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Why Samir Arora is bullish on NBFCs, private banks

by April 29, 2016 General

In a chat with ET Now, Samir Arora, Fund Manager, Helios Capital, says stick to the tried and tested and don’t try and find an obscure private sector bank because you think that nobody has heard of it and therefore it will be a great thing. Edited excerpts
ET Now: Have not seen you on TV in a while. When markets are strong, you have stopped coming on TV. It should be the other way around.

Samir Arora: No when the markets are strong, you do not need me to give you confidence.

ET Now: No but I need your assurance that this is not as good as it gets and markets are headed higher from here as well. Who will talk about that?

Samir Arora: I think they are headed higher or at least not falling apart. But what we have learnt and you know already is that in general equities, India have done well. Broadly speaking India is right now in a start of a good cyclical upturn in the economy and therefore hopefully, the markets also.

ET Now: And I can see at the back there are lot of bulls and bears at display and a China flag as well as India right next to each other.

Samir Arora: Singapore. But actually these are very few bulls and bears because I have may be more than 50 but they are all distributed around the office and in other parts of this room. So I have just kept four-five here so that you can see them, otherwise I may have maybe 60 and maybe 10 painting of bulls and two of bears. I am a collector of bulls and bears. That is my day to day work.

ET Now: The channel too is. We keep on getting bulls and bears every single day on the channel too. But so my question to you is we have had a bit of an intermediate rally. I heard your discussions on the budget day when you joined us live from Singapore. You were not sounding too concerned or too perturbed. I think the view has worked out well. What next? The earning season has started off well so far. So one of the cues is on the right side.

Samir Arora: No actually, it has been on the right side in the sense that this cycle part is working there which is that the monsoons are expected to be good. So that would take care of the economy. Actually right now I think there is a small probability that we may have floods which again will be negative but right now let us say that it is only good monsoon and not beyond that. The interest rate cut has taken place and over and above that, the governor has said that he is in an accommodative mode and that there may be more cuts and even that day it was more than just an interest rate cut.

Coming to the first round of earnings, if you see the volume growth of companies and even if you see other data like cement, do not buy. In cement or port volume or or commercial vehicles, you can see that a normal cycle is returning and in the last few quarters there was a big drag on overall corporate earnings because of fall in profit contribution from commodity companies and PSU banks which lend to those commodity companies. That would also bottom out if it does not go up and therefore you may see about 15-20 per cent type earnings growth.

ET Now: Should one really read too much into the BOJ holding fire and talking down their GDP projections for the time ahead because that clearly seems to have spooked the world markets yesterday at least?

Samir Arora: The Japanese market is slightly more sophisticated than the Delhi stock exchange market that we used to have 10-20 years ago. The Japanese market you can see has absolutely no credibility. For a market to go up and down 3 per cent in a day would normally happen in a third world, third rate currency but unfortunately here it is supposed to be a big currency and a big absorber of speculation. I would think that whichever way you want to look at it, you will not understand anything from it because the worse the economy becomes, the worse that market becomes. The worse the government or whatever the system becomes, the more the currency strengthens. So first of all, somebody has to come and explain to me why that happens. I would thus think that it is – a) not worth analysing and b) even if you wanted to analyse it, you will not be able to do a good job of it.

ET Now: What about IT? Nnow that most of the earnings are out, what according to you are the best prospects within the IT space because now it is getting to be a very company specific story?

Samir Arora: I was about to say that that is has become very company specific and one thing I broadly believe in which actually people can follow is that the fundamentals also have very strong momentum. That means a company which does well for one or two quarters basically and therefore whatever commentary you have around that time, just continues to do well for a number of quarters or maybe even a number of years. Smilarly when things are going bad, we have stopped saying that this company did bad this quarter but this was a one off, this was this, this was that, if it is not absolutely one off. So if you look at it, Infosys we missed but after that the whole thing does goes on and on, every day the announcement or news that comes on Infosys is better than others. Similarly, I will not talk about the bad ones but the guys who do badly in a quarter or two quarters, just do not easily reverse and you can see that in sector after sector after sector. So unless at some point, the valuations become totally wrong, the momentum of fundamentals is a very strong factor which we now look at. We realise that if the company is run badly for two quarters, it is not going to turnaround in the third quarter, they just go on and on for two, three, four years and then something happens and then their cycle turns like it did for Infosys after maybe three to four years of underperformance. So it has become very company specific. We have it but it is not like the best that you have in India right now.

ET Now: You have always bet on the outside opportunity, when I say IT, pharma, these are export dominated industries which you always bought historically. If I look at the way you have invested historically, in 2001 or 2002 you bought into Dr Reddy’s. You were able to smell and see the generic opportunity. What do you make of the news flow in the pharma sector? There seems to be a belief that Indian pharma sectors has topped out. The USFDA clampdown is an indication that they have not followed best practices. Is it a time to be buyer here and a believer in pharma?

