Unlike people who buy only 10-15 names because they think that God has whispered in their ears what to do, we normally own 30-35 names. We already have a mix of things, says Samir Arora, Founder & Fund Manager, Helios Capital. Excerpts from an interview with ETNOW.

Are we in for a good year, a flat year or a scary year?
All we know is that right now is not necessarily a good time. There are many events which in the short term have a negative overhang on the market and we should let some of these play out. Over and above the Iran situation, we have the Budget coming, which could be a big disappointment. We have telecom issues. We have funding issues. We have slow down issues. We have unrest issues, we have band issues and we have loss of confidence issues. So all these things will take time.

You are saying that the Budget will be disappointing?
Before the Iran situation arose, I thought Budget was the biggest negative in this market because the whole world is waiting for this Budget to bring up the magical solution and I thought that the government does not have that many options.

In the last 10 years, gold and Nifty have given the same returns. If I bought into gold, I did not have to bother. It is 150x. Nifty is giving the same return. So, what is going on?
The point is that we all beat the Nifty. That is why we are in business and by a big margin. But broadly you are right because gold is to be viewed as even more than that. Gold is viewed as a hedge if something goes really wrong and if the currency in India weakens. It is like buying insurance and which despite many negative events, had given good returns. If there had been a big negative event, it would have outperformed even more. Indians are innately so brilliant that they have been buying gold as a way to bypass foreign exchange restrictions without realising it may be because so many people who own it may not be bothered what is happening to dollar and rupee and all that. But that is how the wisdom of the masses comes in.

The GDP growth projections show we are going to struggle around the 5% mark. Plus there is the turmoil going on back home and now globally as well. The impact of inflation is yet to hit us. How do you protect capital? Do you profit from those 15-20 names which have made you money in the last three to four years?
We have various funds. We are talking here about long short fund where we are not taking profits from those names. In the long only product, we have about 15-16% cash I thought we would look at after the Budget. That’s what I thought a few days ago. In the middle of December I realised that this Budget is a big negative and not a positive and that I will look at investing immediately after the Budget or on the same day depending on what they do. But now, I have been given more time to relax.

How are you making use of the time? When that correction plays out, do you buy more of the expensive, good quality stocks or do you hunt down and get into bottom-up stories?
We got into the bottom-up stories after the tax cut thinking that this market will broaden. We bought small amounts (1.5-2% each) maybe seven-eight names. Some of them did really well, going up 30% between September and December. We sold off some and still have some from the new group. So, unlike people who buy only 10-15 names because they think that God has whispered in their ears what to do, we normally own 30-35 names. We already have a mix of things. Some of the long-held stocks are not doing well and some of the new stocks which we bought have done well. So right now, would I buy the 36th name? I will not. I have to buy from my current universe but before that, I have to cover my shorts because the main fund is a long short fund and that there is no need to do anything. There is no need to cover any short.

We all know the challenges on the fisc but the government has been trying so hard to allay industry fears, get lenders to lend and really get things going. Obviously, it has not been enough. How much of a damp squib are you expecting the Budget to be?
It will be a damp squib unless they do some out of the box things like reducing long term capital gains tax to zero. They know they will not lose anything and even if they do not gain anything, it will be still a big boost in the short term to the market which can help raise some new capital. I was very bullish till early December on the basis of the corporate tax rate cut. That was a very big event and I thought it would be accompanied over time with other policies and measures.

Whether it is their fault or not, broadly the government has no room to aggressively cut personal taxes, to give tax cuts and on the margin not as a policy but because of lack of choices. There is a need to raise money. If you say they would not increase GST rates but would make it tougher to evade, for me it is the same thing. In the short term, the guy who is evading is not some billionaire, he is some trader who is saving a few rupees and basically a few crores even. He would have the ability to buy cars and houses with it.

In the end, you are taking money from the public whether it is stopping evasion or actually a tax hike. So I do not see the difference. Secondly, when you cut corporate taxes, obviously the corporates will not like the idea when the income tax department is told that they are still supposed to raise the same amount of money which effectively means some day, you have to get this money back from the same audience.

I also feel that the telecom price hike is actually a tax hike because the telecom price hike ultimately is to be paid back to the government through this AGR. Therefore, the opportunity of tax cuts has gone away. Another thing that could make the Budget a good one was if they announced divestments. But the divestments have already been announced and have to happen. Normally the Budget is considered good if it announces infrastructure investments or rural India investments. Then for a few hours most stocks go down. Infrastructure investments have already been announced. I feel the over hype on Budget will be a disappointment.

But if the market falls for these reasons now, then maybe the Budget will not be such a big negative.

