Feb 07, 2013 04:31 PM IST | Source: CNBC-TV18

Demoralised but not giving up yet, says Samir Arora

The price action for the last few trading session has been depressing and most investors are feeling a bit demoralised, says Samir Arora, fund manager at Helios Capital.

The price action for the last few trading session has been depressing and most investors are feeling a bit demoralised, says Samir Arora, fund manager at Helios Capital.

Arora, however, feels the good part is that the market is not falling apart even if it has not been rising. In fact, he says, for foreign investors this year has been "okay" in dollar terms.

"India is up some 4 percent primarily because of the currency, but whatever it be right now, it seems to be okay and we are going to all hang in there till something really bad happens, which doesn’t seem to be the case right now," he told CNBC-TV18 in an interview.

Today is a big day for the market, or more importantly for the government, as the NTPC offer for sale (OFS) hits the street. At the floor price of Rs 145, NTPC stake sale could garner over Rs 11,300 crore to the exchequer, making it the biggest disinvestment so far this fiscal. The government proposes to sell 78.32 crore shares or 9.5 percent stake in the country's largest power producer.

This time around the deal will happen without much support from an LIC, Arora believes. "I am betting that that would then take some pressure off the selling from the Indian insurance companies," he says.

Below is the edited transcript of Samir Arora’s interview with CNBC-TV18

Q: Price action has not been encouraging for the last 10 days particularly in the broader market. Have you tempered your bullishness after looking at the screen?

A: It is definitely demoralising to see how the broader market is behaving. We are still quite bullish. One reason we can say is that the Indian institutions have sold prior to divestments. If these divestments happen without their active support like it happened with the previous issue of Oil India and if today National Thermal Power Corporation (NTPC) happens without all the money of Life Insurance Corporation of India (LIC) being used maybe they would temper some of that selling because it doesn’t look that it is mutual funds who are selling as much as the insurance guys are selling.

But in a big picture sense everybody is a bit demoralised. It is true that markets are not going up, but they are also not falling apart and infact for foreign investors in dollar terms this year has been okay. India is up some 4 percent primarily because of the currency, but whatever it be, right now it seems to be okay and we are going to all hang in there till something really bad happens, which doesn’t seem to be the case right now.

Q: Are you going to put in a bid for NTPC today at Rs 145 or let is pass?

A: No, we don’t do all these things, but we would be very happy if that happens well because not only then the government’s numbers are met, but that the deal will happen without much support from LIC. I am betting that that would then take some pressure off the selling from the Indian insurance companies. We don’t buy all these state-owned companies and stuff like that, but that’s sort of an independent issue.

Q: Are you getting the sense that all these offer for sale (OFSs) are going to choke the market a bit though because come March there is nearly three issues and not all of them are best of breed – there is things like Steel Authority of India (SAIL) etc. that will hit the market?

A: Some of these will not choke the market because they will not be done. There will be a limit to how much people would buy only because these stocks will have increased weightage in the indices. So beyond a point my feeling always has been that if the stock market is up and is up strongly then only these deals get done. It is not that you start and there is a big deal and those deals get done and the market falls.

First, the markets have to be up. So in some sense, they don’t have to be up a lot, but the world has to be stable, our markets will have to be stable – that means the Budget has to be good and then maybe a deal can get done or not done, so it doesn’t matter. But let’s get the other elements in place. The other thing is any case we want large amounts of foreign money.

We want divestment to happen. We want the government expenditure to be down and therefore there are some corollaries of that, some side-effects of that, some positive, some negative. If the basic macroeconomic changes that are happening are right then it is like saying that if government increases diesel price then inflation will be high.

So, it doesn’t matter because the first part was what was required by all theory and so it is the same thing. If these deals can get done let them be done, but for them to happen there will have to be a positive environment around Indian markets, around the Budget, around the world and therefore it is okay then the deal will get done.

Q: Are you sensing any change in sentiment towards India though after January’s performance?

A: We can see purely from numbers that if last month if foreigners put about whatever 3.8 or 4 billion then the index in dollar terms is up some 4 percent whereas the Morgan Stanley Capital International (MSCI) emerging market (EM) is up 0.8 percent. This year if our Budget is good, this seems to be okay. Right now, the people will say that Chidambaram has already said this to us when we saw him in Singapore, Hong Kong or London – that does not matter.

