Expect 15% returns from mkt this year; like IT: Samir Arora

Coming back to the market, he expects returns of around 15 percent from the market this year. He is  bullish on sectors such as IT, pharma, consumer durables and NBFCs. He prefers private sector banks over public sector ones.

Below is the verbatim transcript of Samir Arora's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: This time around there was bread and butter in the Budget but no jam?

A: I think that the Budget was good but as I had thought before that it will be difficult for the government to disappoint you too much, but the interesting things are that because the market went up on Saturday, all the economists now say - which I was saying forever, so I am not surprised -- that 3.9 percent deficit does not matter and these are the same guys who were saying how we should do 3.6 percent and 3.7 percent.

However, more importantly I should have been a journalist because today’s headline which all of you have missed which is a big deal seriously is that Jayant Sinha had said in an interview that the last deficit was not 4.1 percent but more like 5.5 percent and that because of poor accounting, delayed payments and other things, it was presented as 4.1 percent as a target by United Progressive Alliance (UPA).

So to have numbers which were at that time according to the current management of the country so off and that for everybody to ignore it and then they said there is actually 5.5 percent and we have brought it down. It is a big deal. In Greece that was the problem that the new government came in and said that the numbers of the previous government were fudged. So I would think and suggest that the government should put out publicly what was wrong in the previous deficit which I agree they were wrong and how those things are not there, that would increase the credibility of the whole number exercise very much because then you won’t say that 4.1 percent has become 3.9 percent but maybe 5.x percent has become 3.9 percent. So it is a big deal but it also shows how collectively we accept whatever number is put out as a previous number that is and just move on without questioning.

Sonia: So now we have a new number and there has been some relaxation in that number, the fiscal deficit target but what does that do to the Reserve Bank of India’s (RBI) move from hereon?

A: First thing that is why I am saying is all RBI part of the group which had accepted of 5.5 percent being presented as 4.1 percent. The point is unless we understand that, it does look like serious progress - 5.5 percent let us say above 5 percent because of delaying numbers or early recognition of dividends or early forced payouts of dividends from public sector undertaking (PSUs) or whatever. So if it was actually 5 percent but presented as 4.1 percent that means a system as a whole and all the economists and all the journalists being tweaked and accepted that number. Therefore, I would say in a broad sense, this was a good environment for India and in that context, if the numbers have been corrected and 3.9 percent also does not matter but my main point to Latha Venkatesh is that 3.9-3.8 percent, she was the most hyper about this and I was always telling her, it doesn’t matter because you would come to know of the real number six months later.

Broadly, it should be obvious to you that these are declining that they are reducing along a certain path and if you miss 10 bps here or there, it should not matter and in that sense it is good that nobody cares.

Latha: Why are you complaining that you didn’t get jam? Foreign institutional investors (FIIs) have got a lot of jam, more space in some of the quality stocks you want to buy, GAAR is being pushed out, some clarity on minimum alternate tax (MAT), FIIs should be a happy lot?

A: More than that, this Budget was made for a long-short fund managers because some sectors have been seriously hurt and I think my biggest takeaway from the Budget is not that what was done for certain sectors but how certain sectors will be killed and I think rightly so.

I think that real estate in India overtime will crash like we have not seen and I think it is not unhealthy, it is healthy because look at it, if we say that we are going to be hyper serious about black money and let us look at Delhi where in addition we have Aam Aadmi Party (AAP) also saying the same thing and now we have the Centre - so let us find out all the places where this black money would go but nobody has put out what are the negative of catching black money. I think according to me both those negatives are very positive for the market and those are that black money goes only into real estate and gold. I don’t think black money is used to buy pizzas or buy some burger or something. I am not supporting those, what I am saying is in a big picture sense the biggest beneficiary of black money in India was real estate and gold.

When both these get hit and real estate much more I would think because it was local rather than a global price, the beneficiary of that also will be the stock market and capital flowing into financial assets and stuff like that but I think it is very seriously negative for the real estate sector.

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We are delighted because I have no complaints because we like those stocks, the private banks, the consumer which pays full taxes or private sector banks which have this technical help now or non-banking financial companies (NBFCs), so I am happy. I was saying that the only thing which you say is a bit negative - not for me but in general for the market as such - is that you don’t have a new attractive sector to come into the mainfold. It is old sectors which were doing well for various reasons not necessarily by somebody deliberately trying to help them but they have been helped and so we don’t mind because we never like the metals or real estate or restaurants and stuff like that and all those will have much more problems now and gold.

Latha: Where does the investors attention go now until now there was this transformational Budget, which was helping rerating of India, now do you think we should now start looking at earnings and therefore is India’s outperformance at risk? Global markets are on a high so we may continue but maybe India’s outperformance is at risk hereon?

