Samir Arora: Govt first needs to understand how mkts work

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

Samir Arora of Helios Capital tells CNBC-TV18 that the rally in PSU stocks on account of divestment hopes is 'amusing'. He thinks that pledging SUUTI stakes to raise debt is not a good option. "The government is still not recognizing the systemic issues," he rues. Arora sees no chance of an early cut in rates in January by the Reserve Bank.

Speaking about specific stocks and sectors, he says that power sector lebders such as PFC and REC are likely to remain under pressure. "However, the momentum in rupee will continue to support the IT sector," he says. Nonetheless, Infosys' dollar-revenue performance might not be as exciting," he opines.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: What is your prognosis between now and the Union Budget?

A: I think we will be down, and at the budget, we will be really down and after that we will have to wait and see if the government does something. My issue is that the reforms that we talk about are mostly all with picture long-term benefits to economy and to the markets, but the problems are very short-term as to what happens to the budget, what happens to the deficit. My thinking now is that they have to increase taxes across the board in the budget including surcharge on corporate etc.

In general, if the budget is very bad in terms of pure numbers but then they say we will open retail to FDI, we may not know at that time and what to focus on because the FDI in retail is a very macro long-term benefit.

You don't know what to do in terms of pure stock market unless there were so many reforms simultaneously being done that you changed your focus from current state of the economy to these things. But if you just say I am increasing corporate tax, I am increasing excise tax, but I am also opening FDI, which at that point will be clear anyway whether its opening or not. If it does happen, in theory, one stock will benefit- Pantaloon .

So at the end, reforms have to be done with a 2-3 years view but the markets may not look at that horizon when they evaluate what to do next.

Q: You were saying that chances are that the market actually gravitates to a new bottom and new low before the budget this time around?

A: My thinking is that there are four inputs to budget. First one is revenues which are well below target. The budget itself had an estimation of some 18% growth which is supposedly some 8%, the expenditure growth which was supposed to be 3.5% is 10%, and the divestment proceeds were supposed to be Rs 40,000 crore, they are Rs 1000 crore not to forget subsidy that is out of control.

So when you are making next year's budget; the last quarter's run rate for revenue growth is only 8%; then the government itself will not do what they project at 14-15% revenue growth. They will have to somewhere ballpark, if off the last quarter's trend and if that is the number of 8-10% revenue growth, divestment let us say is zero this year up to March, then would you allow them to say again Rs 50,000 crore for next year?

Basically the four components, all of them are much different from all the expectations- revenue, expenditure, subsidies and divestment, and therefore, when you are making next year's budget, you will have to benchmark off last quarter's trend.

If you were to project on that basis and not take numbers out of thin air, you will not be able to come anywhere near the budget number which the market and the government would be comfortable with. Therefore there will have to be some tax increases. Most of the excise of 2% which was still pending will be done, and maybe some corporate tax surcharge or something.

In that context, at that time, if you say that you are going to do a few reforms, unless those reforms are done then and there and have a direct co-relation with the market in the short-term, we will not know at that time whether to focus more on the budget and their numbers and if there is a tax increase, or whether be pleased with the fact that reforms have happened or are promised. Hence I think this will take time.

Also because the budget is so close to the end of the elections, I think it is completely wrong to think that as soon as the elections are over, government will start doing reforms because by that time, the results will be just out (between 4th and 7th March). The budget is scheduled to start between 10 and 15 March. So it is too close to suddenly change your complete view based on what has happened. And that also assumes it will be a relative victory for Congress so that they will be able to sacrifice mentally at least a Trinamool Congress the same morning and in the afternoon announce things which may not have been done if the results were slightly different.

So I think that will take two-three months for them to form new equations and be confident about who is supporting whom at the Centre and whether Samajwadi Party (SP) is there or not. So, all these things cannot be done in the budget because it is too close to the end of the elections.

Q: On the point that you were making that they might actually want to shore up sentiment on an otherwise weak budget in terms of macro with issues like FDI in retail, is that something that you would set your store on because stocks like Pantaloon have been rallying for the last couple of days again?

A: I have been criticising analysts because we are not short and not short Pantaloon either, but there is no way that Pantaloon would benefit. As of now, the rule is FDI will be allowed only in 51 cities and those cities also the states have their right to choose whether they want FDI or not. So there will be some cities where it is not allowed, some cities where the states won't allow. Therefore Pantaloon will have to make two subsidiaries; one where in those cities where it is allowed and one where it is not allowed, and then take in FDI in that one subsidiary where it is allowed.

