Samir Arora of Helios Capital said Infosys has lost its leadership position and the stock may still be a shorting idea. The company posted disappointing Q4 numbers and issued lower than expected revenue guidance for fiscal year 2014.
The dismal picture unnerved investors, and Indian equity benchmarks crashed in the morning trade. Although negative on Infosys, Arora told CNBC-TV18 that he continues to own HCL, Tech Mahindra and Mahindra Satyam among the IT pack.
Speaking about the economy, Arora said he is losing faith in the government’s reforms agenda and feels everything is going wrong with India. Even diesel price hikes will not continue for very long, he said.
Today, everything is driven by United States and Japan. On one hand, India falls whenever US falls or whenever there is a negative data. On the other hand, Japan’s move on monetary measures is a big negative for India. In the coming days, flows from emerging markets will be directed to Japan.
Below is the verbatim transcript of Samir Arora's interview on CNBC-TV18
Q: What did you make of Infosys?
A: You normally expect that a day one result, this mandate was given to Infosys because it made a difference to the market and also to India. Now, the stock is down 17 percent and even then the market is up today. So, that itself shows how much Infosys has lost its position in the last couple of years. I am not short and that is my sadness today.
Q: Can you still short it or do you think the opportunity is gone now?
A: I don't think it is gone, although I haven't thought about shorting it now because we have two ways to short. One is to make money, second is to be highly confident that you cannot lose too much money. Sometimes that is also a good reason to short because it is like a free option you get. Unless everything suddenly changes, you won't lose meaningful amount of money then, may be because we are negative on the market. Also, there will be a heavyweight of people owning it and people won't be able to justify putting a buy on it today.
At the best, people who had buys may say, ‘continue, week hold’ or wait for another quarter but I don't think anybody will come out with an aggressive buy in any case. So it may not be a bad idea but sometimes a short is not that you will make lot of money but just the fact that you may not lose a lot. This is a good reason depending on the backdrop of the market which iteslf is quite weak these days.
Q: What have you been doing with your own position in terms of your net long, short positions? Is it the lowest that you have had in recent times in terms of a net long?
A: It is quite low, it is currently around 30-32 percent but we have been even negative only once in our life. It should be zero, but we don't have that much courage so 30 is quite low for us considering that our steady state is around 60 if we took a seven years average.
Q: Do you think the earning season is going to be worse than what people already expected?
A: I think may be the markets are going to wait for the biggest boons to give up. In the last two-three years, I have not been so bullish, sometimes I have moved around rightly sometimes wrongly, the net exposure. However, market may fall or not fall but there is very little credible evidence that this market can go up so much that I get pained, feel so bad that I took a low net.
Secondly, yes, this result season is going to be bad but the bullishness came from the fact that the government, Finance Minister and everybody was talking about the macro changes and the reforms that they were going to do and are still trying to do. However, now it looks more difficult that the rest of the government even accepts several things that the government wants them to do. For example, if it comes out that Adani Power will be allowed effectively a renegotiation, the next day Haryana government which is Congress, suddenly comes up and says they will file a case against it or when they ask Coal India to do Fuel Supply Agreement (FSA) then Coal India and NTPC start fighting with each other publically. So, it is not clear whether what is being attempted is going to happen in the next five-six months.
I don't think after that even the oil price hikes that are currently estimated at 12 hikes for the year, will come. They will stop at five-six because everybody knows that all the reforms in India lose you votes in the short-term. May be in the long-term they do something to the macro economy which then people appreciate. But in the short-term, a reform in India is defined as increasing prices of things that were previously subsidised.
Now with the coalition partners reducing, the entire responsibility of that goes to the Congress. Previously they could say ‘we have done it but TMC is with us and DMK with us,’ now everybody is distancing themselves because they all can see that all these reforms actually lose votes in the short-term. So, may be Congress will also give up after five-six months or even earlier.
Q: India is underperforming not just in absolute terms but also in a relative sense, many other markets are doing much better. Does that hurt even more than the market falling, the fact that this time there are many markets doing much better than India?
A: Japan, in the very short-term is a big negative for India. For 15-20 years, one simple trade in life for Asia Pacific fund managers or global fund managers would have been not to put complete weightage in Japan but China, India or emerging markets. Being underweight for Japan would have been a good reason to outperform the market by 1-2 percent per annum which is good enough in the mutual fund business, now suddenly finding that you are so underweight.
