, I have realized that size matters. Certain small companies that have great skills and the ability to scale up may not have the ability to face a downturn. An entrepreneur with great technical skills but no financial skills is no entrepreneur. A small organization has to grow with limited means. That involves having a good handle on costs and financial innovation.

However, there is a vast potential in private equities. I have invested in small companies that have the skills, the ability to scale and the financial capability to face a downturn. I have investments not only in software companies but in non-software companies as well. Recently, I invested in an advertising agency. I intend to make more investments in private equities. I have learnt far more from private equity than I have given to it.

CIO: What typically would be the average period for which you hold your investments?

When investments are adequately valued, exit

Rakesh Jhunjhunwala: I have no time horizon. If I feel that my investments are adequately valued, I exit regardless of how long I have held them. See I don't do any planned or structured investments. I don't invest for anybody except for my wife and I. So, I don't set any time period. I held ACC for 14 months and sold it. There are certain investments that continue to hold further potential and I have been holding these for eight years.

CIO: How do you go about updating yourself on a stock in which you have built a position? How frequently do you reassess the stock?

Rakesh Jhunjhunwala: Well, I believe in invest now, investigate later. When I see the basic value in a stock, I invest immediately. Let's take the case of McDowell. They have 40% market share of India's liquor industry. At the price I was getting it, its market capitalization was about Rs200cr. It was incredulous. For Rs200cr you could buy 40% of India's liquor industry, an industry with great entry barriers. So, I invested in McDowell without spending much time on further investigation.

I try and stay in touch with people who are closely involved with the stock markets and interact with them regularly on the stocks that I have invested in. It's not that I do it on any scientific basis, but I do it at least once a year. Wherever I have substantial investments, I try to interact with people more frequently.

CIO: Do you think that meeting the company in which you have invested and seeing it much more closely has helped your investment process? Or do you prefer to keep a distance from the companies you have invested in?

Rakesh Jhunjhunwala: I would say that when you want to make basic investments, investing from a distance is better.

CIO: Are you trying to say that closely interacting with the company could prejudice your judgement?

Rakesh Jhunjhunwala: Absolutely. I feel that an investment has to be a broad decision. It is not a mathematical decision. Investment is wisdom. It is not intellect. It is broad understanding. It is not analysis. I think good investments are made on the basis of broad understanding and wisdom rather than on the basis of intellect and in-depth analysis.

CIO: Would you call yourself a top-down investor or a bottom-up investor?

Rakesh Jhunjhunwala: Neither - I rely on both absolute and relative valuations. I am not necessarily a top-down investor because I have invested at all times, regardless of where the economy was headed. I don't make allocations between equity and debt. I am also not necessarily bottom-up because the relative valuations are always important.

I have invested in Visual Software at the price of Rs90. As time progresses, I will meet the management. Then I will come to know more about the company. There will be external factors that will influence its performance. I will try and be in touch with those factors. I have made a base investment now. Provided that my interaction with the management and the external factors support my decision, I may invest more.

CIO: You underlined the importance of valuation in investing. Could you also tell us about some of the valuation tools that one could use in the process?

Investing cannot be taught; it has to be learnt

Rakesh Jhunjhunwala: Let me tell you that investing cannot be taught; it has to be learnt. I don't know what valuation tools to suggest. I mean look at interest rates. Surely, interest rates are a factor in the valuation of a business. Then there is liquidity. Also, one should think like a businessman. When there is an opportunity to buy 40% of India's liquor market for Rs200cr, there would be 500 businessmen ready to grab it. While buying stocks does not really translate into buying businesses, the logic works.

CIO: By valuation tools, we basically meant ratios like P/E or EV to EBITDA, EV to sales, DCF, book values…

Rakesh Jhunjhunwala: Well, I don't necessarily buy a business because it is below book value or sell a business because it is above book value. But I think that with the risk-free interest rate not being higher than 14%, which is very liberal, a business has to be valued at 7 times future sustainable pre-tax cash flows. That's because a 14% rate of interest gives you a discounting factor of higher than 7.

CIO: What should an investor expect from the stock markets in terms of returns going forward from here?

Rakesh Jhunjhunwala: Well I think in the current interest rate scenario, safe investments are unlikely to yield more than 10% post-tax. I think if one is able to get about 20% compounded over three-five years from the stock markets, it would be a good rate of return.

CIO: Do you short stocks?

Rakesh Jhunjhunwala: Yes, I have made a lot of money by shorting stocks.

