The more one reads about Rakesh Jhunjhunwala, the more one realizes why the man is really a genius. He looks at common everyday stocks but while other investors are turning their noses at those stocks, Rakesh Jhunjhunwala’s vision is able to see the huge value hidden in those stocks that the lay investor cannot see.
We chanced upon an interview of Rakesh Jhunjhunwala with Chetan Parikh of capitalideasonline.com recorded on 31st August 2001. The interview is quite remarkable because, apart from the fantastic insight that Rakesh Jhunjhunwala offers about his investing philosophy, he explains why he preferred to invest in stocks like Bharat Electronics, Shipping Corporation, Container Corporation, Karur Vyasa Bank & McDowell (now United Spirits).
Rakesh Jhunjhunwala’s logic on why he chose to invest in certain stocks even though they were extremely unpopular at that time is simple and yet compelling. With regard to McDowell, Rakesh Jhunjhunwala explained that it was then quoting at Rs. 20 and had a 40% market share of the Indian liquor industry. At the price of Rs. 20 per share, the market capitalization was only Rs. 200 crores. “It is incredulous” he exclaimed that “For just Rs. 200 crores, you can buy 40% of India’s liquor Industry, an industry with great entry barriers“.
How prophetic those words were. Since then, the stock has given a 3175% return to its investors.
Bharat Electronics and Container Corporation came in for special mention because there was at that time, a “contempt” for PSU stocks amongst the investing public.
With regard to Bharat Electronics, Rakesh Jhunjhunwala explained that their profits were 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. “Their valuations are simply incredulous” he again exclaimed. Bharat Electronics has earned Rs. 220 crores before tax last year, which is approximately Rs. 27 per share and the stock is available for Rs. 62. He pointed out that Bharat Electronics had the size and the profit protection and the big trigger for its re-rating was the disinvestment which was inevitable. “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“, he said.
The same simple logic was applied to Container Corporation. Given the extent of containerization in India and the competitive position that it has, if Container Corporation is run by more commercial-minded people, it will dominate the industry, Rakesh Jhunjhunwala explained.
Again, with Shipping Corporation quoting at Rs. 16 and offering a dividend of Rs. 4.50, how can you ignore the stock, the Oracle asked. The stock offers a huge margin of safety, he emphasized.
Well, none of this was idle talk. Bharat Electronics has given a 1950% return since that fateful day, while Container Corporation has given a 1438% return. Even Shipping Corporation, despite the doldrums that the shipping Industry is currently in, has given investors a 217% return in the same period.
However, surprisingly, Rakesh Jhunjhunwala was very harsh with his critisism of Larsen and Toubro (L&T). He said he would never invest in the L&T stock as he did not “trust the management“. “Though it is India’s largest player in the infrastructure sector and is technically very competent, there is no integrity in its financial restructuring and ambition“, he said. When probed by the interviewer, the Badshah explained that “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“.
Of course, one would like to ask Rakesh Jhunjhunwala whether he still stands by his criticism of Larsen & Tuobro because L&T has, in the period since 31.8.2001, given its investors an incredible return of 3120% (31 times)!