In the long-term, people will do carry trades and will borrow in Japan and invest it somewhere else, but that can be done only by a small group of hedge fund type investors. But for the rest who have to deal with their corpuses, they will definitely take out their discretionary investments in emerging markets. I would have done that and tried to bring up their weightage somewhat in Japan. On the other hand somebody will say that the Japanese investors will try and leave the Japanese market because of the currency but that would mostly be fixed income investors. This is because for the equity investors within Japan, they are losing on their currency and that too in a relative sense. They will not see it even if they measure themselves in dollars which they may not and they are gaining in the market. But for the fixed income guys, they may want to move out.
Imagine a fixed income guy in Japan, his first move will not be to invest in India. He will first invest in the more obvious markets like the US that are high yielding or real estate or Real Estate Investment Trusts (REIT). I do not think in the first round a Japanese guy trying to flee his own market will come to India, because mostly that will be a fixed income guy and that matters a lot in the short-term. In the long-term even if two big markets go up, generally other markets also go up, they may underperform. Right now, we are falling and the rest of the world is rising which is quite rare.
Q: Do you fear that our underperformance comes at a time when the US is doing well? If for some reason the US were to go in for a correction of 5-8 percent, will we get hit?
A: Right now, I am optimistic. I feel everything is going wrong for India. Look at in other way for the US. If today, North Korea says that they are about to test a missile market, does not fall anywhere, but if the US says that their new employment was 88,000 instead of 180,000 the market falls. So today, as in life people can only deal with one factor at a time and today that factor is the US.
It does not matter that there is bird flu in China or there is a nuclear tension in Korea, because today everything is driven by now maybe two things, Japan and the US. But our markets are quite simple and they cannot deal with three things at a time, so today these things matter. If the US falls, it would have been a negative and if it goes up a lot, I do not think it is negative because rising tide will lift all boats. It is not going to make a big difference if you are not super bullish on India which we are not.
Q: What is your own strategy on IT? Do you own some of the large companies or are you underweight on the sector?
A: We are not underweight. We own Accenture, HCL Tech and Satyam Tech Mahindra. In today’s trade, people are selling Infosys and immediately buying these stocks right now because a correction is an opportunity, I do not think so, although our weight is similar to 14-15 percent in our portfolio.
The fact that Infosys is bad does not mean you start jumping into buying the others, even though we own three of them ourselves. It matters up to a point that you have a 20 percent difference in one month or in one day effectively or in two days between two stocks in the same sector. But I am delighted in a different way.
If you see the money flows that are coming to India in the last six to nine months from India dedicated funds, two or three funds are getting all the flows because they have a list of 32 stocks that they buy. These are Infosys, ITC, TCS. We won’t, because we feel that this is an unsustainable strategy. We have seen in the 90s with two or three domestic mutual funds, in end 90s with another mutual fund, in 2000s with another large Indian asset management company which is now one of the largest mutual fund companies.
If you keep giving flows to one investor or one fund manager and they have a list of 35 stocks that they buy, you can play this game for a long time and outperform everybody else because you just get too much money. In some sense, Infosys’ fall is delightful, because many of these companies have it as their number one investment. Anyway it was an unsustainable game, it seems to be crumbling quite fast with suddenly the flows into these 30 names trying to hold up our market and some funds relative to 99 percent of the rest of the world.
Q: Now, does it look like that 2013 could be a difficult year? 2012 was surprisingly good compared to expectations, do you think this year might be a different ballgame?
A: It is already difficult with market down 6-7 percent in dollar terms. Normally, you can be optimistic. Markets are suppose to discount 6-9 months into the future and so many times if the current situation is bad people still say, no it does not matter, because we are looking six months ahead and things will happen.
Today, the problem is that there is no guarantee that six months later it will be any better. For that you have to anyway make some assumptions on the government and who will be its coalition partners even if it is Congress, Bharatiya Janata Party (BJP), whether they will allow new things to happen. So right now that does not fit into the six month frame. We know that six months later things will be okay, so we can be optimistic today and ignore what is happening right now. If you only look at what is happening right now, you cannot be bullish. In six-nine months you cannot see what will happen, so, be circumspect to neutral to negative till at least elections are announced or imminent and then we will see.