CIO: Would you like to talk a little about this? You see very few investors actually have the temperament to short stocks.

When going short, timing is crucial

Rakesh Jhunjhunwala: I believe that trading has to be learnt. It cannot be taught. That aside, why should you not go short if there is money to be made out of it? However, one needs to understand that when one goes short, timing is crucial. Keeping strict stop losses is crucial. You make money by shorting only when stocks are incidentally overvalued. You need to keep a base value for the stock to go short at and a reasonable stop loss. That's about it.

Let's take the case of ACC during the Harshad Mehta boom. A price above Rs4,000 for ACC was fabulous. It is a commodity company and was being valued at say four times its replacement cost. So, you could have gone short at Rs4,000. However, you might have ended up losing money if you really did so. To avoid large losses, you need to have a reasonable stop loss. If you go short at Rs4,000 you should know how to cover at Rs4,200. I think that is the whole secret.

CIO: Apart from valuations, are there any other triggers to timing?

Keenly follow the market to get your timing right

Rakesh Jhunjhunwala: I get your point. See, to get your timing right you have to be on the spot. You have to realize when the play is over. In short, you have to keenly follow the market. There is always something coming through the grapevines.

CIO: How do you determine your stop losses? Do you decide beforehand how much you are willing to lose on a particular bet?

Rakesh Jhunjhunwala: I don't keep a record of what I do. Neither do I have strict pre-determined figures for anything. I'm not really answerable to anybody. So, I can afford to take off the cuff decisions. When I short, I generally short the market. I don't short specific stocks. I might short seven-eight stocks and I might have a stop loss in mind cumulatively for all of these stocks. I don't short everything at one price and I don't buy back everything at one price. I might short some ACC shares at Rs9,000, some at Rs8,000 and more at Rs6,000. When the price moves up to Rs6,500 I might square-off some positions and square-off more at Rs7,000. If the price goes down to Rs6,000 I might short more. So it's a constant process.

CIO: So your shorting decisions are driven by the overall market call as well...

Rakesh Jhunjhunwala: Absolutely.

CIO: What have been your spectacular market-calls in the last five years? Ten years ago, obviously you had a great market call when you had just entered the market and it had a major bull-run. Have you made good money in the last five years as well?

Rakesh Jhunjhunwala: Yes, I have. I made a very good call post the nuclear explosion. I made a very good call post the budget of 1999. I made very good money on both these calls. Post the budget of 2000, I made a call that the market was going to go down the drain. However, I didn't make any money on that call because the market was too volatile for shorting.

CIO: What are the factors that go into making a market call?

Rakesh Jhunjhunwala: Market booms and dooms are created by a set of economic circumstances. The markets always tend to exaggerate those sets of circumstances. But eventually, they return to some base valuations. One very good indicator of where the market is headed is the price of cats and dogs. I have bought stocks at 60paise and sold them for Rs14. Today the valuations that we see reflect a crisis of confidence in India. In this crisis of confidence itself you could get an opportunity.

CIO: What you think about derivatives as an alternative to the badla system?

Rakesh Jhunjhunwala: I personally feel that we should eventually have only derivatives in India. But we should have allowed the badla system to continue parallel to derivatives and then allowed the derivatives to gradually take over trading volumes.

CIO: Now that you have only derivatives…

An alternative margin system essential

Rakesh Jhunjhunwala: I think there will be a problem if you deal with only derivatives. You've got to provide some kind of a margin system. Abroad, brokers can access money from the banking system. I think in the US, brokers can get up to 75% finance from banks. There are no such provisions in India. There have to be alternatives other than derivatives for leveraging. There should be broker lending - both in terms of money and stocks.

What the government can do is to allow the banks to give certain funds to the BSE and the NSE. Since the trade is guaranteed by both of them the banks are exposed to low risk. The BSE and NSE can in turn allow brokers to take money on the market through the imposition of margins. We should try to bring down the cost of lending. Also, stock lending for shorting purposes should be available much in a more simpler and easier manner. Short selling is as much a part of trading as buying.

CIO: So you see the combination of stand-alone derivatives and the cash market not taking off very well…

Rakesh Jhunjhunwala: I don't think it will take off. We should have allowed margining. It's available in all the world markets.

CIO: You are one of the most vocal investors in public sector stocks. Could you explain why?

