Samir Arora, Founder & Fund Manager, Helios Capital in an interview to CNBC-TV18 talks about the latest happenings in the market and the outlook going forward.
Below is the verbatim transcript of the interview.
Anuj: What are your thoughts on the kind of phase that we are seeing in the market?
A: In general, I would think that if we look at big picture, we have CNBC anchor/advisor Larry Kudlow basically fighting for the low tax base in the US and being Donald Trump supporter and we have your Indian CNBC anchors fighting for higher long-term capital gains (LTCG) tax and actively lobbying for it. That has come through and basically in the last month, we got saved a little bit because on the day of the Budget, we became very negative on the basis that this LTCG was a wrong thing to do.
Now since then because we had shorted and sold whatever, other things happened like Punjab National Bank (PNB) issue and then maybe for a few days global volatility. So in that sense if you look at it, India has done better than I would have thought because any one of these reasons could have led to this 7-8 percent fall in the market. Whatever be the reason now, some part of that has played out. So we go back to being a normal boring market rather than either a very bad market or a very good market.
Surabhi: We were not routing for any form of tax, we were just reporting. Since we last spoke to you on February 2, you were calling for underperformance in India, now that has come through for one reason or the other. Beyond LTCG, I want to straightaway get to banking and what you have made of whatever has transpired in the last month and a half?
A: I think that is a very big negative. It is bigger than LTCG and it is bigger than any normal story that there is political uncertainty in India and all that. If you look at what the RBI governor has said today, he is saying that this pressure that they are now trying to put on banks is like churning of the ocean and he is using a churning rod. In Hindi if you call it a rod, it is a danda, so he is saying I am giving danda to the banking sector and this danda will continue till Nectar comes, as some mythological story goes.
However, the bottomline is that Reserve Bank of India (RBI) itself recognizes that some of these things were wrong.
For example, the RBI governor says that there was collusion between banks and promoters. He is saying that the bank management or lenders were colluding, which cannot be meaning one individual in some Bombay branch. When you say lender, you cannot be talking about one individual in one branch. So if the RBI itself is feeling that these things were so wrong then we cannot say that – then he is saying that this churning will continue.
We have a very easy decision, we don’t bring our ego to the market, we don’t have to look for counter consensus trades or the contra trade just because that somebody else in some market egoistically had a trade like that -- you remain negative or stay out and enjoy life.
Anuj: You have always liked HDFC Bank at every level and that is the stock that has made you the most money. Do you get a sense that this is another incremental opportunity to accumulate private banks and they will now garner more market share out of the PSU pack?
A: Without any doubt and without having to ask anybody. It is so obvious that first of all – and if you are doing well when everything else as in competition had some hope -- for example, I feel negative on one point related to this issue other than what RBI governor himself confirmed is that the hope that the government does not become hyperactive in trying to find a counter narrative or catch people.
For example, this letter of undertaking (LoU) – who would have known or bothered about it two or twenty days ago. Now we find that it has been on since 1991 and to scrap it in 10-15 days -- I am not 100 percent sure what analysis, what is the exposure, how many banks have it and what happens to those borrowers or those exporters, it cannot be that all of it was just arbitrage between a rating of a bank versus the rating of that individual and if it was such a disposable item or expendable item or a product, why it was never reviewed in the last 27 years.
So, some of these things we are used to doing these things to throw out the issue itself, our regulatory things become – 'na rahega baas, na bajegi baansuri'. So they will say that some people have done round tripping if at all because nobody tells us which fellow has done but suddenly they will scrap the whole P-note swap programme where you could access futures and because they scrapped that, suddenly, the Singapore exchange came up and said that I will give you that opportunity then you had to go and cancel or try and fight with that.
So in the same way today, the economic advisor Sanjeev Sanyal said that we should not throw out the baby with the bath water. So that is a big issue that we have – now not try and catch people or scrap these things or generally make it more uncertain than it was or generally where business and life is uncertain, this makes it a little bit more sort of urgent in terms of time period that if they do all these things so fast, how does that sort itself out.
Surabhi: I guess, three issues with the respect to banking – one we have discussed, the PNB fraud. The second is whether the extent of additional provisioning and the additional NPAs that will be recognised because of this February 12 circular, whether that has already been priced-in even in some of the private sector lenders like ICICI Bank and the third is what is happening with National Company Law Tribunal (NCLT) whether the banks will recover some money or not, your thoughts on the latter two?
A: On NCLT, first round, I assume that the way these companies were chosen and the sector was chosen which was mostly steel, they were expected to get better recoveries, higher recoveries than normal otherwise you would have done the other sectors first, so the first round, some of them have gone well but I don’t think that can be projected for every case that will go to NCLT.
Plus now they have also announced whenever they announced on Budget day or after that that after all these cases you will have to take to NCLT and give some 180 days and everything has to be provided upfront, not provided but in a sense accepted upfront or recognised upfront, I don’t think that our systems can also handle and how many bidders will be actively roaming around day and night. We don’t have such infrastructure or capacity to do so many things simultaneously or in a short period of time. But the first round has gone, I would think relatively well.