Samir Arora: No, I just said that we are short on nearly all of them for six to eight months including the biggest one. It is the same thing as momentum of fundamentals, you cannot turn these things around in three months. Look the older ones which we do not have, that Ipca Labs and the other one, I mean we do not have on the short side or the Wockhardts and all. You know they have a problem because everybody said that the stock has fallen, the stock may not fall more but look at how many quarters have passed, two years, three years, these things suddenly turn, that is what I am saying. In fact, that is one of the reasons we have continued to short sell. These things are not easy to turnaround because the momentum of fundamentals. So we are not going to wait. In one quarter we may lose 5-10 per cent because suddenly things would change but it will change for one company maybe. But broadly, you get into these troubles you cannot come out of within 3-6 months. So it is possible that the stock has already discounted that,and therefore you will not make money on short or whatever but it is very unlikely that suddenly they will all surprise you next quarter saying we have solved all our problems. And you can see that from the stocks that had problem two to three years ago and are still having problems. Momentum of fundamental, it is one line, I think that is what I said.

ET Now: Absolutely right. I am with you. I have been making this point that for Sun Pharma we know the problems, we do not know the solution. So let us flip the question around. We have discussed a pocket where momentum is weak and news flow is weak. Which is one pocket where momentum is strong and news flow is strong?

Samir Arora: That is exactly, my sector which I am buying into. Even yesterday we bought NBFCs, not only do their earnings grow a 20 per cent. They just grow and grow and grow but today there is no reason why they would not grow for at least the next four, six, eight, ten quarters. I tell investors a younger fund manager gets embarrassed to tell a client that his number one holding is HDFC Bank or something that is obvious. We do not get embarrassed because the momentum of fundamentals makes sure that whether it is foreign owned, over owned, everybody knows it, the same story is known and it still does well. I personally own a lot of Disney. It is my number one holding outside Indian things and everybody knows the story, there is nothing new in it, it just goes on and on and never stops performing. So the point is just buy the obvious. Why do you need so many people to come and tell you so many things are needed?

ET Now: On budget morning, you said that government had very little reason to come up and implement tax on long-term capital gains. You were long, you were bullish and you got your call right. So what is your big call now in terms of positioning are you long, are you short, how are you differentiating your portfolio? What is your differentiated approach?

Samir Arora: Because our performance has been good in the last 20 years, we have found that you do not have to be number one in every period but if you are consistently good, you become a good performer. In general, we are bullish. Our net must be around 72-73 per cent, which is high. Some of the stocks that we short we feel that they deserve to go down or and they will not go up even if they tried. We are bullish on the financial sector and that is including banks and NBFCs and they are anyway doing a good job in terms of not only giving earnings growth but also doing well in the market particularly this month and last month. Do it is all good right now.

ET Now: What about metals? Markets love to hate metal stocks. The economic reason, the fundamentals factors for metals are not there. Metal stocks have been having a rally. Is it a good time to initiate a long short position on metals?

Samir Arora: We would not do that even if this was a sustainable five year story because we do not buy companies where the main determinant of the performance of the company is the price of something. There is no big picture feeling, no real confidence that you have in the price of that particular thing. You can understand a business, you can say that it is good, sustainable, management is good, there is some requirement in India, there is a shortage, there is low penetration but if you say that all that is okay but the fortune will be decided by the price of what these guys sell and the price will be determined by what happens in China and what happens in Brazil and the Australian mines and things, how is anybody supposed to do it? People who do that do it as a trade sometimes and we choose not to. Particularly one day before we are having Warren Buffett on web, you are not suppose to talk about commodity companies and looking at grass and looking at what Shankar Sharma says. We are supposed to do things more sustainable in our life.

ET Now: I wanted to ask you about a theme that you discussed may be eight or nine years back and it is kind of starting to make a bit of a comeback. I do not know whether you still have an opinion or an investment there but the scenario for Indian real estate seems to be changing especially for companies which have got strong rental yielding assets as well with this whole REITS phenomenon too, do you think there is a serious case for investments here or is it?

Samir Arora: Forget about me. Raghuram Rajan gave a speech a few days ago showing from 10 or 20 different angles how bad the Indian real estate sector is in terms of an investment. If you look at rental yield, nowhere in the world do you have a 2-3 per cent rental yield against 10 per cent interest rates. Nowhere you have this kind of affordability. You know, the real estate in Mumbai will is way more expensive than Singapore whereas Singapore is the third richest country in the world. If you look at corporate governance, they were always doing bad.