It is like saying that you buy a car for your kid and the next day the kid say that what are you going to do for me today? And you tell him that I just bought you a car yesterday, he says but that is discounted. Things are not discounted, things have to be implemented, done, and you have to wait. For Chidambaram to even credibly present in the Budget whatever his targets on fiscal deficit and all - some only cynical guys will say "we already knew it", as if these tough things have to be just said and they are discounted.

We have a positive environment. World is okay. Our earnings are sort of okay. The only thing is that this sector rotation is not working, as in the infra, the cap-goods and all that is really not working. The state-owned banks is not working, which beyond a point we like because we didn’t overly changed that and that might be hurting a few people who moved just because the new year is there, let’s go to new sectors.

We also did that a little bit, but it was with 5-7 percent of our portfolio. Other than that it is okay. Nothing so wrong that with the way Indians are selling is a bit too much.

Q: Is there anything in the horizon which worries you going in with a bullish position about the world, we have got used to USD 3-4 billion a month of liquidity, some initial signs of hiccups coming from Europe. Anything that you can see in the next 4-8 weeks, which can turn the tap off in terms of liquidity?

A: Although Chidambaram said that he favours a stable tax regime, but then the rest of the government guys start throwing these balloons in the air whether excise tax should be increased, whether that for rich people it should be increased, whether estate tax should be increased, maybe some corporate surcharge should be done – the tax on ultra-rich like you guys and increase some surcharge people may not bother.

But anything to do with corporate earnings will be a bit of a negative and so it should in the end be what has been presented. There should be one or two more aces, something, which has not been said. Now the only thing I thought till yesterday that maybe one surprise can be that you takeaway the short-term capital gains tax in India for Indians, anyway we don’t pay it. It is coming via Mauritius, Singapore etc and you substitute for everybody with Securities Transaction Tax (STT), which would give more money.

You neutralise it. So, you are not giving a gift to the stock market, nothing, but it will just be a great thing. But then today if I read that they might do STT on commodities then that means it can’t be there for stock market guys you will do it and remove all capital gains and on the other hand you will do it for the commodity guys without removing that. Therefore, I feel maybe that would happen. But you need more surprise so that really nobody can say that he heard everything from Chidambaram before. I hope he has one positive surprise for that day, which then we can celebrate after the speech that day.


Q: You have been telling us all along that it is not guys like you who are getting the fresh money to put into markets like India. But other kinds of asset managers like Exchange-traded fund (ETFs) and maybe global emerging market (GEM) funds. Do you see that class of investors being susceptible to pull out of money if India’s performance relatively starts slowing, as it has over the last few weeks?

A: They are measuring it in dollars, so in dollars we are up 4 versus 0.8 for emerging market index. Secondly, if part of the money or most of the money is from ETFs then anyway that money is coming proportionate to the index weights. Our index weights are going up because of these large issues and free-float increases plus also the move of Vanguard to move from Morgan Stanley index to Financial Times (FT) index, which is supposed to help India because it does not have Korea’s part of the index.

When I was in Alliance I used to say that I strongly believe that India will be the biggest emerging market one day because all other markets would have become developed by then. So, FT has done that with Korea being taken out of their EM index. The thing is the foreign flows right now are not affected because they are in a sense getting reinforcement.

On the other hand, this year India-dedicated funds like us and the country funds will get money because my thinking is that the reason why we didn’t get money last year – all the India dedicated guys was because 2011 was pretty bad in dollar terms primarily because of a huge depreciation of the currency, but whatever be the reason.

This money which comes from foreign investors into the funds is as much momentum-driven as anything else and they see recent performance. Now one can say last year was very good and long-term is good and then people forget about 2011 in between.

If this year foreign investors don’t put money via India-dedicated funds then we have to question this thesis of whether we should be doing India-dedicated funds or be part of bigger funds. But today, there is lot of change in e-mails, conference calls in trying to understand what has changed because also what they read today in the papers in the backdrop is positive about India.

Therefore that is all consistent with me telling them please invest – they are reading in Financial Times and Wall Street, the actual performance being good, recent performance being good and then it all sort of adds up. This year will be good unless something happens in between, but broadly, this should be a better year for India-dedicated guys.

