Indian market can correct 5% if global markets fall: Samir Arora

The Securities and Exchange Board of India (SEBI) on Thursday tightened participatory notes (P-Notes) norms by imposing limits on the transfer of p-notes and seeking more disclosure.In an interview to CNBC-TV18, Samir Arora, founder and fund manager of Helios Capital Management, said this won’t be a genuine issue for regular investors because foreign institutional investors (FII) using P-Notes meet the norms. Now new P-Notes will be issued only after FII standards are complied with, he said.Further, Arora said money that leaves India is unlikely to come back soon.  Meanwhile, he believes that Indian markets can correct 5 percent if global markets fall.Below is the transcript of Samir Arora’s interview with Anuj Singhal on CNBC-TV18.Q: You are very popular back in India. One thing which stands out which a lot of people ask me is, first thing you have to ask Samir is that he has stayed in New York, stayed in Singapore, stayed in so many places but you have still maintained your Indian Punjabi accent, how have you done that.A: My thinking is that there are some people who change their accent because they are going to the airport to receive some relative in India and by going to the airport they change their accent. There are some people like me who have studied abroad and haven’t change. One reason could be that I went late in life to US. Also my job has always been India related for 20 years. So, talking to people in India all the time, I have had no need to change even a few tones or something.Q: The other thing that I have found out about you is that wherever you have gone, you have only loved Indian food. You even now can only eat Indian food, is that right?A: I would like Indian food but I can eat Thai, Italian and may be Mexican food because that is what I have some angle which I have had in India. However I am not interested in searching for new food and new places, when I go travelling I am not trying to find new restaurants, I am trying to find maybe new places.Q: What is your daily routine? You stay in Singapore where quality of life is high. You have everything at your doorstep in terms of whether it is fitness equipment, whether it is good quality of food, whether it is good public transport or private transport. So, what is your lifestyle? How do you normally go about it?A: Lifestyle of a fund manager generally is much more defined than other jobs. I am in office precisely at maybe 9:20am and I leave at 6:01pm because the Indian market closes at 6pm Singapore time and at 6:02pm I will not be there. Some of the other guys in the team are there because they have to calculate the NAV for that day. To go home or to come to office it takes less than 20 minutes. So, after that there is a lot of extra time relative to other places where you would not leave precisely at a fixed time. So, yes, we do many things including - I read everyday a book, not magazines or newspaper which is anyways part of the job. We see English movie, serials or even Hindi movies, we walk for about 40 minutes.Q: What is the latest book that you have read? I know that you are an avid reader. Anything in particular?A: Right now I am reading two books. I am reading, Misbehaving by a guy called Richard Thaler who founded behavioural economics. Basically saying that in economics people say that this guy is rational, he maximises his returns but takes care of his risks, which he says is all non-sense. His book is about how you are not behaving inline with what the economics theory is. So, his argument or his stream, he is sort of a founder of that theme. He is a University of Chicago Professor.The other one I am reading is Tavleen Singh's new book.Q: It is important for fund managers to read a lot?A: I think it is super important. The whole idea in our life is to connect. There is no value in a fund manager trying to find new information about a company or EPS because that is not making any difference to anybody. It doesn't matter that I thought that the EPS should be Rs 820 but actually it turned out to be Rs 840 or it was A but I have a feeling that it will beat it by one cent. It makes a difference once in every 50 stocks because there might be a very big turn in that companies life but generally speaking if you are talking about a portfolio, in 95 percent of the cases it does not matter whether it is one cent higher or lower.Reading is part of thing because I can sit in my office and I connect that this thing has happened there or this thing happened in the past or that this thing is logical or illogical. So, right now one book which I tell everybody to read which is scary book is Rise of the Robot's. It is basically not about robots but it is saying that the jobs will be more and more difficult  to have and automation will be big and big.If I look at a big picture sense why has Infosys done well in the last 2-3 years? Because Vishal Sikka has been saying these things for two years. I read it may be 6 months ago but he must have read the book two years ago. If you have read the book, you would have connected with it much faster, that this is the new change that what you can offshore you can automate. So, you have to know about these things and you are not going to think of them by reading newspapers in India.Q: Do you think Infosys has well and truly turned corner? It did not do anything for so many years, TCS became almost three times of Infosys, now things are changing a bit.A: I do not know. We own it, but I do not know whether it has turned the corner, but the point is in a market, most of these big guys are always doing adequately well or reasonably well. But the market