When there is contempt for a stock it is perhaps the best time to buy

Rakesh Jhunjhunwala: Let's view the fairly large 5-6 companies in the public sector. As far as their size is concerned, they are fairly comfortable. Their present structure protects their profits. Take for instance, Bharat Electronics. Their profits are not going to diminish over the next three years because of the external opportunity in the field that they are in and their competitive ability. Above all, if you look at their valuations, they are incredulous. I mean Bharat Electronics has earned Rs220cr before tax last year, which is approximately Rs27 per share and the stock is available for Rs62.

You have the size and you have profit protection. Then you have the step for which we are all waiting. Disinvestment is inevitable. It is like death; it has to come. There is little choice for the government but to divest. So you have large size, you have huge profitability, you have the maintenance and growth of that profitability plus you have that all-important step of divestment coming up. Despite this, there is contempt for the sector. I have realized that the best investment decisions are made when there is contempt for particular stocks. I feel there lies the greatest opportunity.

CIO: How does the public sector measure up on your own investment principles of external opportunity, competitive position, scalability and integrity?

PSUs well placed; just need a more commercial mind

Rakesh Jhunjhunwala: For external opportunities, we need to examine individual units. Let's look at Container Corporation for instance. What is the extent of containerization in India? If you see the competitive position that it has, if it is run by more commercial-minded people, it will dominate the industry. So is the case with most other PSUs. Size may be in terms of market size or size of profitability. Size also has to be seen in relation to domination of an industry. That itself should give most PSUs a premium. Let's not talk of industries where there will be plenty of change like telecom for instance or of companies that have gone sick. There are at least 10-12 PSUs that maintain these criteria of size, profitability and domination. These companies just need a more commercial mind.

CIO: You said that divestment is as inevitable as death. But there is every possibility that it could get postponed by say another two years. Doesn't that pose a risk?

Rakesh Jhunjhunwala: I agree, the process could take years. But what's wrong? If I buy BPCL at four times post-tax earnings, I don’t think it would be a mistake. Its profits are not going to diminish. Nobody can create the kind of marketing network it has. Every multinational oil company is contemplating buying BPCL. Nobody can think of challenging BPCL's network. In several instances, the only way for a person to dominate a particular industry is to buy out a PSU in that industry. Believe me, if one or two units get divested in a proper manner you will be amazed at the prices people would be ready to pay.

CIO: So, it is very critical that ultimately these PSUs are divested for your entire investment argument to stand out…

Rakesh Jhunjhunwala: I agree. But you see divestment is inevitable. Look at the kind of returns you would get once that happens. For a company of Rs120cr pretax, you have $45m. That's not small change. What kind of valuations should you give to that company; and the profits have grown each year for the last three years. If I were to value it at 7 times pre-tax earnings, it gives Bharat Electronics a base price of Rs180-190 per share. From the point of yield, it is an attractive opportunity. PSU stocks could give you 7-8% yield tax-free.

CIO: Which are your favorite stocks at the moment?

Rakesh Jhunjhunwala: Well, my favorites are Ashok Leyland, Tata Infomedia, Bharat Electronics, CMC and Karur Vysya Bank. I know all these companies are unpopular. Most people wouldn’t consider investing in them. But I think they carry value and the downside risk in them is very low except perhaps for CMC. Like I said before, in India we have never had a really sustainable bull run in the last five years because we never had sustainable growth. I personally think that the next phase of growth in India will be difficult but when it comes it will be sustainable and it will come with second-generation reforms. I don’t think that the bear phase that we are having now will last. Once the market turns, it will be like the American bull-run, the likes of which we have never had.

CIO: Your list of favorites does not include BPCL and BHEL…

Rakesh Jhunjhunwala: Well, I don't think they are the greatest companies to invest in. I don't think that there the upsides are as huge. The change due to privatization is not going to be as great as it is going to be in CMC or in Bharat Electronics. These are technology-oriented companies. The domination of the individual and therefore the benefits from privatization, especially in Bharat Electronics' case, are just mind-boggling.

CIO: You said that your investment ideas are unpopular. When do you think that the market will actually begin to take note of them?

Rakesh Jhunjhunwala: I think it has already begun to happen. In the last six months, the public sector has been one of the best performing sectors. I bought BEL at Rs52 in February when the Sensex was 4,300. Today it is Rs60.

CIO: BHEL has also gained quite a bit during the period…

Rakesh Jhunjhunwala: So you can see that the market is already indicating a preference for public sector stocks. The problem is that these stocks have still not caught the fancy of FIIs, who tend to drive valuations in our markets.

CIO: What do you think will arouse their interest in these stocks?

Rakesh Jhunjhunwala: Appreciation.