ET NowIn an interview with ET Now, Samir Arora, Founder & Fund Manager, Helios Capital, says with the second round of reforms, financialisation and formalisation really remain the big picture themes despite the slips and frauds.
Edited excerpts
Should I introduce you as someone who is still a India bull, someone who is now cautious about what is going on or it does not matter, India story will roll on irrespective of Trump and oil?
You can say that I have become slightly more bullish. I was very bearish last three-four months.
Why have you become slightly more bullish? Is that largely because you are confident of earnings or have the prices come down to reasonable levels?
That is because we did our shorts so well. We have covered many of them including some of the state-owned banks. It is not that we think their life will ever improve, but 30-40% look more than enough. For the moment, our net has become higher mostly because we covered many shorts. You are right, it could be that at the back of the mind we are thinking people will focus on results and for both US and India. may be excluding these banks. For banks, mostly the results should be good.
Is the heightened crude price just an irritant or is $70 the new reality that we are going to live with and the OMCs”will continue to fall?
Well, we do not cover all our shorts and so those are okay. But in general, it is more difficult for oil except that I don’t believe that we ever had any reforms in the sector. Those reforms were only working when the prices were falling and never were really tested. I was always negative for the last many months but in general, I do not know about oil beyond a point.
I hope it does not go up too much but from a stock market point of view, it has not been proven that rising oil prices are immediately negative for the Indian market or for that matter any market because it comes with other issues.
Now if normally oil goes up because of growth, it is considered a positive, at least in the initial phase. Now if it is happening because there is tension or more to do with tension between Middle East and US or US and Syria or Saudi Arabia, then it will have a slightly different angle.
Generally a few dollars here or there, affects those stocks but not so much the market.
What about banks? What do you do with ICICI as well as Axis bank? With management changes at one, are we at the trough of bad news? The stocks have fallen and they are cheap. Should one look at these stories?
We have many analysts in the banking sector but one analyst in the Reserve Bank of India. We should listen to RBI analyst. If they are worried and nervous, we should not jump the gun on anything. These are not normal times when RBI tells the banks and the boards what to do but if some analyst sitting at home thinks that he knows more than what RBI knows and what RBI has said in an unprecedented manner, then they are most welcome to their views. I rely on the best analyst at that point for anything and right now the best analyst for these stocks is the Reserve Bank of India which itself is nervous and upset and angry. So why should we jump the gun?
Given the fact that there is so much scrutiny around ICICI Bank and Axis Bank, how are you viewing the story from an investment angle?
I do not view anything as an opportunity. Why should we keep jumping into every event, every takeover rumour? Every news is a secular story which means when we buy, we hope it does not happen every time but we hope that now we want to hold it for two, three, four years and that will give us at least 30% per annum or even 20% per annum. We are not buying a stock because if I buy today, tomorrow it might jump 5% and after that, if that happens and the news is out I can also buy it, I can buy a 10% later as long as it has a long runway. So, we do not buy like this.
We do not overdo before an event and we like to buy after an event or when there is no event. I do not think we have made ever any money trying to buy on some event kind. Plus this is the last quarter. Look at for how many years, we have said the same thing for so many companies that this is the last quarter. The steel industry was doing badly and then they put in very big anti-dumping duties and that day the stocks would have jumped a little bit. Anybody could have made money five days after that and still made a lot of money when then everything was known. But if you bought it three days before thinking that now anti-dumping will come, may be you made 3% extra but who cares and may be it would not have happened? There is no need to pre-empt everything in life every morning.
What is your overall assessment of the banking situation in India primarily because so many people asks us this question every single day. Do you think we are in a mini crisis of sorts?
Oh! It is a crisis. Today they are saying that there was another loan to Mehul Choksi which was not counted. If it turns out to be true, it will be a disaster beyond limits that after three or two months, we still did not even know that there was another Rs 5000-crore loan which was not counted in the scam numbers. So, it is pretty bad.
As I said, I had backed out from the stocks because ultimately these are state-owned banks only. Nobody is thinking that they are going bankrupt! May be stock price will fall. If they are accounted for a relief, if they go into the P&L early, it is better, but generally the state-owned banking sector is really a mess. What else can you call it?