fancy becomes for something that you do, either you talk better, you disclose better, you give some strategy which may not be yielding fruit then and there and you have to take a bet. And then that gets reinforced for a few quarters. So, actually if you say turn around, we will not know but the stock is doing well because recent returns and recent announcements have all been reinforcing each other.Q: Someone told me that you genuinely think that robots will take over the world one day.A: They won't take over the world one day but this book will convince you that they will take over many of the jobs and the problem will be that the guys who are controlling upto a point these robots, they will still have jobs but many jobs, journalism jobs, analysis jobs, private banking advisory jobs, these are already being done according to this book in different places. I read the latest book and I get convinced because it looks logical to me. For example there is a story there that burger making - the Americans have already made a machine, it is already out there, it has not gone across the board but it is there. So, now just the presence of that machine means that you can negotiate better with the employees saying that I can substitute you with the machine.There is an example in the book that these robotic apps or whatever it is, they can create stories every 20 seconds. If you want to populate a website with new stories, with breaking new stories, it will pickup things from the net and it will write a story as if a human being has written it. It is not really for in-depth journalism like interviewing me but if you just want to have a site where constantly news is getting updated, that news is being not written by anybody but just by automation.       Q: I believe you are an avid watch collector. How many watches do you have?A: I have maybe 10. These watches are not simple watches. You have to buy them when you are in a good mood. The last one I bought which I called the Modi watch is because the money made in 2014. It is a A. Lange & Söhne Zeitwerk, these are high end watches. So, 10 is a big number but it is not that I am right now going to buy another one as if every month I buy or every year I buy but yes I buy.Q: What else, sunglasses?A: No.Q: What is the most stupid or idiotic nuance that you have heard? For me what I hear is that earnings have missed estimates or earnings have missed consensus. It is the consensus which is wrong not the earnings missing the consensus.A: There are many things. For example on days it is announced that one company say CEO has been raided, CEO has been arrested, say you found blackmoney  in his office, say you had a corruption case charged against that company, massive trading happens. Who are the guys who buy that day? I want to understand the guy who buys a company because some government is about to come to power and that one particular company goes up say 10 percent, so what is the thesis of a fund manager buyer that this government is going to blatantly help this company? It could be that somebody is arrested or it could be somewhere they find cash in somebody's office, who are the guys who buy saying don't worry this is India, this will get suppressed? Why do the guys things like that for buying? For  selling guys it is very easy that he doesn't want such companies. However somebody comes along and has massive trading on those days, so what bet is he taking? That these things are normal, these things should not be counted, I get very upset with the fund manager guy who has a job, who is doing it for other people, who is betting that if some corrupt practise has been found, I have discounted it because it will take 10 years in courts, that kind of attitude I don't like, that's what bugs me the most.      Q: We attended one of your presentations yesterday which was quite phenomenal, I must say. There one topic which came up was this was already discounted, after the event you say this has been discounted. What is your call on that?A: My thinking is that nothing is discounted. The companies that are doing well today in India or in the world, let's say Google, three years ago what would you have said about Google? It is a good company, it has search dominance. Today also you will say search dominance, in between once in a while you will say is that search dominance on phone or is it on computers but let's come to India. See the private sector banks, of course we have again broken them into two private sector banks which were lending to retail. Let us talk about the retail first. What has changed? Three years ago we would have said HDFC Bank is private sector, it competes with public sector, it has good employees, it can motivate. Now also you are saying the same thing although the earnings has gone from 30 percent compounding to 20 percent, but because 20 percent is also good number relative to our market or any market, so what I mean is that for a day or two some negative news can be discounted. However a good company which is growing 20-30 percent per annum, you cannot discount it so easily unless you feel that in the previous 2-3 years or some period whatever you define, if you feel that the stock price has gone up much more than the earnings.  