Q: When we spoke at the start of January, you were mostly long in your long-short combine. How are you going into this pre-Budget phase then? How are you playing it tactically?

A: Same. I am mostly long means my normal range is like let’s say 60. These days we would be more like 75 net. So that is our upper limit plus. In addition this time maybe for the second-third time in the last one or two years we have even bought Calls because this time the Calls expire on that same Thursday after the Budget. They go till the end of the month and one can buy them at about 1.3 percent premium for a 6,000 level.

It is part of a bet that if this month in rupee terms we don’t go 1.3 percent then we have to rethink because right now the world is good and the flows are good. The only thing, which has to change a little bit on the margin, is just stopping not forever, but cessation of Indian selling and that can happen if these big deals happen without the support or active support of LIC. So, today is a crucial day in that sense in my theory on this.


Q: How do you play infrastructure because a lot of people have become cautious on the defensives as well in part because the valuations in part because numbers weren’t that special?

A: We all more from a macro basis that it must be that that same sectors cannot continue. Therefore, as if on January 1 something should change. But more and more evidence is saying that on actual infrastructure nothing is changing even if they do this coal pooling and things like that it directly impacts those 5-6 companies, but it does not give confidence to a new guy to start a project or to commit capital.

We can see it from the disbursements and approvals that there are no – and we can see it from just the news that there are no large projects coming up or being conceived today. So, it might take two years. Now some stocks may go up. But in between if we can handle the bad news then only it works.

Broadly, I am still in the old names. We had 5-7 percent, which also but not infra names, but names that were beaten up and which we thought okay maybe the debt is high and one day they have sort of learned, they will conserve their expansion plans and go back to focusing on sort of mining their current business.

In general, I don’t believe that the sector rotation has worked and is not getting reinforcement and there is no bottom-up news of any kind, which would show that. So, for the moment we are out of any cap-goods kind of names and infra anyway we didn’t have direct.

Q: Arshiya is up 5 percent. Last time you came you were talking about it, but we couldn’t make up what you were saying. What’s your sense of what went wrong and did you clean it out of the portfolio?

A: We have it and we are going to put it aside for six months and then evaluate it because it is like most of these other infra companies. We recently bought Adani Ports also. My theory which I used to present was that in most of these projects implementation risk is biggest in infra companies and in both of these there was no implementation risk because the assets are already on the ground.

But because of being a new sector, maybe because the leverage was a bit much if you get into a financial problem then personal problem of the pledging and all, which I care, but no so much right now because it’s already down a lot and that is only important, the first one or two days when the stock gets 20 percent down. Now it is a matter of whether the business is okay or not and that’s why I said we will just put it aside because if they are going to corporate debt restructuring (CDR), which suppose is getting reported today then what happens is that the cash element goes out of the problem for the moment for one or two years and then you have to get your business in shape.

We believe that the business makes sense and is already implemented. It is only a matter of now convincing the private sector customers rather than going for every approval or buying land or getting forest clearance or getting whatever else is needed in these projects. We have it and we have lost quite a bit on it.

Q: If you are not buying infrastructure now and I know you own a lot of banks. What are your other non-bank bets for 2013? What does your portfolio comprise of?

A: We bought a lot of media on this whole theory of digitalisation. Now we feel that the broadcasting companies are better than the cable companies. Although we own them both but cable companies are not really getting as much cash from the local cable operator (LCOs) yet. If they do in the next 2-3 months people see that LCOs are paying these multi-system operators (MSOs) and that would again bring a second round of re-rating. So, the new changes are basically in the media sector.

Other than that we even bought another private sector bank. We stick with our consumer, pharma and auto. One can even buy real estate - anything which does not need as much of a big commitment from a corporate or industrialist or approvals from government.

Even if the government is very keen we now find that they still take 2 years. Even like today when they talked about coal pooling they said it will start next year. That can help those companies and people can discount it, but people will not believe that now a new order will be given in this industry. It is only those kinds of things, which we are avoiding, rest are fair game.

Q: Are you buying any of these big turnaround stories though? Just Suzlon as an example?

A: We have our own turnaround to deal with in Arshiya. No, we already have enough of turnaround. We don’t need another one.

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