Jhunjhunwala’s portfolio consists mainly of mid-cap stocks while the Sensex is composed of large caps

Over the past five quarters between January 2008 and March 2009, 48-year-old Jhunjhunwala’s portfolio of publicly traded stocks, of firms in which he owns at least a 1% stake, has underperformed the benchmark index. His portfolio has dropped at least 60% in value, according to data from exchanges, while the Bombay Stock Exchange’s (BSE’s) benchmark equity index Sensex dropped around 52% over the same period.

The Sensex has climbed back about 45% since, while Jhunjhunwala’s concentrated portfolio, which has largely been kept undisturbed, gained only about 15% over the same period.

Jhunjhunwala, the founder of proprietary trading firm Rare Enterprises—named using the first two letters of his and his wife Rekha’s names—twice declined to speak for this story. Most of his portfolio picks are held under this firm, by himself and in the name of his wife.

The most visible, albeit minor, changes made by Jhunjhunwala to his portfolio indicate a trend towards defensive sectors. He purchased an additional 0.65 million shares in software firm Geometric Ltd, where he now owns a 7.27% stake, and 0.3 million shares of Agro Tech Foods Ltd, in which he held a 7.8% stake at the end of December. He also purchased 0.17 million shares of Karur Vysya Bank Ltd and 0.13 million shares of drug maker Lupin Ltd.

On the other hand, he has cut his exposure to Hindustan Oil Exploration Co. Ltd, selling 1.4 million shares during the quarter ended March. Jhunjhunwala also sold about one million shares of Hyderabad-based Nagarjuna Construction Co. Ltd. He reduced the ownership in Pantaloon Retail (India) Ltd by 0.43 million shares and in Titan Industries Ltd by 0.12 million shares. Apart from large investments in a concentrated portfolio and smaller investments in a larger portfolio of listed firms, Jhunjhunwala owns sizeable chunks of equity in several closely held entities through his private equity and venture capital- style investments.
According to data published at the end of December, he owned at least a 1% stake in 31 firms, valued at about Rs1,466 crore.

And at the end of March, he owned at least 1% in 27 companies traded on BSE that declared their latest shareholding details. Some of his portfolio stocks, including the pharmaceutical services provider Bilcare Ltd, pharma firm Zenotech Laboratories Ltd, publisher Infomedia 18 Ltd and water treatment firm Ion Exchange India Ltd, are yet to update shareholding details.

Jhunjhunwala’s holdings in at least a dozen non-listed entities include the 16% stake in Diwan Rahul Nanda’s Tops Security Ltd, New Delhi-based A2Z Maintenance and Engineering Services Pvt. Ltd, Dharti Dredging and Infrastructure Ltd, Inventurus Knowledge Solutions Pvt. Ltd, Maneesh Pharmaceuticals Ltd, Nandan Biometrix Ltd and Concord Biotech Ltd, among others.

To be sure, Jhunjhunwala’s portfolio consists mainly of mid-cap stocks while the Sensex is composed of large caps.

And, despite the beating his portfolio has taken during the downturn, people who have worked with this whisky and cigar aficionado vouch for the soundness of his overall strategy.

“He has tonnes of patience and the temperament that makes him a rare stock market investor,” says Alok Agarwal, a Mumbai-based funds adviser who owns at least 2% in Aptech Ltd, a venture he started to provide computer education. At the end of March, the Jhujhunwalas held a 31.7% controlling stake in Aptech, valued at around Rs123 crore.

It is this so-called temperament that, starting with Rs5,000 in 1985 when the Sensex was trading at 150—on Friday it closed at 11,876.43—has allowed him to achieve almost cult status with investors in a country where only 3% of the 1.2 billion population invests in equity markets.
His investment strategy, followed closely by many individual investors, involves maintaining a steady portfolio of stocks with a long-term view while committing smaller amounts to the high-beta activity of equity trading such as day trading that tends to be highly volatile.

And to be fair to Jhunjhunwala, he is reported to have said that comparing him to Buffett is an insult to the chairman of Berkshire Hathaway Inc., who also happens to be one of the richest men in the world and has famously willed away almost all of his fortune to charity.

STT mopup rises 11% to Rs 3,530 cr on bullish market

Buoyed by a resurgence in the stock market, collection of security transaction tax (STT), a tax levied on every transaction on stock exchanges, rose 11% between April 1 and September 25, over the year-ago period, according to figures compiled by the Income Tax (I-T) department.

According to I-T officials, there is a distinct possibility STT collection will continue to grow for the rest of the financial year.

STT generated Rs 3,530 crore as against Rs 3,173 crore collected during the corresponding period last fiscal. During the first two months of the current year collection dipped 24.7% to Rs 795 crore, against the comparable period.