However in most of these private sector banks I feel that mostly they go up in line. If you look at annualised returns from these stocks and the annualised earnings growth of these stocks for the last 5-7 years more or less they will be similar.There are many examples where because of what happened in 2014 where everybody who bought midcap suddenly thought that he is gods gift to the midcap world, there the stocks went up 60 percent per annum and earning were growing at 20-30 percent per annum which was a good number. However those stocks we sold and we would think that difference is easy to see. Otherwise I don't think anything is discounted.Q: You will never sell an HDFC Bank? I mean the earnings growth has come down from 30 percent to 20 percent. It will not generate that kind of wealth.A: I will sell one day when it properly disappoints us on some issue. But the point is, that day it will not fall a lot according to me. Because new people will come in and say, this is my one shot, so I will get a chance to evaluate that day. I am not saying that I will never evaluate it, but there is no need for me to pre-empt any such things, because they are on a good track, good wicket. And it is not one company. I deliberately always use HDFC Bank example, because anyway the whole world knows that I own it. But, we want to own similar companies, not of this consistency because we have not found, but similar companies where you feel there is high confidence that you will make a reasonably good return. You will not make the highest possible return, but the confidence is higher on making a good return.Q: The other thing in market right now is about Tata Motors versus DVR and there are a couple of more DVRs. Historically, Google’s DVR is trading at par with Google. In fact, at times trades at a premium. Now we have the Tata Motors DVR also being part of the Nifty also, still there is a discount of 30-35 percent. What is that explaining about the Indian market.A: According to me, it does not explain anything, because this means that Indian corporate governance is higher than US because we as a market are valuing the vote so much, not realising that in other companies, we have never voted. We do not own either the Motors or the DVR for different reasons. But in general, I would say this is, in a sense, the Indian markets belief that the vote is so important, which I do not think it is in an Indian context because nobody was listening to you anyways. Nobody was bothered about your vote anyway.Q: It is a Tata group company, right?A: This makes it even worse, as if the Tata Motors have the worst, that they will misuse. I agree with that, again I don't own the stock.Q: There is some global headwinds which are emerging now. Again some noise on Fed hiking rate in June. The minutes were quite hawkish. You think that could change things a bit going forward?A: In the very short-term, it could, because if they have to do a hike, they have to do it in June now, although the probability at least day before was 35 percent or something, I do not know what happened yesterday. But, right now it is, because after that, I am not sure whether they formally accepted, but it will come very close to the election time and somebody will say that you tried to help A versus B. So, June, there is a little bit of a probability, yes.Q: I take your point, but if we have a fall, 10-20 percent fall in emerging markets or in India because of a rate hike from Fed, do you think that will be more of a buying opportunity?A: Please, 10-20 percent is not a normal fall. 10-20 percent will be a major negative.Q: 10 percent would just take us back to the previous lows.A: But I do not believe that we deserve the previous lows.Q: Okay, let us 5 percent.A: 5 percent can happen. Already 1.5 percent happened yesterday along with currency. I think it is generally a good opportunity because India cyclically  is turning and that is the key part and rains have to come, more important than what happens in US. If you see the earnings of this quarter, if you do non-financial, ex-financials earnings was not bad. In financials it is bad, clearly we know why it is bad. It is bad because of provisions made by state owned banks. So, that is known and separate. However if you look at the ex-financials I read in a report some 50 percent of the companies had reported by that time and the earnings were just 15 percent and with financials it was some 8-9 percent. All the indicators are up MHCV sales, power and  airport business and ports handle, cargo handle, so I am very okay okay bullish. I am not negative.Q: A lot of your bullishness is premised on rains being good right. We have had two bad years of monsoon now we could have a third year of bad monsoon. I mean the hope is not a data point?A: No, no, it is a data point because its being raining in Singapore for the last few days. There also they were serious and the main thing is that now actually it is raining in Chennai, so why we have hope and when two agencies whether they have track record, I don’t know generally okay Met or Skymet whatever the Indian department they are also saying. You are only one or two or five days away, cloud are already there no, no it won’t rain, why it won’t rain it will rain and should rain and we will pray that it rains.Q: Let’s talk about some more issues about your life. Any regrets about the way things turned out with Alliance and the fact that then you and partners had to start Helios?A: By the way I must tell you that my Helios partners are Alliance people, so Helios is not owned by me alone but 3 people. The other person was a chairman and CEO of Alliance and the third person was chairman of Alliance India, so with Alliance it is the old guys who knew what was happening and they are the partners, so regret relative to Alliance. Otherwise, of course it was a tough thing what happened between Alliance and Helios, but much worst things had happened to many other people who deserve it less, so now that it is over and been a happy ending and our fund has done well and we have got from my previous life these two partners, so in a world I can say that insiders