You have mastered the art of identifying secular stories. We have interacted for over two decades now and you have identified IT, private banks, pharma when nobody understood how to value a company like Dr Reddy’s and molecules they were working on. This is 2018, can you give me a sense of where do you think there is going to be a secular growth and a secular demand cycle which could be favourable for next two or three years?
In the early ‘90s, the reforms in India were related to opening the market to private companies and foreign companies and reducing tariff. It was very easy to say that do not buy existing companies which have been protected for many years and instead buy new companies that have come up in private sector. So, you could buy about Bharti or Zee or HDFC Bank and made a lot of money.
The second round of reforms which is sort of currently going on are related to saying that we should have more financialisation and formalisation of the economy. The unorganised guy or the guy who does not pay taxes will be hurt and the guy who is a bit organised will benefit and you will invest in financials. You will have more credit. The CBIL scores are there. You can give more money to small scale because there is no data. People will use data and things like that.
The second one is formalisation. That is currently the theme which will make you money till the third round of reforms happen when we privatise banks, Air India or reduce corporate taxes. That time we required those kind of companies. Today the story is very simple. It is financialisation and formalisation and all of them will go for a long, long time.
Then the third story will come in. So the best is still private sector banks because it has today the tailwind of the previous bull run story which was private companies competing with government and still at a new theory or the new reforms or the big picture of financialisation. That is why private sector banks and these two-three retails banks are absolutely the best even today. But you can buy anything in financial sector.
You can buy NBFCs also. I do not think it is such a big deal. You can buy wealth managers, brokers, asset management companies. This is a big picture theme and that theme is not going anywhere. During the formalisation, there is some confusion about whether the unorganised guy is right. Right now, in some sector they are dumping what they had produced for all the years because they did not want the e-way bill. But still, that theme has also worked in the long run. We are bullish on both these themes, very bullish.
What puzzles me is that why are Indian consumer names and especially consumer staple stocks trading at such elevated PE multiples. They were expensive two years ago. They are expensive today also. And frankly if I look at what markets have given a Titan or a Jubilant Foodworks or the kind of returns which we have of late got in HUL have been absolutely amazing. I am aware that these stocks are expensive. They are great businesses but not good prices. But yet someone in the market is really chasing these stocks. What is the logic here?
We do not own Jubilant. But even there and in say Westlife or whatever, you could have made benefit on the top line because of the GST deduction. These guys are paying about 5%,. There is not credit on the other side but it is a big deal.
Last quarter’s same-store growth for these guys was at 20%. Where did you ever get 20% growth and even though they are at 60 or 50 PE now, these guys have expanded well and they are profitable. Also there is a young population and there is this formalisation and then they got tax benefit plus there was a low base effect.
Titan and others are the biggest beneficiaries of formalisation by far. We bought it very late. But I do not think there is a bigger beneficiary in India than Titan from the market point of view. Forget about the PE part because you have demolished the competition. The third biggest company in India is saying that we sold fake diamonds! Who will go to any of these companies anymore? Therefore Titan having all the benefits of GST, being clean and now since the other guys were outright frauds – is a very big beneficiary of this trend. We also have made some 15-20% already. We said forget about the PE for the moment but in general, for some of them, it is a bigger gift than normal because of just the relative positioning of the one company versus the other kind of thing.
Metals they have had a good run so far in the upcoming season earnings season. Do you think they can deliver another quarter of strong performance?
We brought metals all our life. Although we own some steel stocks because we thought that their cyclicality has been drastically reduced because of very high reputation. Our biggest issues against cyclicality is that we cannot predict what will happen but you protected them so much that we do not have any moral issues. Otherwise we do not buy.
Tomorrow is Infy day. What do you expect?
Infy day is nothing. I think the bigger event would be Singapore Nifty which I am most excited about. Singapore India Index sorry.
What are your views there?
I think it is one of the most brilliant innovation that they have come out with. There is no underlying so nobody can fight with them. All they are saying is that on the last day we will give you the Nifty price. Let us see how the world accepts it but it is a contract with no underlying except that on the last day it becomes Nifty. It is a brilliant legal manoeuvre. Let us see how it works but it is very exciting and more than anything else, it is good.
