Budget To Propel Markets Further: Samir Arora

Samir Arora: So even if it is volatile, we are taking in that at the end of two or three months or more it'll be higher than today. In the sense that I am going into the budget being bullish. So what are my reasons for feeling bullish on budget, although there was this feeling that I had before that maybe when the election results are announced, you know, we should rein in some bullishness because whatever news the world is waiting for would have come out. But the thing is that I'm bullish on the budget because Mr Modi himself keeps saying that it will be a transformational budget number one. So if he's saying, there's something they will do, which I think will be related to, otherwise it'll be a letdown and there was no need for him to use these words, again and again.

Second is that in the last budget, I mean this February interim budget, the government said that next year, the fiscal deficit target will be reduced to some four point, 5% or something which looks a bit tough, but it is directionally they will reduce. So if you are going to directionally reduce the deficit, but also make it transformational, that can only happen if you can't just cut in the investments or the government or cut subsidies or cut capital then that is not transformational in any way. So the only way it works is if you want to cut the deficit but have it transformational, which mostly has to do with either big reforms or big spending, that you have to do something to PSUs, and my guess is you take one or two PSUs and you sell them off completely or announced that you would sell them off completely and separately, you do some reforms relating to some new investments, some new labour policies, something else to be able to justify that label, but forgetting about new things and they do which normally we find that their impact on the ground takes five years, three years, none of that happens immediately. I think the only way this can be done is by doing whatever it takes to keep the sentiment of the market high and then taking advantage of that to privatise one or two PSUs and over time sell down some of them into the market. So then the investments can be maintained while still cutting or keeping the deficit in check, or lowering it as their own guidance or their own plan.

Samir Arora: So we're waiting for the real budget to happen and the main thing is if you put all these three things together, nobody asked them today to say whether the budget is transformational or not. Nobody was voting for them on that basis in the sense, I don't think the issue in the election this time, for there is no issue because there is no opposition. But in general, this is all being done because they believe in these things or they want to do these things and therefore you won't see, one could be that it's an election thing to say that we will do these things, but nobody's asking them on you know, a particular expectation because of that votes will be given to the to the BJP.

Therefore, it's being done of their own choice and their own vision or whatever for the future. Therefore I think that there's a reasonable chance that from their side they will attempt a transformational budget. Now on that day, we might find that oh, this is not  practical or this is too far into the future, we'll see on that day. That's why I'm saying from today, there is no need to fine tune this. You know, the view on the market that I will be negative in between because it may be volatile because the initial news of the election is already known. Let's just go for the budget and decide on that day what we want to do in terms of changing our net. That is all that you know we change in these events.

Samir Arora: Actually (it) is really good. First of all, it is good in the sense that they have done whatever it led to some correction but at the end of the day, this month has not been bad like March. You know if I look at you in the market, it is up some 1% or whatever month-to-date. So at the end of the day, the correction has happened intra-month, and maybe some, you know, stocks may have fallen more or less but basically you have dealt with the first round of nervousness related to these things, but handled by the market well. So now it doesn't matter and it's good that some of this release of air from a balloon has happened without disrupting the whole market at a bigger level. So it's actually good that it happened.

Samir Arora: But (in) hindsight means see, that day, I could have also felt that you know, I should cut my exposure, reduce my net in my long short front because I had decided that I am going to do everything now based on budget because I am really betting a little bit more in the sense of saying that the budget will be a key part for the next round of whatever happens, although broadly, I've always maintained that to get 13-15% type index returns, you don't need a new event every day. You can just get that normal ongoing growth of corporate earnings and everything but still, you know, you have to see okay, what is the next thing we are excited about in life, and that was the budget rather than getting confused in between that there was this little bit of pressure on mid and small caps and then in the end this month is not bad. So it's okay.

Samir Arora: By the way, I also feel that the results in April will be not so great in actually two sectors. One is I.T. for sure and one is regular consumer normal consumer type companies. So in that same way, what is left you know, you have to keep doing new things and new sectors. So big picture, broadly in  the next 15-30 days, is not good. But the consumer thing to me doesn't look like anybody can say that therefore the consumer sector in India is dead, which broadly I'm saying a little bit for the IT sector, but for the consumer sector you it's okay. You know, if it corrects a little, that's why I'm saying don't get confused day-to-day on what might happen in 15-20 days here or there, because it’s quite possible that the results in some of the sectors are disappointing or some people may say, we have already discounted, we have non-discounted. But coming to your question, that the correction should be more severe. Why, if the world was doing badly and we were doing well, that could have been one reason, but that's not the case. Actually, we are underperforming the world this year. World means U.S.and all.

