Not looking for big reforms but simple tweaks: Samir Arora

Some may have been surprised by the strength the Indian equity market has shown over the past few weeks, but Samir Arora of Helios Capital isn’t one of them. He believes this rally was expected because focus had shifted to domestic cues after the European Summit. And since there was a bullish sentiment in India, he says the market was bound to move higher.

However, he warns that the rally will only continue as long as there are hopes of some policy action from the government. Change in guard at the Finance Ministry post Pranab Mukherjee’s resignation led to hopes that we were going to see Prime Minister Manmohan Singh bring about a few key policy changes. The market too was buoyed by these hopes. But, Arora says the government should use this window of opportunity to make important decisions within the next few months, or the sentiment on the street will fizzle out.

“If they don’t use this window, then all the threats of downgrade and the threats of the Reserve bank will come through and will lead to total pressure on the government and on the Congress party,” he said.

Furthermore, the failure of the government to deliver could trigger a sharp correction in equities, he said.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Did you see the kind of strength we have seen on the market screen this last fortnight coming, and what's your sense of where it could be headed?

A: It was little bit expected. As soon as the European problem got solved or there were expectations that it will be stabilized, the issue came back to India, and in India we are definitely bullish right now. This is on the basis that the government has a window of opportunity which they will use. If they don’t use this window, then all the threats of downgrade and the threats of the Reserve bank will come through and will lead to total pressure on the government and on the Congress party.

Also, you can see that the Prime Minister is proactively going out and giving interviews. It would make no sense from his point of view if in the end they are going to do nothing about it, because he would not raise hopes unnecessarily.

I think this window is only for two months. The window is there for the time when the PM is still acting as the FM, because say after 2-3 months a new politician becomes the FM and some thing should be done before that.

Q: So how are you tactically positioning yourself given expectations of some policy changes? Have you added a lot of high beta stocks to your portfolio?

A: The first thing to do is cut off our high beta shorts. For the moment we have added only to the larger cap longs and in the futures in infra and financials because if at all something happens it will all lead to a interest rate cut by the RBI.

The problem is that after say 19th July every day will be counted and so I don’t think the government will be given more than 30-45 days to do something which should be very visible. They cannot do simple things after this because that should have been done at any time in the last three years. So right now we don’t really care about which stock or whether we make the highest return in that period, but we want to participate in that run if it happens.

But on the other hand, we are very willing to go on the other side if say by in 60 days nothing happens. If a new FM comes in who doesn’t seem to be very well known to the financial markets, then you can’t do anything. The only thing that will help is that if oil is USD 60 per barrel, otherwise it will be total disaster for India.

Q: Where should the bar be set at with respect to policy expectations, what has the market priced in? And what would be a prudent kind of expectation purely from a market perspective?

A: You can see that it is longer term money which has been waiting for some action, so I'm not the only guy betting on this right now and I will not be the only guy who will become negative if nothing happens in the next 2-3 months. So it is not that I’m a guy with a different view; there is a general view that the government has a window that they themselves have been creating. They were waiting for a political environment or a political opportunity.

It would be unreasonable to think that they will use new equations to get their Presidential candidate through, but after that they will revert to the old equations where they say they cannot do anything without TMC. If they can get their Presidential candidate through, then the same equations have to be used to have an oil price hike and may be FDI in retail or something. They can’t suddenly say that they don’t have a coalition partner who is not agreeing. The coalition partners did not agree to their Presidential candidate but they still pushed it through. So the same thing should be done for some other decisions.

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Q: Is there a specific list in terms of major reforms people what to see, because right now the government is throwing a dart at everything - FDI, fuel decontrol, reducing fiscal deficit?

A: First of all let us reduce that further, we don’t even want major reforms. If you allow FDI in some states which want it, it is not even a major reform but it is adequate for the current situation. Similarly if you just take people who want to invest in India, IKEA wants to invest in India, Zara wants to invest in India, don’t stop them. Find out what the issue is and change it appropriately. So we don’t want any major reforms.

For example, nobody wants diesel price decontrolled, just hike the price by Rs 3-5 over six months. Don’t let the diesel car guys, customer buying diesel car increase their price. How is that a reform? Instead, don’t over analyze and don’t get a new economic advisor like Raghuram Rajan who is such a high profile guy because he has already told us everything. So those things will be absolute headlines stories but will not make any difference. The difference is give land to somebody who wants it, give FDI approval to somebody who wants it within the existing rules. Just push GAAR back by one year more because it is absolutely messy still. Just do some simple things, it's enough; we don’t want high profile things anymore because it is not even needed.

Q: The outperformance has actually been more apparent in the midcap space. How are you approaching the boarder market now?

A: I'm not going to keep bringing up names because we haven’t added new names. But we have a fair mix of midcap and also MNC subsidiaries of about 8-10 companies. In theory nearly all of them are midcaps because we don’t have the big MNCs like Hindustan Unilever. But they do not behave like midcaps, they behave in their own low beta way.

Basically our idea is that we don’t want to change the long side as long as possible. Right now we would think that maybe 90% of the portfolio will not be changed whether this market goes up 50% or goes down 50%. Everything will be adjusted with and overlaid in futures on the short side.

Q: What are your expectations on Infosys and how would you approach that stock now?

A: We have Infosys, Oracle, HCL Tech and MindTree and we will keep them whatever happens it’s ok, even if the valuations are quite low. Ultimately, whether the market gives credit for the fact that currency is weak or not, in reality the way business is that a weak rupee helps exporters. When somebody exports, we don’t overly differentiate how much of that earnings came from the weak rupee or from having a constant rupee. It is only in IT that we overanalyze these things.

So if the rupee is weak, the earnings are higher. Even if you don’t remember today, next year you will get confused because the PE would look even lower and at some point it will come through so it is a good hedge.