Rakesh Jhunjhunwala Defies Warren Buffett’s Credo & Pockets Fortune From Taboo Sector & Stocks

Novice investors like you and me have always laboured under the impression that airline stocks are “wealth destroyers” and should be avoided like the plague.

This impression was created in our tender minds because Warren Buffett, the World’s greatest investor, has never missed an opportunity to trash the airline sector and airline stocks.

In his annual letter of February 2008 to the shareholders of Berkshire Hathaway, Warren Buffett called airline companies the “worst sort of business”. He said:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

Warren reiterated his allergy to the aviation sector “As of 1992, in fact – though the picture would have improved since then – the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.”

Warren again slammed the aviation sector by calling it a “death trap for investors”.

Also, who can forget Warren Buffett’s timeless interview when he publicly admitted (@3.35) that one of his “biggest mistakes” was buying the stock of US Air, an airline company. “I now have an 800 number I call every time I get an urge to buy a stock in an airline. I say “My name is Warren, and I’m an air-o-holic” and they talk me down” Warren joked.

So, when Rakesh Jhunjhunwala went ahead and bought himself a massive truckload of SpiceJet stock in October 2014, all of us gaped at him with a stupefied expression on our faces. The ET put our thoughts into words by having the temerity to ask “Did Jhunjhunwala err when he bought a stake in SpiceJet?”

We cannot blame either ET or the novice investors for asking such a foolish question because buying an airline stock at that time was akin to shooting oneself in the foot. The entire airline sector was reeling under heavy losses owing to the cut throat competition and the sky high aviation fuel prices. In addition, SpiceJet was undergoing severe promoter related troubles with Kalanithi Maran being under the scanner for violation of several laws. It was also rumoured that he had run out of money to fund the airline.

Today, just 24 months later, the airline sector is the toast of savvy investors. SpiceJet is up a whopping 320% over two years. On a YoY basis, the stock is up 253%!

This gives us an idea of Rakesh Jhunjhunwala’s immense foresight, business acumen and contrarian instincts. This is how the man became a 2x Billionaire even though others are barely eking out a living!

We got another chance to make amends when the Indigo (Interglobe Aviation) IPO was announced.

Rakesh Jhunjhunwala sensed that novice investors were feeling wary to apply for the IPO. So, he took time out of his busy schedule to address us on why the Indigo IPO is a non-brainer. He said:

“What makes me very excited about aviation is and about Indigo in particular that 85-88 percent capacity utilisation, Air India’s market share is shrinking every year. There are not many planes on order. Indigo is the lowest cost airline. Can you imagine he invested Rs 300 crore, he has taken away Rs 3,500 crore as dividend? The Return on Capital (RoC) is 300 percent. And if you just make his first quarter’s earnings into four he will earn about just 640 multiplied by 4 is Rs 2,600 crore which is about Rs 80 per share. Rs 80 per share what price is it coming. At 765 it is coming at 10 times earnings and I am very bearish on oil prices. I don’t see them going anywhere in 3-5 years. So, it is a leader, the industry – one large player is shrinking, others don’t have money, he has got the largest planes on order, he is the lowest cost operator. It is a no brainer.”

It is a tragedy of our lives that while we rush to buy junkyard stocks recommended by dubious websites and stock gurus of questionable credentials, we turn a blind eye to a stock certified as a “no brainer” by a person with a proven track record for creating immense wealth.

Shares in the Indigo IPO were offered at Rs. 765. Today, barely three months later, Indigo stands tall at Rs. 1200, translating into absolute returns of 56% and annualized returns of 227%.

Indigo’s Q3FY16 results are also blockbuster. The quarterly revenue rose 12 percent YoY to Rs 4,407.4 crore while the net profit surged 23 percent to 653.7 crore.

The best part is that more hefty gains are in the offing for the shareholders in aviation companies. Raamdeo Agrawal of Motilal Oswal summed up the position with his usual clairvoyance of thinking:

“The best of the gains are still ahead, because what we have seen is the USD 35-45 per barrel oil price. In fact, the current price reflects, in my mind at least, USD 45-47 per barrel oil. So this 45 to 30 is yet to happen. I mean, USD 6-7 happened just in one week.”

Raamdeo called Indigo a “clear leader” and emphasized that it is “not an ordinary company”. The entire sector will be re-rated and there is a “lot more to make” from aviation stocks, Raamdeo Agrawal said with a tone of immense confidence in his voice.

Now, the million dollar question is whether we will be able to shake off the taboo created in our minds by Warren Buffett and embrace the new ideologies of Rakesh Jhunjhunwala and Raamdeo Agrawal or we will continue to languish as before?