Second is one way of looking at it is that if our recent returns are very high as compared to our say 5-10 year results, then you could say recent results are very high. Therefore there'll be a correction. Just like if you would say that  recent performance of the market is very high. Therefore it's you know, beyond normal, or you could say the other way around that the recent performance of the market is very bad, therefore, it's a good time to invest. Now, you may please check on your system if you see the last two-year returns of the market. It's very similar to the last five year terms of the market. Last two years, which means calendar ‘22 and calendar ‘23 combined. The combined is less than 15% per annum and that is the same as the last five year time return and the last 15-year time return, the last 20-year time returns, which are in the 15-ish 14 to the 15% type in rupee terms, annual returns.

So by chance this time the last few years returns are the same as the last 5-10 years, so you can't get a signal from that. Now of course you could say I won’t look at the last two years. I will look at the last one year, then of course it's much higher. But what I'm saying is normally if you look at it one reason for ‘23 being very good was because ‘22 was very bad and therefore if you just do broadly this thing, it doesn't look that you're coming at some great high point, just like it doesn't look that you're coming at some really extraordinarily cheap level. So therefore it's a normal market which also is a fair market. It is not that every market should be very cheap before you buy. Maybe you don't get re-rating anymore. Mostly you will not get and you get the earnings growth and that earnings growth is a mid teen type range, I believe so you get that kind of return, what is so unreasonable about it.

Samir Arora: Well, I have been zero weight since 2022 July and underweight since Jan ‘22 and all my life and for that I'm overweight on I.T.  and even ran a big IT fund even in India, one in Asia. So I don't know whether it is dead or not. But it is not doing well and the issues are more than just you know, what happened this month that month kind of thing. It is a serious issue. But broadly, I always believed that the Indian IT companies do not properly guide and I saw that many times in my life, so I don't listen to them or ask them what it is. I draw my conclusions from the big picture in this case and the big picture is against I.T. and so there are many reasons for that. First is that these Indian I.T. guys are not hiring themselves. 

They aren’t even having the decency to honour on-campus recruitment, I mean, how much more signal do you want that they don't see the potential. Second is we broadly know that AI is getting a lot of investment, what is the true objective of AI? One could be that you are doing things which human beings could not do. Let us say some drug discovery, some new metal discovery for which the accelerated computing as required and AI is required. God knows what is required. But the second is to replace jobs and the replacement jobs and to bring things on shore and near shore and, you know, a fight between different countries and hacking and everything means that one purpose of that AI is to replace jobs and those jobs that you replace are of people who use computers. It is very difficult, although that is also being tried. By doing, say autonomous driving, that you're trying to replace jobs of people who didn't use a computer. But at the first level it will be that a computer can replace a job of a person using a computer. The big picture has to shrink. So don't tell me that we have all these cost reduction orders which have a very different margin profile, very big projects they are announced but that is you can multiply an order by 15 years and call it a $1 billion order or if you multiply by five years, it will be a $500 million order and then you can always have an option for that company to break it after seven years. All you have to do is get a $50 million a year order and you say it's a 1 billion order because it's for 20 years.

But between you and the company there is an exit after eight years. They are not telling us all that and I don't believe in cost cutting orders being immediately good. They might be good one day in the end when you cut the costs and you move those guys offshore or what have you done with them. But in the big picture I don't like it but the second reason is, other sectors are doing well and I have $100. So why should I bother? If nothing else was doing well, I’ll be forced to say, is it discounted, is it not discounted, has it fallen too much. Now I say why, first I should have a reason and the stocks haven't done so badly. They did badly in my first year of not having them. In the second year they have done actually well. So they have not hurt me only because some other sorts also did well like Zomato or HPCL or whatever worked for me. So that same money. Why am I banging my head in a complicated situation, since many other stocks are going well and the amount is the same, put in here or you put it there.  So unless it really pains me, I don't need to go to the stage of analysing if it is discounted or non discounted, will the third quarter be better because the stocks haven't done badly. Actually it's not that I have hugely gained relative to an index. But I don't like it right now.