Now let us talk about REITS. The current gross yield for a commercial properties may be say 8-9 per cent in rupee terms. Now when then gross yield is say 10 per cent, the whole process of raising money will take 1 or 2 per cent in the management fee or whatever. So the foreigners are basically buying a 7 per cent rupee bond hoping that one day every five years or 10 years, that rental will go up by 5 per cent? What is the need? I can buy a Singapore dollar REIT for 7 per cent yield right now. On Bloomberg you can see hundreds of them in dollar terms and every year the rupee has depreciated on average by 4 to 5 per cent. This is just for this absolute long-term pension fund guys who may bet that in the end the rupee will depreciate by 2 and not 5 or 3 and not 6 or something. Otherwise what is the big deal? I do not see any deal. The guys who do well in REITS and the guys who raise money in this, raise some debt and they leverage the return. Here when you are borrowing in India, you cannot borrow below 10 per cent. So there is no concept of having a leverage return on a rupee debt. The interest rates are as high. In Singapore, may be in US, the borrower rate is 1 or 2 per cent and the commercial property yield at 4 or 5 per cent, make sense. In India, it is nearly the same, actually the opposite. When the commercial yield is lower than what you can borrow from a bank, how can it work?

ET Now: Disney, did you say Disney, I mean are not you too old to go for Disney now?

Samir Arora: No I have owned the stock. I do not go. I know what it meant for 10 years. I am just saying the story does not have to be discovery. It has to be high confidence in a reasonable return kind of thing and today I think that happens in private sector banks and NBFCs of highest number because it is just too easy to imagine why this is happening, where it is going, what are the macro numbers for Indian debt versus GDP etc etc.

ET Now: Patanjali was listed. Would you be bullish there because somehow yesterday’s Dabur’s numbers and their con-call seems to suggest that there is quite a bit of growth in that side of the market for India.

Samir Arora: Sorry which one?

ET Now: Patanjali.

Samir Arora: Patanjali, I would have bought if somebody gave it to me yes.

ET Now: So my question was more about what some of these companies are doing because Dabur is certainly reving up in trade post its results but my question to you is – are NBFCs and private banks your best bet right now?

Samir Arora: Biggest bet.

ET Now: Your biggest bet right now.

Samir Arora: Actually I am not telling you something new. Nearly forever, they have always been as a combined group for nearly 10, 20 years.

ET Now: So tell me something new. I mean if I say that Samir Arora holds private banks, that is a five-year-old story.

Samir Arora: Again I am not a young guy trying to get a point by saying I told a stock that you have not heard of. The point is if what you have heard does better, just concentrate on it. Do not try and find a 17th private sector bank because you think that nobody has heard of it and therefore it will be a great thing. It is not needed. My whole point is that.

ET Now: So it is not age, it is wisdom which is the reason why you are buying private banks. It is not age that you want to be safe.

Samir Arora: No actually we have thought about all these things. So if you look at it and reverse that, what does the performance of a good fund across many years tell yu? Look at your best fund in India which is actually half of what my performance has been, let’s say HDFC. So their 20-year performance is some 20 per cent and ours was little higher. 15-20 per cent is a very good rupee performance of anybody beating the market and doing well and compounding earnings and everything else. So there are two ways of doing it and we try to do both. One is that you are deliberately trying to find a 40-50 per cent type of stocks which will give you that much return but when you find seven of them or 10 of them, three will move up that much and two will fall a lot. So in the end, you are going to make 20-25 per cent. We know that because we have not seen anybody making 25 per cent per annum for 20 years.

The other side is you try directly buy stocks which you think will make 20-25 per cent return not 50 per cent but the confidence in getting that type of return, not 20-25 per cent but say 15 to 20 or 25 per cent is very high. So in the end, you are going to get the same return from the two strategies. If you can mix and match them a little bit and that needs luck more than anything else, you will get 25 per cent per annum. Otherwise whatever good things you do will make you 18-20 per cent. So one is directly trying to buy stocks which make you 18-20 per cent with a higher confidence or with the slightly lower confidence because you never know you will try and buy a portfolio stocks which you think will go up 30-40 per cent but then one will have income tax raid and one will be arrested for something else and others will go up and you are still getting more or less the same return. But the problem to recommend the second strategy to a retail guy is that he will buy one of them and not the 8, 10 per cent ones that we are starting the race with and he will lose his pants or he will get nervous in a 2008 type environment and then he will say that this turned out to be a wrong strategy and the markets are bad. There is no point in telling the public to look at one large stock. If you want to tell the public about one large stock, you tell the high confidence and reasonable return which in the ends going to do more or less as well as the best bet you can get in the market.