How big is this SGX trading I mean when we spoke to NSE and BSE they said look it is a business decision. A lot of global trade moved out of Nifty to SGX but is SGX very important or do you think markets will adjust and nobody would care about SGX after few days?
If two foreigners have to trade in each other, why should they go to India and pay 30% tax. It is like we do a single stock. We do not use it as much but we just enjoy brilliant manoeuvres because we are analysts. We analyse many things and we enjoy and that is how we cannot survive in this world for 20 years because you should enjoy the business of finance and one party does the counter manoeuvres on another party. We are observers.
I remember we had a conversation in January. At that time you were slightly circumspect. You said markets were too high, nobody was talking about valuations, everybody was taking volatility from granted. But now if we have seen a shakeout, what is your sense? Do you think we are nearing the end of the decline or this is going to be one of those years where we should not try and predict the market because there are too many moving parts and volatility is going to hit us both ways?
I do not think it is a bullish market. You may sense that now you make 20% returns from here, I do not think they are going to do that. All I thought was that in the last three months we had three or four negative news thrown at the market. One was the long-term capital gains which of course is a lifelong negative that they will never overcome.
The second one was the PNB issue and the then the third one was this Axis, ICICI type of news. Plus the global volatility was also there and after all that, since December, the market if is down like 4-5% and midcaps are down more. We thought that they have fallen enough and at this price we should be having them. Now comes this results season which I think in US will be very good because ultimately who are we, we are just blind followers of what happens in US! The US market will be good and there will be more excitement and also the results will be okay at least in the stocks and sectors at 90% of the public concentrate on the non-PSU banks, non-commercial banks.
For the moment, there is no need to be overly negative but I do not think either globally or in India, suddenly it has become the time to buy and see the next good round. It appears like the first phase has played itself out, but it is not super excited and there is no need to be super negative either. We covered our shorts, our net became some 65-66. We would be happy to bring it down one day where viewers find new names because these names have delivered.
Edited excerpts
Should I introduce you as someone who is still a India bull, someone who is now cautious about what is going on or it does not matter, India story will roll on irrespective of Trump and oil?
You can say that I have become slightly more bullish. I was very bearish last three-four months.
Why have you become slightly more bullish? Is that largely because you are confident of earnings or have the prices come down to reasonable levels?
That is because we did our shorts so well. We have covered many of them including some of the state-owned banks. It is not that we think their life will ever improve, but 30-40% look more than enough. For the moment, our net has become higher mostly because we covered many shorts. You are right, it could be that at the back of the mind we are thinking people will focus on results and for both US and India. may be excluding these banks. For banks, mostly the results should be good.
Is the heightened crude price just an irritant or is $70 the new reality that we are going to live with and the OMCs”will continue to fall?
Well, we do not cover all our shorts and so those are okay. But in general, it is more difficult for oil except that I don’t believe that we ever had any reforms in the sector. Those reforms were only working when the prices were falling and never were really tested. I was always negative for the last many months but in general, I do not know about oil beyond a point.
I hope it does not go up too much but from a stock market point of view, it has not been proven that rising oil prices are immediately negative for the Indian market or for that matter any market because it comes with other issues.
Now if normally oil goes up because of growth, it is considered a positive, at least in the initial phase. Now if it is happening because there is tension or more to do with tension between Middle East and US or US and Syria or Saudi Arabia, then it will have a slightly different angle.
Generally a few dollars here or there, affects those stocks but not so much the market.
What about banks? What do you do with ICICI as well as Axis bank? With management changes at one, are we at the trough of bad news? The stocks have fallen and they are cheap. Should one look at these stories?
We have many analysts in the banking sector but one analyst in the Reserve Bank of India. We should listen to RBI analyst. If they are worried and nervous, we should not jump the gun on anything. These are not normal times when RBI tells the banks and the boards what to do but if some analyst sitting at home thinks that he knows more than what RBI knows and what RBI has said in an unprecedented manner, then they are most welcome to their views. I rely on the best analyst at that point for anything and right now the best analyst for these stocks is the Reserve Bank of India which itself is nervous and upset and angry. So why should we jump the gun?