You always have championed buying mega trends — be it whether IT, private banks or logistics names. You bought into insurance. In a three-year scenario, where valuations are decent, earnings are there and a sector or company that will either gain market share or others will get disrupted and this will become bigger?
I can talk about three but the reason why I emphasise on “now” is because we all should put pressure on the system. The fund managers take it too easy by trying to ignore the current issues and saying that in the long term. equity makes money, which every kid knows now. But deliberately, the system of fund managers and investors come on TV and say in the long term it is India’s fate to grow at 7% and therefore equity is better and stuff! That is why I deliberately emphasise the immediate and now. We should all in a sense give feedback to the system at large that there are things that are not right and that can be put right.

We have 100 years and 200 years of data. If you invested before World War II in Japan, you still did better in Japanese stocks and Japanese bonds over the next 15 years. If you invested in the US in 1929 October before the crash started, you did very well but it took 20 years. So in nearly every market over a slightly longer period, equity does better and in India, the same thing will happen.

We also do not want every story to be sold on a three to five-year basis because there is a limit to how much patience foreign investors or even Indian investors may have. In the last 10 years, we have massively underperformed in nearly everything that we could have underperformed. We must look at short and long term together from a system point of view.

What are the chances that 2020 may actually be not a bad year but a years of disasters? Oil is boiling, fiscal deficit target is going to be missed, rupee will weaken, capex is not picking up and the slowdown started in the middle of last calendar year. We are starting the year on back foot. We have a full year of problems to deal with now?
The problems do not have to happen on a calendar year basis. It is more to do with time and that is what I agree. I hope it is not a disaster because in some sense, there is a disaster in the market if you leave out 20 names. About 80% of stocks of companies are doing badly or even normal might be down 30-40%. The ones which are up, actually have decent performance or maybe their valuation is out of line. In that sense, we are not at an all-time high for anybody other than somebody who has five stocks and who for six months maybe doing well in life. So broadly speaking, the market is reflecting it. The economy itself could be at these 5% levels for six months, nine months more and that is what the government has to do.

From our side as investors, we would think that after three to six months, your base comparisons will be very easy. Your interest rates may have been down and would have seeped through. If the world is okay then you would still be getting part of the flows as we got last year and life will move on, but it is not the best time ever to buy stocks today.

More than 40% of our long portfolio is in financials and if we looked at our net, it might be 80%.

-Samir Arora

It is okay. We wait for these events and negotiate them but broadly if you do a very big picture top down, then you can say that yes equity does better and so you should average. This I agree with totally because I am a total equity guy and we would not know when it will turn. But it will turn because that is the history of the equity markets across countries and across years.

If you say why today, I would say if you are already invested you can wait to find out what happens to Idea, how to deal with telecom, how to deal with the Budget and then plus, minus a few weeks of that, whenever these events including the Iran issue either blows up or subsides, then you start again. It is a continuous investing process rather than saying this is a great point because the market fell 2% this month.

When you are looking at the short side, thematically what are you looking at — the expensive consumer mega caps?

On the short side we have everything while on the long side, we have a few things. Some of them are also expensive consumer names where the company is saying there is slowdown and their parents and everything else have fallen but it bucks the trend in India. There are so many of these where there is obvious slowdown but where we are bullish. We say we already know it, but knowing is not enough. I do not believe everyday that everything is discounted. I have never believed it because for 20 years we are using exactly the same line to buy private sector banks that they are competing with state owned banks.

Basically those stocks have outperformed even though not even one new line is added to it. It is very easy to do both buy and sell according to me.

Just a quick word on financials. The overall weightage of financials has gone up from 25% to 40%. Do you see a risk of them underperforming going forward?
More than 40% of our long portfolio is in financials and if we looked at our net, it might be 80%. Again individually these stocks look good and I do not think that the weight is a good way of analysing. For ,example the biggest private sector banks are not in the MSCI index and most of the foreign money comes via MSCI Index. So, when suddenly HDFC Bank’s weightage was reduced from the biggest company in India to zero, it was done over four quarters.

In 2013, the stock still outperformed and in some sense everybody owns HDFC Bank or Kotak Bank and are actually taking a bet against the index because the index does not have it. In the end, in a big picture scenario, you can say yes how can weightage be over 40% because historically higher weightage has meant that something else happened but you know not all sectors are even represented in the stock market. Some people say real estate weightage in India is very low, it is wrong and these stocks have to go up. But that is because 97% of real estate is not reflected in the listed stocks because real estate has is done by every contractor and every fellow in your neighbourhood. So, many of these things are not represented. It does not mean that the index is good or bad. Anyway, we are not giving up our financials so easily.

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