Bullish on India thanks to a good monsoon forecast: Samir Arora

The Mauritius tax treaty is a concern for overseas investors in the Indian market, said Samir Arora in an interview to CNBC-TV18 on the sidelines of the traders' carnival in Bangkok. He hopes the Indian government realises the intensity of the issue by March 2017 and provides some clarifications.

Like most investors, Arora says normal monsoon forecast makes him bullish on India but feels it will be a stock-based move. The index may not move much and some sectors like banking may still not fully recover.

He is bullish on financial companies, particularly non-banking financial companies. He says the chance of not recovering money is limited for these companies at least in the immediate term. While he prefers to not go long on banking stocks, he is bullish on HDFC Bank saying it usually outperforms the market and is among the safer bets.

Commenting on the issue of Reserve Bank governor Raghuram Rajan being given an extension, Arora says there is no point looking for a potentially good candidate when there is one who has already delivered. Below is the transcript of Samir Arora’s interview with Anuj Singhal on CNBC-TV18.Q: What brings you to trader’s carnival? You are an investor.A: I have to come and teach them why not to trade and next time call it an investor’s carnival. So, my topic is why not to trade too much.Q: But since we are talking about trader’s carnival and we are talking about trading. It has been a very interesting market for the last two weeks or so. One day up and one day down, professional trader’s delight, novice’s nightmare. How do you see things unravelling for us? 8,000 has been a bit of a resistance. I am sure you look at some of these aspects. Going forward, what do you think?A: Actually, I do not look at these but in general I would think that times are uncertain in the world more than in India. In India, we have this new uncertainty about how we deal with these treaties and all, because although today, there has been not much of an impact, but as it becomes closer to March, 2017, there will be many issues. But let us keep this aside, because maybe by that time, there will be clarification and people will be going to the government and asking for things and then they will realise that it is much more complicated than just trying to tax somebody. But in general, I am and was more bullish in the recent months because I am betting, like everybody else, that monsoons will come and make a big difference to an average Indian’s life.Q: One more question on this Mauritius treaty issue. Since that day we spoke on the phone, I remember you replied to my tweet that everything in life is not about that day. Do you still think that it is an overhang which is going to remain, which is going to become big as you move towards 2017? And do you think that the government will have a bit of a rethink on that?A: No, there will be many questions that they have to resolve. The biggest question is that we are currently in a situation where the government wants to avoid 10-15 percent traders or investors not paying taxes in any jurisdiction. But now, I fear the situation where you may have to pay taxes in two jurisdictions because when an ultimate investor in a fund pays taxes, but in India, the taxable entity is not that individual but the fund. So, how will the government of India give tax certificates to underlying investors whose names also they do not know, because the taxable entity in India is not those individuals, but the fund in which they have invested and it cannot be a situation where they pay taxes in India, nobody gives them a tedious kind of a thing or tax and then in their own jurisdiction they go and again pay taxes. This is a very mega thing, because I do not think this was the intention of the government to have people pay two levels of taxes without a set off.Q: And I believe there will be some consultation on that.A: Actually, theoretically, I think this is impossible to do, so let us see what solution they find.Q: Let us get back to market, you said you are now bullish and you have been bullish because you believe that monsoon – so in your fund, is it the highest net long that you have been in some time?A: Highest net long was when Mr Modi was coming to power in May, 2014.Q: That is two years back.A: That was 80-90 percent. Now we are around 68 percent net because right now also, I feel that there are some sectors which are really not going to recovery. So, we are as excited about the shorts, as we are about the longs in recent days and months.Q: Let me make an educated guess. Would the shorts be in the PSU banks?A: Because if they were, I would not be tweeting on them. So, from that you can imagine that I am not short on them, but obviously, I do not have them on the long side. But in general, there are a few financials which may not be PSU banks, but they could be near PSU banks, as you may imagine, and there are many other sectors – telecom, gold, many other things are there.Q: Our viewers would know what stocks you are talking about when you say private sector banks which are now being considered at par with some of the PSU banks. One question that I have always wanted to ask you. Something like an HDFC Bank which has created so much wealth for you which has been one of your best investments. Has it saturated now? Do you see over the last one or two years, it has not given anything.A: No, it gives. Even this year, it is up 4-5 percent when the market is down 1-2 percent. Basically, it beats the market every year. Remember, in 2013 end, it reached foreign ownership limit. Before that, foreigners used to have in the index, the MSCI India Index, it was 7.5 percent of the index. So, if India was getting USD 14-15 billion a year – USD 1 billion was in theory going into just one stock. Since that reached the foreign ownership limit, the stock has actually not fallen, has outperformed the market and in addition, foreign investors who kept holding it have got a 20 percent premium because the FII a lot of them are a 20 percent premium. So, if you look at it over the last three years, we have made whatever it has made in India which is better than nearly every other stock in a big picture sense, plus a 20 percent gain on the premium that has picked up. So, in fact, it is one of the safer stocks, because if foreigners were to sell some day, they have to first shrink that premium down to zero. So, for an Indian investor, there is a 20 percent buffer against a foreigner selling that stock because he will first sell at 20 percent premium, then maybe 19, 18, 17. It has to go to par and then he will in theory hit the local stock price.Q: So, you are still bullish on this.A: Yes, very bullish, number one ownership.Q: What else are you bullish on right now?A: Our biggest longs are in financials and non-banking finance companies (NBFC) and basically, in NBFC, the story is very simple. If the company has money, its debtors never default, because they know that if they repay, he will give it back. So in all these new initial public offerings (IPO), you know that they are lending very small amounts to the poor rural Indians at Rs 9,000 and Rs 10,000 is the loan average. That person also knows, if I pay back this Rs 9,000, these guys will give me Rs 12,000. So as long as this fellow has the money to give, his NPA will never come, because that guy will always pay back and this story will go on for a number of years and then one day, maybe 4-5 years later, you will realise that the rural Indian has been given too much debt or too much credit and that these guys are not getting funded, but for the moment, the cycle is so virtuous that I think you can under ride a 20-30 percent growth per quarter, every quarter over the previous year for 4-5 years. So, I do not think anybody will be able to stop their rerating.Q: it has been a bottom up stock pickers market. The index has not done anything, but a lot of stocks have done so well. Do you see that continuing or do you think there is a bit of a risk in certain midcaps now where we have seen so much gains over the last six months or so?A: I would think that the index still may not move a lot because there are still problems in these banks, PSU banks, in commodity companies. I do not think that these things have gone away. If these things were to go away, that means that the world is in a very positive state of mind. I do not think that also is the state. So, you still have to find within India, stocks that you feel that within an Indian context have some business which is better or sustainable or underpenetrated or in this case, a technical thing that financing is easily available for certain businesses and NBFCs. So, if they can continue to grow and things like that. And also, a little bit lower interest rates. But it is not that world has totally healed itself and therefore everything has to move up.Q: Raghuram Rajan’s term is expiring this year and there is a big debate going on India. You have one political view saying that he should not be given a second term.A: I do not think that is a political view. I think it will be deeply embarrassing for the government if they had made that on these kind of things, they will not, it will be a huge negative if they do not make him, because he has himself hinted that he is willing by saying that I have not been asked, so I have not decided.Q: But from the markets point of view, do you think he needs to get a second term? A: Absolutely, because you got a good guy, why do you need to search for a potentially good guy when you have a person who has already delivered and there has been no real negative from any global, local angle from the economy side. It will be a huge negative, not only from a stock market, but on how our government, in a sense, is not encouraging talent or promoting talent or doing something not related to the job at hand.