Given the fact that there is so much scrutiny around ICICI Bank and Axis Bank, how are you viewing the story from an investment angle?
I do not view anything as an opportunity. Why should we keep jumping into every event, every takeover rumour? Every news is a secular story which means when we buy, we hope it does not happen every time but we hope that now we want to hold it for two, three, four years and that will give us at least 30% per annum or even 20% per annum. We are not buying a stock because if I buy today, tomorrow it might jump 5% and after that, if that happens and the news is out I can also buy it, I can buy a 10% later as long as it has a long runway. So, we do not buy like this.
We do not overdo before an event and we like to buy after an event or when there is no event. I do not think we have made ever any money trying to buy on some event kind. Plus this is the last quarter. Look at for how many years, we have said the same thing for so many companies that this is the last quarter. The steel industry was doing badly and then they put in very big anti-dumping duties and that day the stocks would have jumped a little bit. Anybody could have made money five days after that and still made a lot of money when then everything was known. But if you bought it three days before thinking that now anti-dumping will come, may be you made 3% extra but who cares and may be it would not have happened? There is no need to pre-empt everything in life every morning.
What is your overall assessment of the banking situation in India primarily because so many people asks us this question every single day. Do you think we are in a mini crisis of sorts?
Oh! It is a crisis. Today they are saying that there was another loan to Mehul Choksi which was not counted. If it turns out to be true, it will be a disaster beyond limits that after three or two months, we still did not even know that there was another Rs 5000-crore loan which was not counted in the scam numbers. So, it is pretty bad.
As I said, I had backed out from the stocks because ultimately these are state-owned banks only. Nobody is thinking that they are going bankrupt! May be stock price will fall. If they are accounted for a relief, if they go into the P&L early, it is better, but generally the state-owned banking sector is really a mess. What else can you call it?
You have mastered the art of identifying secular stories. We have interacted for over two decades now and you have identified IT, private banks, pharma when nobody understood how to value a company like Dr Reddy’s and molecules they were working on. This is 2018, can you give me a sense of where do you think there is going to be a secular growth and a secular demand cycle which could be favourable for next two or three years?
In the early ‘90s, the reforms in India were related to opening the market to private companies and foreign companies and reducing tariff. It was very easy to say that do not buy existing companies which have been protected for many years and instead buy new companies that have come up in private sector. So, you could buy about Bharti or Zee or HDFC Bank and made a lot of money.
The second round of reforms which is sort of currently going on are related to saying that we should have more financialisation and formalisation of the economy. The unorganised guy or the guy who does not pay taxes will be hurt and the guy who is a bit organised will benefit and you will invest in financials. You will have more credit. The CBIL scores are there. You can give more money to small scale because there is no data. People will use data and things like that.
The second one is formalisation. That is currently the theme which will make you money till the third round of reforms happen when we privatise banks, Air India or reduce corporate taxes. That time we required those kind of companies. Today the story is very simple. It is financialisation and formalisation and all of them will go for a long, long time.
Then the third story will come in. So the best is still private sector banks because it has today the tailwind of the previous bull run story which was private companies competing with government and still at a new theory or the new reforms or the big picture of financialisation. That is why private sector banks and these two-three retails banks are absolutely the best even today. But you can buy anything in financial sector.
You can buy NBFCs also. I do not think it is such a big deal. You can buy wealth managers, brokers, asset management companies. This is a big picture theme and that theme is not going anywhere. During the formalisation, there is some confusion about whether the unorganised guy is right. Right now, in some sector they are dumping what they had produced for all the years because they did not want the e-way bill. But still, that theme has also worked in the long run. We are bullish on both these themes, very bullish.
What puzzles me is that why are Indian consumer names and especially consumer staple stocks trading at such elevated PE multiples. They were expensive two years ago. They are expensive today also. And frankly if I look at what markets have given a Titan or a Jubilant Foodworks or the kind of returns which we have of late got in HUL have been absolutely amazing. I am aware that these stocks are expensive. They are great businesses but not good prices. But yet someone in the market is really chasing these stocks. What is the logic here?