are there who knew and get off.Q: We went through a brutal fall on 2008 where your fund also took a big hit, of course, it was massive financial world got turned upside down. Have you recovered enough or have you gone back to the peak, where are you right now?A: So what happened in 2008 was very bad for us, it was bad in line with others, but it was much worse for us because we are supposed to be shorting stocks and protecting more, but because of changes in the laws where for 7-8 months you could not short because you had to go from a P-Note owner to foreign institutional investor (FII) which is what we are now, so for 7-8 months you couldn’t short stocks. So in performance we have well and truly recovered, but AUMs have not recovered because in 5, 6, 7 it was like above the world, but we have recovered enough to be able to have credible story with the investor that over 10 year with or without aide we are pretty good.Q: Let’s end the show by talking about some light things. What’s your favourite holiday destination, is it Europe someone told me that you like a Europe a lot?A: No, no I like but three consecutive years we are doing Europe including this year, so Europe is good but next year I am going to US because Europe now three years mostly every country has been covered, not every place but three in a row is a good enough, but is very good. Of course Europe is very good.Q: I am feeling jealous because I know you are going to watch the French open final, so who is your favourite player?A: I am going to see women final and men’s final and men’s double final.Q: Who is your favourite women’s player, who is your favourite men’s player?A: I want Nadal to win.Anuj: What do you make of the P-Note issue?A: I do not think there will be a genuine issue for a regular guy because my belief is, because we are foreign institutional investors (FII), we also use P-Notes, so we anyway meet the FII standards because we are FIIs. But, I thought that people who now do P-Notes, generally have to have plus-minus near FII standard of compliance before the P-Note issuer is willing to show them P-Notes. So, maybe once in a while there may be.The second is which I heard just today morning is the selling of P-Note by that guy who has bought it. Like, suppose I buy it from Citibank, whether I will sell it. I have never heard if it. Because normally you give it back, not give it back but you will ask Citibank to sell it. But, if that is being checked, that is a well deserved check, because I cannot even imagine why somebody is selling it forward to somebody else if he wants money instead of giving it back to the guy who issued it and asking him to sell it back in the Indian market. So, that I am not sure is a big thing, but whoever is doing that looks a bit shady to me.Q: There is a lot of emphasis on round tripping like what is happening and we want to curtail that.A: That, I do not think we can curtail with this, because my logic is that if money has left India, first of all, I cannot imagine that the money that leaves India, desperately wants to come back because the people who take out money are not really stock market guys.Maybe, 10 percent, let us say are corporate, but the rest are export over invoice or import over invoice, under invoice or it is some pay off or it is a bribe or it is a defence deal, those guys are not so much interested by stock market after they have got money outside or with great difficulty have taken it out of India.So, maybe the corporate sector has, or owners of corporate and maybe they are bringing back something to support their own company. I do not think they are going to buy the index.So, that money cannot be very big. But, this is not going to stop it. It may tax it, because if they come back and you have not found them out till now, and you ask them to pay tax, they will say okay, take tax. That will make them even more credible later on that for five years they have been paying taxes. So, this may tax round tripping money, but it will not catch round tripping money.Q: And I will not hurt that money to be taxed a bit.A: But that money is let us say, 10 or whatever percent you say. First of all, it cannot be very big, because in the last 10 years, we have not been told of a single example, where somebody was caught doing it. Somebody will say there is something wrong here, but at least tell us one guy who used it and give us his story why he did, what did he do with that money when he brought it back, so then we can relate, same thing happened in some other company. Right now, I say we have not found even one example. So, how can we say it is a lot? Normally, sample should drive what you think about the universe.Q: Anyway, from SEBI’s own order, the offshore derivative instruments (ODI) percent has come down from 57 percent in 2007 to what it is right now.A: That it must have, but why use? We are also FII, we use because we need leverage. Suddenly an initial public offering (IPO) comes and in that IPO, if you apply for 20 million, you will get one million. Thirdly, suddenly, you want to buy something. If you are an FII, if you want to buy, you have to first send money to India. You may that day, not have been thinking of buying, but the market fell a lot or went up a lot or whatever, suddenly you want to buy. So, this flexibility.But for other people who are not even FIIs they do not want to have an Indian tax code, an Indian custodian, deal with Indian chartered accountant, they just want to pay 10-20 basis points extra and that does not mean that they are hiding from India, they are hiding from having to do these things. It is nothing more than that for a large part, but not for everybody of course.