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Market Polarisation Can’t Last For Long, Says Helios Capital’s Samir Arora

Stark polarisation or crowding of stocks at extreme ends in India isn’t sustainable and can’t last for a long time, says Arora.

A chart is displayed inside a stock exchange. (Photographer: Jasper Juinen/Bloomberg)
A chart is displayed inside a stock exchange. (Photographer: Jasper Juinen/Bloomberg)

Stark polarisation or crowding of stocks at extreme ends in India isn’t sustainable, according to Singapore-based fund manager Samir Arora.

“If you believe that the market in the end is going to be okay, then it has to broaden,” said Arora of Helios Capital Management Pte, referring to investors right now seeing value in a only a handful of large caps.

The Indian equity market has seen polarisation within the NSE Nifty 50 since the index bounced back after the government announced a corporate tax cut to revive growth. The benchmark now trades at a 15 percent premium to its 10-year average, according to Bloomberg data. But nearly three-fourths of its constituents are trading at a discount to the historical valuation.

At such times, Arora suggests a mix-and-match strategy to pick stocks. Helios Capital is invested in some of the stocks trading at higher valuations, he said, but it has also picked up some of the most distressed private sector banks because of their low multiples.

Explaining with an example, Arora said if there is Company A which has returned 20 percent per annum for 20 years, a big part of the reason why it gave high returns is because the investor started his journey at a lower PE multiple, he said.

The trick, according to him, is to weed out the bad stock which can be done on various parameters. Apart from that, investors should look at the stock which will give them the best returns instead of going after companies that were built the best.

“You don’t have to buy the best company ever built.”
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Here are the edited excerpts:

Despite the pullback in surcharge, foreigners are still not coming in. It’s probably not as simple as that the government reverses a few things and foreign money starts coming in, right? Because there’s global things that the money managers have to take into account as well.How do you dissect this piece of the puzzle, what’s your opinion there?

It’s actually even simpler than that. If for three days the market is up, fourth did they will come. It’s just a matter of time. I don’t give so much credit to the intelligence of a foreign fund manager. I mean, they are just like Indian fund managers, maybe less clued in. Right now,if the government does it right, they will all come. It can be a matter of few weeks here or there. Even now if you look at it on a gross level, nearly every QIP that is announced; nearly all of them are taken up by foreigners. I am not sure whether those numbers come into the daily FII numbers which are done as like a block trade or a barrack new issuance. But you see any of them, all of them have been taken up. If they were okay till July, they may have been disappointed in the July budget. If all these things has happened in the July budget then the budget would not have been a disappointment, right? So, if you see it is their laziness and sheer momentum that, ‘Oh, we were disappointed in the budget’ but,the budget is over and now, you look at the two months of announcements as one budget. They were buying till one week before the budget and whatever they may have expected from the new government; as in government coming back the second time that they will do reform, now they are doing. If the government can privatize these strategic big companies which are politically I think difficult to do and the yare doing it and then cut corporate taxes which is the most politically difficult thing to do, then other smaller reforms will be easier to do because you have done the big one. Don’t worry, they will come back.

We got a sense of that from the Howdy Modi rally where he pointed out that corporate tax cuts were just the beginning of it and it made a push for many companies to come and take advantage of India,set up manufacturing hubs in India and he said that the growth story is going to come back in a big way.

And also, at the Bloomberg Forum, he said that the equity taxes will be in line with some global benchmark or something like that. Which basically means that,whenever the next pressure point comes, we have to get rid of Dividend Distribution Tax because that is not in line with global practice.

So, you think that could come about next?

No, because he said it, I didn’t say it. We are not recommending it. He said that we will bring equity taxation in line with global tax benchmarks or something like that. So, in equity what are the things? According to me, there are two things which are not globally benchmarked. One is tax on foreign portfolio investors because they should be taxed in their home country. Second is DDT, which every investor should pay based on his treaty with India. I mean,whatever India versus whatever that country. For Indians, to pay as per their tax bracket.

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India Has Become A ‘Show Me The Money’ Market, Says CLSA’s Mahesh Nandurkar

We were having a conversation with CLSA yesterday and they suggested that in the last one year, India has somewhat become a hope market. So, when you started investing in India as a market, it was a hope trade that they will deliver, you will see those numbers kicking in on-ground. Now, the mood is shifted to ‘show me the money.’ ‘Where is the growth coming from? What are they going to deliver in terms of earnings?’ So, is this shift keeping investors at bay?

Could be, because the people look at their most recent experience. That’s what I am saying. If you look at the FII flows, literally before the budget we had about $12 billion this year and from the day of the budget till now, mostly they’ve been selling every day not realising that the budget has been re-written. So, budget is the technical point because it happened the day after or on the same day of the budget and then continues till now for a few days.