World doesn't work like this that some foreigner will come and invest in part of the company where the other company will be on its own and they will be operating together. How will this work? I don't think it is so straight forward that just because it is allowed somebody rushes in.

In any case, these things will take time, maybe one company will benefit, but that doesn't again change the big picture that these things are all good for the long-term and they are good for the short-term if that is the main focus. It is an add-on, but not to compensate for other issues. When you open foreigners to invest in India in a bad time, it might not be much. That is why I say it doesn't matter today. It will matter after three years when anyway flows will be coming in.

For example if today I reduce my hedge fund performance fee to 15% instead of 20%, nobody will care, but if I had done that in 2007, I would have got half a billion dollars more because today the world is not interested in India, they are not interested in Hedge Fund etc. So tinkering today doesn't help.

These are all things which from a market point of view will not affect in the short-term as well as there is such plethora of those things that become the new theme of the market and of investment. Unfortunately, it's not going to be like that. They will do a few here and there which may positively impact one or two stocks if at all, but is more a big thing for the next round.

In the short-term, it has to be via investments and we are not able to get our arms around them. We still fight with everybody who wants to invest in India. If you read the latest issue of The Economist, one will get thoroughly depressed because an unnamed Indian official from one of the ministries, either economics or other, basically laughing with the reporter at businessmen who are saying that there is something wrong with India. If that is what the real impression of the bureaucrats is that they should be laughing at Indian businessmen who are saying that these things have gone out of control and makes fun of them; he does not have the guts to be named; but if that is the spirit in which we are operating, how will it work?

Q: So for the next couple of months, the next 10% move in the market, do you think 5200 is more likely or 4300?

A: Right now, I think it is down. I don't know the level, but I don't think it can go to 5200 in the absence of better global cues. So the best case for India is if the world goes into deep trouble and we can put all our problems on the world because at the end of the day, we all live for our ego, and we don't want to be highlighted in the world as being thorough losers.
So in some sense, we benefit when the world does badly and we can say everything is because of Europe and everything is because of US, and it is all because of global concerns.

Q: A lot of pressure on bank stocks again because of talk about NPAs (non-performing assets) of Kingfisher Airlines , Hindustan Construction . Would you be underweight on this space now given the adverse macro-environment?

A: Actually, we are not underweight only because we have this very concentrated position in a few private sector banks. Although, if I really look at it versus the index, we may be underweight. But if you ask me, some of my biggest holdings are banks. I always feel I am overweight because I don't compare it to the Nifty. I maybe underweight without realizing but we are only in the private sector banks and that also in these two-three banks like IndusInd, HDFC Bank . But we also have exposure to NBFCs. Maybe we are short some of the other banks, the state owned banks because there is no end to this. The power sector problem is going to be very serious because ultimately if some 15-20% of your loans are projects which are uncompetitive because of contracts, fuel prices or whatever and 15-20% are to SEBs, you can do what you want but these are irrecoverable positions unless there is new funding support from the government. But that would mean dilution and things like that.  So the stocks can keep falling and nobody would show interest in stocks which have these huge terminal problems at the end of two-three years. Yesterday if you saw Deepak Parekh's interview on Devil's Advocate and all that, we have to take bull by the horn and they have to do some simultaneous five-seven things. You cannot do for example the SUUTI thing where you will borrow money and then buy stocks. You have to say, okay, today I take ITC , I sell it off, story over. It is at a good high price unlike L&T and Axis Bank , it is not something which you feel you are selling at the bottom of a cycle. Take it and blow it out. Take 5% discount and hit it. That is the way we missed it with ONGC when at Rs 260 there was going to be a deal. I came that day on TV and said it was the biggest goof up we have done. We cannot wait for ITC to be down one day and then feel that we must sell it off. Things like that. Something will have to be done. Maybe we need an announcement in black and white that the PSU companies will not be forced by the government to do anything. Anyway it is not working. Best is to have an explicit policy that the boards of PSUs will do what they feel is right, that they will first keep aside what they need for capex, expansion, and then they will do XYZ. Something like that has to be done. It doesn't need anything except focus. But everyday to read that today the government will borrow money against ITC....even hedge funds don't borrow against stock in bad markets to buy more stocks. So these kinds of things I don't know who advices and why it reaches a stage where it looks as if it is nearly there although none of these things get done in the end. But the fact that they even reach this stage shows that there is no understanding. If you remember about a year and a half ago, I literally fought with everybody when they said that NTPC will get done at a premium. I said it has never happened like this. Divestments or dilutions or selling stocks never gets done at premium. But in presentation after presentation, in fact there was an interview I saw on your channel once, not with NTPC guy, I think it was an Indian Oil guy when the price was Rs 360 saying because my stock is so hot, I will sell it (to investors) at Rs 440. If we haven't yet got these things right as to how the markets work; we will never be able to raise any money in divestments or otherwise like this.