Surabhi: February 12th circular which you spoke about, the fact that there will be a lot of additional recognition. So coming down to stocks, do you think there is value given the huge price fall?
A: No, which value. I was saying that I do not work so hard that I have to figure out whether things are priced-in or not priced-in. We have seen for five years people trying to price in that Reliance is coming into telecom and therefore it is priced in and therefore after five years there will be only three telecom companies left, therefore it is priced in.
For 20 years I would have been telling you that HDFC Bank is a great company and still not priced-in. We just agreed. Nothing is priced in. What is pricing in means because every day a new thing happens. We have just agreed that the RBI Governor is saying that it is no over that I am going to give you a bigger ‘danda’ than you have seen. We have separately the government saying that for every Rs 50 crore NPA please tell me that whether it is fraud or not. Look at the bank -- on what basis will he say it’s not a fraud then you will catch the banker after few days if you find a fraud by mistake or by chance or maybe another bank for the same NPA says it’s a fraud or not a fraud but a possibility of a fraud. First of all what is a fraud also we do not know. If somebody has overly projected his numbers, not because of malicious intent but just because he was a bit more optimistic and you find that he underperformed, so is that a fraud or not a fraud we do not know.
Why in the middle of this to prove something that we analysts and we work hard for our living. Why cannot we live life more peacefully and make higher amounts of money. Buy private sector banks and enjoy life. It will be sorted out and then somebody will buy and we will pat him on his back and say good show.
Anuj: In your funds, where are you right now in terms of long shot. We have seen a 10 percent correction from the top now. Do you see another 4-5 percent?
A: I do not know about 4-5 percent but generally we are a bit low now. At one point we were about 40 percent net, our average long-term is 60 but that happened because of Budget and it was done. We don’t normally short the index but on the Budget day there was no time so we shorted the index in a reasonable way and now we have covered some things here and there, so now our net will be something like 47 or 48. We will go back to the normal 60 but there is no dying rush.
If I feel left out of anything, I will cover but otherwise I am not going to preempt because what will happen on a day when it goes up 2 percent. You can analyze what has happened to the world. There is no urgency either way but we are still buying a little bit here and there even today we bought and we are shorting little bit here and there, but I am not moving the 48 up so easily but just because it is there, let it be. It’s not paining me either way.
Anuj: You normally do not evade this question in terms of is there more correction for this market, for example can this be 15-20 percent correction. We have had in the past, bull markets where markets have corrected 15-20 percent?
A: It could be. I no longer after 2008 say that we are god’s gift to mankind because we are not. I do not evade this question but I also do not evade the question that we do not know. We are not arrogant enough to know because things like trade war or whatever, if you read anything you will realise that the 1929, the whole world crisis or crash came because of trade wars. So the trade war word is very bad.
Yesterday, I was there or a day before because I am so confused, so many meetings that Trump says that we will now have tariffs of USD 65 billion of more goods from China basically in telecom and some electronics or something. I do not know what the Chinese will do and back and forth, there will be this mess. And in itself we may not have bothered, not realizing what it means but because the biggest crash ever happened because of trade war related reasons, you cannot get excited today; you can play it out. We are not out, we are not fully in. If it goes 5 percent we will relatively underperform by 2 percent. It doesn’t matter. All I feel is that today neither way there is too much urgency.
I heard when you guys were talking to Ashwani Gujral, he said that this is like a narrow range. In a sense I do not use those words of technical but broadly it means that that right now it’s neither here nor there and there is nothing much to preempt in this. So it can happen and you can go along. It’s not going to go up 20 percent that if somebody doesn’t invest today what a golden opportunity he would have missed. It’s an okay market, good market. Over a time it will deliver but nothing that is happening in the next 15 days that I should get hyper about or even longer maybe.
Surabhi: Does Gujarat excite you at all? The point is that what do you think of this entire business of Indian exchanges not sharing data with SGX and now we don’t know if there is some settlement happening. MSCI coming and saying we will reduce India's weightage because this is not giving fair market access, your thoughts?
A: The thing is that in the end, the fact that the Indian government or the regulators want the international exchange, that means first they have accepted what I have been saying for only 10 years and particularly before this Budget that foreign investors don’t pay taxes in other countries.
So by having that exchange, therefore if I do trading there whenever it becomes active and I am doing futures trading there and I am not paying the business income or that 33 percent tax or I am not paying STT, that is exactly would have been better if they had done that in Bombay itself so that the Indian public also doesn’t pay the same taxes.
Finally, they have accepted the fact what I have been saying that foreigners don’t pay taxes in other jurisdiction except that they are breaking the market into two.