Samir Arora: Thank you very much for investing. I'm not the fund manager of that fund. But broadly speaking, we are all overweight in financials at Helios, including my offshore fund, and the number one reason for that is that the stocks, by the way this year, are not doing badly if you leave out HDFC Bank, the others are like State Bank (of India) is up some I think 17-18%  and ICICI is up some 10-11% and this is when the market is up 4% and so maybe even this month HDFC Bank is being compared to the market. 

So broadly speaking, the big picture for financials has always been that they are generally going much more than the GDP and earnings growth are in the 15-20% type range. Now for this year and for the last one or two years because they've done badly. The logic has also been that if you think that the market is up a lot, and you know you're still getting these shocks at say one and a half two year old prices. They have definitely underperformed and their valuations are at their lowest that they have been in the last many years. I think because of HDFC Bank overhang in the sense that HDFC bank hasn't done well. It has put other value issues also in check.

Separately, there were these regulatory issues and some shocks but if nothing else, again, we don't have some of them, we only had Paytm. That issue is also over and has been absorbed by the performance. If you look at the mutual fund in India, whether you look at inception to date or months to date or year to date, it has outperformed the benchmark which is NSE 500, which means it has broadly outperformed 70-80% of the funds or 60% of the funds, because not all funds outperform the benchmark. So the big picture, having these has in no way hurt the performance, and there are fundamental reasons for supporting it. So again, as we said, there's no reason to rethink or reconsider any of this.

Samir Arora: It is so because the stock prices have massively underperformed. Second is even if you look at this year, first of all, obviously, because of all these things, maybe the stocks haven't done well. Secondly, if you look at going forward, can we expect 15-14% type or even 13% type number from HDFC Bank for sure, you will get that I think and not one company in I.T.. and mostly other than these new consumer type companies, none of the other guys are growing 15%. Maybe some of them will grow because their margins might go up or something commodity price cut or something, but broadly 15% that growth is a valuable number not for the highest growth stock that you can find.

But for a reasonable part of the portfolio which we call high confidence in reasonable return. You are not expecting every stock to be like these new Zomato type companies where you expect that the revenue will go 30-40% per annum for many years. You need both kinds of stocks and it's these financials that fit perfectly in our stocks which we call high confidence and reasonable return. Once in a while they don't give that return like HDFC Bank didn’t give last year. But even in ‘22 it gave. by the way, it outperformed the market by seven % in ‘22 calendar year which may be much less than what ICICI and SBI made.  But you have two levels of expectation from a stock. One is you do well relative to your industry,but if nothing else at least do better than my benchmark, because the objective is to beat the benchmark properly.

Samir Arora: First of all both Zomato and Paytm we thought we bought at good prices. Zomato, we bought at 52 rupees and Paytm at some 510 or 520. This was November 23, whatever, whenever it was ‘22 or ‘23, I have forgotten now. These were after the big falls in both the stocks that Paytm from that price went to Rs 900 or Rs 1,000 or whatever and now it's gone back again. But coming to Zomato I think I was one of the early ones to realise that the management had changed and was willing to bet on that and second that Blinkit is a good thing. People used to talk about the fact that why does anybody need a 20-minute delivery and what are these things that you need? I used to say it doesn't matter. If you get everything in 20 minutes, you want it urgently. But if you have it with you in 20 minutes, what is wrong with that and that expansion of the list of things that can be sold without really thinking that it's super urgent because you're buying it, it's coming to you, you're paying the same price. So how does it matter that it comes in 20 minutes rather than scheduling a delivery for the next day and the fact that people would say that no, the local Kirana guy can do it and I have to say what local Kirana guy, if a big company can do it at the same price they will get better bargaining, they will get better margins from the manufacturer. 

They will be open for maybe 20 hours in a day, whereas the local fellow will open maybe at 10am and shut at 8pm or something. These guys can open at 6am and be open till 4am or 3am In the night. So these were easy things to do. Now this thing about disruption. This is management talk. I listen to it. Oh my God, he is disrupting his own. Now, the growth is there. Execution is top class and now even valuation broadly can be justified if you go out a few years and just treat it like a consumer company. But also there is this issue about the fact that if you grow strongly, there is a lot of interest by us and others not for the whole portfolio. This part of the portfolio we call the other way around, reasonable confidence in high return. In the first group you say high confidence in reasonable return.  Our only difference with the world and which has made me survive for 20 years with dignity is that I don't have any stock which has high confidence in high return and people who have high confidence in high return are the ones who mostly blow up. So we call the second group reasonable confidence in high return. So it's okay for that category.