We do not own Jubilant. But even there and in say Westlife or whatever, you could have made benefit on the top line because of the GST deduction. These guys are paying about 5%,. There is not credit on the other side but it is a big deal.
Last quarter’s same-store growth for these guys was at 20%. Where did you ever get 20% growth and even though they are at 60 or 50 PE now, these guys have expanded well and they are profitable. Also there is a young population and there is this formalisation and then they got tax benefit plus there was a low base effect.
Titan and others are the biggest beneficiaries of formalisation by far. We bought it very late. But I do not think there is a bigger beneficiary in India than Titan from the market point of view. Forget about the PE part because you have demolished the competition. The third biggest company in India is saying that we sold fake diamonds! Who will go to any of these companies anymore? Therefore Titan having all the benefits of GST, being clean and now since the other guys were outright frauds – is a very big beneficiary of this trend. We also have made some 15-20% already. We said forget about the PE for the moment but in general, for some of them, it is a bigger gift than normal because of just the relative positioning of the one company versus the other kind of thing.
Metals they have had a good run so far in the upcoming season earnings season. Do you think they can deliver another quarter of strong performance?
We brought metals all our life. Although we own some steel stocks because we thought that their cyclicality has been drastically reduced because of very high reputation. Our biggest issues against cyclicality is that we cannot predict what will happen but you protected them so much that we do not have any moral issues. Otherwise we do not buy.
Tomorrow is Infy day. What do you expect?
Infy day is nothing. I think the bigger event would be Singapore Nifty which I am most excited about. Singapore India Index sorry.
What are your views there?
I think it is one of the most brilliant innovation that they have come out with. There is no underlying so nobody can fight with them. All they are saying is that on the last day we will give you the Nifty price. Let us see how the world accepts it but it is a contract with no underlying except that on the last day it becomes Nifty. It is a brilliant legal manoeuvre. Let us see how it works but it is very exciting and more than anything else, it is good.
How big is this SGX trading I mean when we spoke to NSE and BSE they said look it is a business decision. A lot of global trade moved out of Nifty to SGX but is SGX very important or do you think markets will adjust and nobody would care about SGX after few days?
If two foreigners have to trade in each other, why should they go to India and pay 30% tax. It is like we do a single stock. We do not use it as much but we just enjoy brilliant manoeuvres because we are analysts. We analyse many things and we enjoy and that is how we cannot survive in this world for 20 years because you should enjoy the business of finance and one party does the counter manoeuvres on another party. We are observers.
I remember we had a conversation in January. At that time you were slightly circumspect. You said markets were too high, nobody was talking about valuations, everybody was taking volatility from granted. But now if we have seen a shakeout, what is your sense? Do you think we are nearing the end of the decline or this is going to be one of those years where we should not try and predict the market because there are too many moving parts and volatility is going to hit us both ways?
I do not think it is a bullish market. You may sense that now you make 20% returns from here, I do not think they are going to do that. All I thought was that in the last three months we had three or four negative news thrown at the market. One was the long-term capital gains which of course is a lifelong negative that they will never overcome.
The second one was the PNB issue and the then the third one was this Axis, ICICI type of news. Plus the global volatility was also there and after all that, since December, the market if is down like 4-5% and midcaps are down more. We thought that they have fallen enough and at this price we should be having them. Now comes this results season which I think in US will be very good because ultimately who are we, we are just blind followers of what happens in US! The US market will be good and there will be more excitement and also the results will be okay at least in the stocks and sectors at 90% of the public concentrate on the non-PSU banks, non-commercial banks.
For the moment, there is no need to be overly negative but I do not think either globally or in India, suddenly it has become the time to buy and see the next good round. It appears like the first phase has played itself out, but it is not super excited and there is no need to be super negative either. We covered our shorts, our net became some 65-66. We would be happy to bring it down one day where viewers find new names because these names have delivered.
(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
Read More News on
(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
Get Unlimited Access to The Economic Times