So today – means in six months – when the Singapore exchange, their time runs out in August, they have already said that they will try and do a product along with NSE but whether they do it or not – I don’t care but as long as somebody has moved to Gujarat and is offering that facility to foreign institutional investors (FIIs), all the FIIs for that part of the business will move to Gujarat and Gujarat would have taken that volume not so much from Singapore but from Mumbai, from NSE and Bombay Stock Exchange because there is not so much outside other than this one index.
So, I would be very happy because I get what I have been saying that we should get which is no tax on the trades. However, I think from an India point of view, it may be slightly negative instead of positive. In the sense that now we will have two exchanges or whatever but more than that the Indian public will see that in their own market some people are not paying these taxes which is me and some people are paying. Right now, it was not so visible and therefore there was not so much pressure or this disparity or whatever is the word, so by bringing it home, I think overtime whichever government, not now, maybe after five years, the government will basically let all these things go for the domestic public also because every day they will see that when STT is increased, I am coming on your channel and saying, it is very good, it is very healthy for tax collection knowing that I am not paying it.
So I don't think it is bad in any way for foreign investors if this works. Domestic guys will feel bad and therefore overtime they will have to reduce it for them.
Anuj: This year we have been amongst the worst performing markets, of course you would ascribe domestic reasons as well but I am looking at MSCI Asia ex-Japan for example which is up 4.5 percent, MSCI emerging market is up 5.5 percent, while we are down about 4 percent. So almost of 10 percent of underperformance, you reckon we can correct some of it or do you think we are starting a bit of a trend here for the year?
A: No, I don't think it is a trend because if we go back and say that LTCG – I firmly believe that alone is worth 10 percent underperformance because you put a 10 percent new tax, now you could have said at the end of January that 2 percent was already known, discounted – so 7-8 percent but because of this PNB thing, I would say that plus-minus and other 3-5 percent relative underperformance.
When you ask a question whether the market correction is only 3-5 percent, previously on February 1, there was no PNB, there was no trade war, there was no Rex Tillerson being fired on a tweet, there was no Gary Cohn leaving who was supposed to be very pro-Wall Street etc. So I don’t think today you can say when the world is so exciting that in the sense that it will go up a lot but please let us not become negative.
The equity market, the first starting point for a new investor or even an existing investor and particularly existing investors who have made 40-50 percent return in the previous year is that they will not lose a lot. I don’t think we are going to lose a lot by hanging around. I don’t think it is some super negative today.
So, for new investor, it is okay if he is starting now and slowly taking time and for the old investor, he is consolidating and he may have lost –actually year-to-date Nifty is down less than 2 percent. It is only the midcap index which is down 8-10 percent. Therefore, broadly speaking, you are within range and this 4-5 percent that you said India is down, out of that 2 percent is currency which the local investor is not feeling. So for a local investor MSCI India in rupee terms is down 2 percent. So how much analysis we should do for this 2-3 percent up or down, it is broadly okay is the answer, neither here nor there as I said.
Surabhi: That means that India is not going to lose its premium because of this PNB issue? That will be good to hear?
A: No, India’s premium is not coming for these issues, India’s premium comes because we have different kind of stocks. We have stocks like multinational subsidiaries, we have stocks which are low capital intensive, we have a pharma types where there is no earning but right now the P/E would be high. In general, we don’t have as many oil and gas companies in our index, we also don’t have public sector undertaking (PSU) banks in our index in any meaningful way. We have HDFC Bank type of stocks in the index and therefore our sector to sector – I don’t think we have a big premium over others. Our premium comes from the fact that we have higher concentration or weightage in sectors themselves or groups that themselves have high P/E.
So if you look at steel to steel, consumer we have higher than anybody else. Other than that I don’t think we have separately very high relative valuations to other markets but this is more to do with these kind of companies that we have.
For example, technology today doesn't have a very high P/E but it has much higher P/E than Samsung Electronics which has 8 P/E because there is a capital intensive spends USD 8-10 billion a year on capex, of course these days it is doing well in terms of cash flows and everything but generally it always traded at 8 P/E and at worst our Infosys would trade at around 14-15 P/E. So it is okay. I don’t think the relative issue is there.
Anuj: IT has made a big come back, in fact this year if it wasn't for IT index perhaps the market would have been down far more. Do you think this is just a correction of the massive underperformance, just catching up of valuation or is something changing for Indian IT?
A: On a relative basis it is changing. We also bought 4-5 percent in IT, which we were zero for one year and negative for previous one or two years but in general it is not so much to do with the IT. It is to do with the fact that now I feel that there might be a risk on the rupee in general because we are not used to having the rupee at the same level for three-four years, from 2013 end, it’s at about the same level and in general more issues related to India and I agree with a little bit of the fact that TCS and all have won massive contracts.
Then you saw day before yesterday in an accelerated offering which may have given warning to the investors or maybe two-three days, FIIs were otherwise net sellers, suddenly came around and bought maybe billion dollars in one day. So in general because of not knowing what to do on this side, we have also a bit tilted towards IT. I am not 100 percent sure in absolute how much we will make but relative outperformance could continue for some time till the Indian side recovers, the local side that is.
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