A: No, I don’t think it is at risk. I think the only thing you can say that it is at a lower level than last year but it is more of the same. That means some companies will keep insisting that there is no change on the ground and the investors will keep ignoring it but in some sense the outperformance will continue to outperform but at a macro India level, I think the earnings valuations all that are not high and please don’t go by one quarter. We have these 30-years or 100-years history of stock market, nobody looks at a quarter, they look at big picture, and then the conference happens. Why was Nifty Futures up today morning in Singapore - primarily because the market was up on Saturday. So these things of day-to-day doesn’t matter.

The point in a big picture sense is that the overall valuations of the market are not high and the government has done good stuff on macro India concept. It has not specifically helped one sector. Even though I am also negative as you know for 20 years on state-owned banks, philosophically all that you are debating and everybody in India wasting time is that USD 2 billion have not been allocated to PSU banking sector recapitalisation because they are saying some Rs 7,000-8,000 crore should have been some Rs 20,000 crore. So are you trying to say that this whole country and its performance and the market and foreign investors will stop because for the moment, USD 2 billion out of USD 200 billion or whatever USD 60-80 billon Budget have not been given on that.

We pushed things as they are, I am not saying - I am also negative on state-owned banks. What I am trying to say is we overanalysed these things and the big picture is that India is in a sweet spot and the Budget would have had to do many more things to shoot itself, it didn’t do anything bad, they have just helped one-two sectors, like for me they didn’t help the housing sector by giving some incentives. So okay for one day the stock will -- I don’t know how much it is up today or down - but these are not going to change India, India is on a positive tone and undertone and the Budget has done nothing to hurt it in anyway so it will continue, outperformance will continue.

Sonia: Since you did mention that this Budget didn’t have anything new sectors to look at, how do you approach the market, do you continue to remain bullish on the sectors that you were bullish on like private sector banks?

A: For us, it is private sector banks because of now of course additional help, NBFCs additional help, consumer additional help in the sense that over time these are the guys who anyway paid 30-35 percent tax and what we never like real estate according to me are hurt very badly, gold very badly hurt, telecom badly hurt, metals in a sense neither here nor there so badly hurt, we like autos so neither here nor there, so we will continue but broadly what I am saying is it was made for a long-short kind of a fund manager, so I am very happy but in a big picture sense it would have been better to give even though I am short state-owned banks give them USD 2-3 billion, throw it at them, let the world move on now at least the world when they want to be balanced, they say Budget is good but you see state-owned banks have not been helped but the absolute amount is USD 2 billion which can come up.

Broadly it was adequate Budget to move us along, maybe it could have been little one step higher, my bet was before going to the Budget was different that they cannot hurt the market.

Latha: The service tax - we are getting some details and this was always in the works, these are statements coming from the finance minister and it says there will be service tax enabled provisioning in the finance bill to levy service tax on all services provided by the government to business entity, so services provided by the government could include coal and spectrum auction. So those also will get service tax, there is also a chance that there will be an additional 2 percent cess on services and that could mean 16 percent for a lot of services, we don’t know that just what that list is so 14 percent even on coal and spectrum auctions plus another 2 percent we don’t know that cess will apply on which kind of services, that list is yet to come. So therefore would your list of negatives include telecom companies in India as well wouldn’t consumption be crimped because of such high service taxes. So those who are depending on people to eat out pizzas and hoteliers Mainland Chinas?

A: Always negative but before that on telecom I would think that if you know before the auction, which is about to happen that you are going to pay service tax, I hope that much calculation people can do that therefore now they are bidding including a 15-14 percent or overtime 20 percent service tax. Broadly speaking other than these coal guys and on that also look at the market, we pay extreme amounts of money to the government and people said that everybody has benefited, how can it be.

So when you pay, you are paying a contractual amount but what you are supposed to get back is you have to either pass on to customer or consumer which may take resistance or you have to get it back from government allowing you back and nobody taking it to court but we don’t look at the negatives and I think they were not negatives but sufficiently negative impact on some sectors, which according to me is positive for India. I think that high real estate and high gold is a negative for India.

Latha: Leave us with some numbers as well, what kind of levels are you now looking at in the market as well how should we ride at all other than private sector banks?

A: I have given you all my favourite sectors. My thinking is that the Indian momentum for the stock market was already up and the Budget had to be extraordinarily good from a stock market point of view or extraordinarily bad to spoil that slope. Maybe the slope is a little bit here or there because some stocks may be hurt more and some will be helped. The Budget is good but it obviously clearly does not uniformly help all sectors. It is just up to a point our luck that we like those sectors because this technical issue of foreign ownership and all, we never thought of these things.

Sonia: One more sector if you are looking at to the upstream oil companies, the government has budgeted about Rs 30,000 crore for oil subsidies and some of these companies like Oil and Natural Gas Corporation (ONGC) are moving higher today, any thoughts on how to approach it?

A: Commodity plus PSU is more untouchable than commodity or PSU.