The fall was a continuation of the slowdown in STT collection that began mid last year as the local stock market felt the tremous of a global financial meltdown. By December last year, STT collection was Rs 4,455 crore, about 32% lower than the December 2007 figure.

But things began to look up since July ‘09. Since big bourses like National Stock Exchange (NSE) and Bombay Stock Exchange(BSE) are based in Mumbai, the city alone accounts for over 95 % of the STT collection.

Introduced in 2004-05, STT is paid by the buyer as well as the seller in a security transaction. The objective of the tax was to partly offset the revenue loss arising from the removal of long-term capital gains tax and the reduction of short-term capital gains tax from 30% to 10%.

However, the tax was opposed by brokers and investors. However, the draft tax code which has been recently announced by the government, has proposed the removal of STT and imposition of a tax on capital gains.

Indications are that STT collection, which is proportionate to the trading volumes in the stock market, will continue to grwo. While the figures for the first week of September ‘09 showed only a marginal improvement over the corresponding period last year, the collection has surged within a fortnight.

A higher trade volume has also pushed up the corporate tax collection from brokerages by 20% to Rs 580 crore.

Can SEBI do to stocks what RBI did for banks?

Though Reserve Bank of India (RBI), through monetary instruments succeeded in protecting Indian commercial banks from global financial crisis, the Securities and Exchange Board of India (SEBI) did not succeed as much to protect the stock markets.

From January to September 2008, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) jointly lost Rs. 56,47,685 crores in terms of market capitalization which amounted to more than Gross Domestic Product or Aggregate Liquidity Stock of India. The regulators of stock market presumably did not pay enough attention to this loss, probably because it is not a debt based entity and they saw no need to bail it out.

During 2006-07 to 2007-08, the growth rate in financial sector has been higher than other reality sector growth rates. We have now reduced demand of credit and RBI Governor opines that it is due to slow down of economic growth whereas practically the higher cost of credit during global recession has restricted growth in credit demand.

Unable to attract even 10% of national domestic household savings form less than 2% Indians, with liberalization of capital account, the Indian stock market has been mostly heated up with portfolio investments by Foreign Institutional Investments (FIIs).

After liberalization of capital accounts in 2004-05, with increased foreign inflow the stock indices started picking up new heights due to increased trade volumes; but after sense of global financial crisis, the decline in indices is also noticed at faster rate with rapid outflow of capital from stock markets.

The stock markets are now more exposed to international capital market, thus the global financial boom and crisis considerably affected the Indian stock market. Now any appreciation or deflation in stock market indices up to 5% in a single day is a normal rate of fluctuation.

When the Market was moving upward, during nine months period Market Capitalization at BSE increased by 102.25% (from Rs. 35,45,041 crores in March 2007 to Rs. 71,69,985 crores in December 2007) and by 94.32% in NSE (from Rs. 33,67,350 crores in March 2007 to Rs. 65,43,272 crores in December 2007); financial experts were quite happy to cite the growth rate in stock indices.

Pity to observe that this tremendous increase in stock Market Capitalization has not helped the GDP growth rate to move north, instead during this period, the GDP growth rate has declined from 9.2 in the first quarter to 8.8 in the third quarter during 2007-08.

Since this considerable increase in Stock Market Capitalization was not chanalized to productive system, rather restricted to speculative trade only which could not last long without real economic growth, by January 2008 onwards the Stock Market started falling and during a period of nine months, Stock Market Capitalization of BSE declined by 41.91% (amounted as Rs. 41,65,384 Crores by September 2008) and NSE by 40.39% (amounted as Rs. 39,00,185 crores by September 2008).

During growth of market capitalization at BSE and NSE, unprecedented amount of money been invested in stock derivatives. These trades and investments in stock and derivatives did not helped GDP growth, rather created inflationary pressures in India.

Since the real economy could not grow by speculations and derivatives businesses, with global recession and fall in GDP growth rate, the stock market started falling. While empirically it is proved that screen touch price mechanism of stocks could allow growth of speculative business only, and not the real business, the regulators have to think about means to convert the stock market capitals into real assets for production units instead of paper assets.

With monetary instruments we may handle liquidity pressure for shorter period, but cannot avoid consequences of recession without policy initiative to allow interest free or equity based banking and finance which is meant to counter problems like higher input costs, default in lease finances and gap in transacted and transferred traded values.

The focus of SEBI to promote stock market trading should now be shifted to arrange FDI on project basis instead of encouraging share trading. The investments should be canalized into genuine project finances on medium and long term basis instated of short term investments on equities. For short term investors arrangements could be made for investments in short term trade finances. And the derivatives have to be purified from business of speculation and shifted to real term business.