Q: On the subject since you are talking about it a lot, a clutch of these public sector companies have been rallying some 30-40% over the last one week in hope that something will get done. You find that amusing?

A: That is why I don't like Indian casino stocks. Because we have such better casinos in our market that people can speculate on such non-sense, you don't need casino companies in India. No chance, all complete non-sense, a waste of money that people want to do. It should not be poor SEBI's responsibility to protect them and see that nobody is cheating them. If this is a level of dumbness that is required to get into a market, nobody should protect you. Absolute loser trades. But they want to do, what can we do?

Q: Have you been holding any positions in two wheeler stocks? Any of them over the last six months or so because that's been an area of concern which has just opened up for the market, this last one week?

A: No we don't own any auto manufacturing stocks. Actually in auto we own only the supplier kind or auto ancillary stocks. We hold Bosch, Timken and Goodyear. We also own Eicher but none of two wheeler or four wheeler stocks.

Q: We will have results from Infosys later this week. What's your positioning on IT and how do you think those stocks might pan out in the near term?

A: They will definitely outperform. We hold Infosys, TCS. We also hold Oracle which we believe is an open offer candidate. Because of the currency, they will definitely outperform. I would think that Infosys on dollar basis will not do very well. It may keep the lower guidance. I hope they don't reduce it by 0.5-1%. So we are on the long side and nothing on the short side in any IT stocks.

Q: You spoke about having exposure to some NBFCs. Are any of them in an infrastructure facing space like IDFC or is that a dangerous space to be in now?

A: I think it's dangerous although we are not short. We thought we should; but we haven't done it. We own M&M Finance and Bajaj Auto Finance and HDFC. Basically infrastructure revival, anything which needs infra, I think this is going to take lot of time. Stocks may go up ahead of that. But right now it doesn't even look that we have accepted the problem. If in this interview in The Economist, the bureaucrat is laughing at the corporates - that means he thinks that the corporates are being unfair. If in the meeting which yesterday I understood Mr. Parekh and other industrialists had with the Prime Minister, the Prime Minister was angry with the industrialists, that means the government is still not accepted this as a problem and they are looking at it more as a creation of the market or the business guys. If that is the stage then obviously the problem will take longer to resolve because they are in a sense not accepting the problem per se. But looking at it more as a creation of some vested parties who are interested in investing India billions of dollars and therefore they have some axe to grind...if that is how we look at the business people and foreign investors then obviously this will take longer.

Q: The one hope that a lot of people have been talking about also stoked by recent comments from the Reserve Bank is that maybe rates start coming down starting late January. Are you hopeful?

A: No chance. I would think there is absolutely zero chance of that if at all it has to happen. If at all it has to happen, it will happen after the Budget for many reasons. One is that there has only been one meeting of Reserve Bank which was in December. So if you increase rates in October and reduce them in January, (a) you have to publicly admit that you were wrong and nobody in India or in the world does that so easily. But secondly because you can't in one month say okay sorry, wrong number, should be the other way around with the whole USD 2 trillion economy...let's turn it around in one minute because we made a mistake. So nobody will accept it. But secondly and rightly so, they have to give few months, few weeks - six-eight weeks, let the Budget come, let the government feel that they are under some pressure on fiscal and then do it in March after saying that the government has also done its bit in terms of trying to bring fiscal under control. You can't do it ahead of that but more importantly you can't do it within one month or three months of tightening it where at that point also there was a lot of criticism from really everybody including nearly 100% of their own advisors. So it won't happen in January but language can change as it should.