It’s a new budget in some sense. Now, ‘Show me the market’ can be done but what ultimately the investors are looking for are earnings. They are buying earnings. They are not really buying economic activity as long as those earnings are sustainable. So, first of all, for this year you’ve got the additional 8-10 percent because of taxes. These are not one-off benefits to be written off and said they’re not sustainable. It’s a permanent benefit. Basically this time it’s on 8-10 percent entries just on that account. 8-10 percent entries mean the market has been given maybe six months return in one shot. So, for six months they should not object or question in the meantime economy turns.

The main point is, I can’t imagine that the government stops at this; that it does the most politically difficult thing that you give money to the rich, to the foreigners, to big companies, to multinationals and then you don’t do anything else for the rest of the economy. So that is why I think it has to be seen as a precursor to many things. For example, BPCL privatization as anybody would’ve imagined, I would have been willing to bet a million dollars that would never happen. Now that they are doing it, it is such a big deal and you need five such things, you need a few big multinationals to announce their coming to India because of the 17 percent tax rate, you need Apple or somebody to announce, you need a few disbursements and then you can say that it was not just a one-off tax cut and all of that is I think very mentally and philosophically and psychologically easier to do.

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I find it astounding that the quantum of the period for which this polarisation in the market has seemed to have lasted and not just the Nifty but even the broader markets insurance companies for example or AMC’s, people are just buying those select few stocks. In your experience can this last for a period of time which is not possible to calculate or at some point of time value stocks start finding some favour? How and when does that happen?

I wouldn’t only say value stocks.  Anything outside these ten stocks, we can say or 20 stocks. We also own some of these stocks, but we believe in a mix-and-match strategy because actually I don’t think it is sustainable. Simply because, let’s take some company which actually we also own some of these examples, so I won’t give you the name, but let’s say some company has given a return of 20 percent per annum for 20 years and everybody likes it including us. The point is it gave that return because then the 20-year period started its P was , say, 20 and now it is 40.

So, the one part of the reason why you got at 20 percent or some such there is a good number for 20 years is because you didn’t start with a 40 P. You started with a 20 P, let’s say. Now, in many of these companies as I said even four or five of them- out of the 15 or so on, the P’s have continuously gone up actually for the whole 20 companies let’s say the P’s have gone up every day and they’re at an all-time high every day the P.

So, today to say that the earnings will be whatever the 15-20 percent rain but the P’s hold, because that is the current actually according to me, is not really sustainable; but we believe that we want to do well broadly in every period because you don’t have to be number one in any period but if you are in the top 5 percent in three years then you’re number one in the three years because the rotation of style, the rotation of companies, the rotation of fund managers, we’ve seen that nobody really is up there as a strategy so we want to do a slightly more mix and match but I don’t think it is sustainable because the valuation has been there for one day because it goes up every day. So, how do we know the valuation will remain? Forget about the earnings.

We are now buying even the most distressed private sector banks it is a mix and match the whole game is that to think that somebody dropped this formula from the top of the heaven and now you got it. We, as I said, we also have owned some of these and even buy new but we are not going to make any of the strategies as our core because over time things move and broadly if you can weed out the very bad or various parameters, you actually don’t have to buy the best company that has been formed, you need to buy a stock and the stock sometimes is more than just buying the best company. This best company formula is working because the times were bad from eighteen to now and times will change because if times don’t change, then that means India is doomed that only 20 companies will be rewarded. So, I also own a few of them but I am just saying it cannot be an all-or-none strategy.

So, since you were talking about valuations the fact that in each of these pockets, some of the valuations are just eye-popping just to figure out. Avenue Supermarts is trading at about 1900 yesterday but 93 times or so. You’ve got Bajaj Finance at about 10 times booked. All of these, do they make you wonder whether or not you’re assigning such valuations to them but the earnings projection and the probability of them may not really show up?

No, I’m just saying that there are 20 such companies and we own five-six of them in together, whatever their weightage be, but we also own others because you don’t know how long this will last. Philosophically, I know it cannot be like this that only twenty companies do well and that somebody says that I only follow twenty-five companies because these are the best things since sliced bread because their starting points over this the returns have been calculated were very different.

So, I agree with the broadening. If you believe that the markets, in the end, are going to be okay, then it has to broaden. By definition, broadening, it means that others have to do better than these twenty otherwise it was not broadened its the same group continues to do super well. Why should a fund manager say that I am a growth manager and not a value manager? I mean the thing is, you have to justify each stock.

Some stock would be justified because it is of extreme value and some stock can be justified because it is high growth and there is a long runway and there’s a big opportunity and the management is very good. What is the mental issue in being able to put both these stocks in one portfolio? Because they both make sense separately to you. So, I only buy stocks that make sense to me. They could be the worst possible companies that this world has seen but somebody has to convince me or I have to convince myself that it is even cheaper than that and I will buy it. Similarly, I will buy the most expensive saying right now for two years, their room is good, the market environment is like this, there is a preference for this, (then) I will buy that.

By the way, India’s weightage in the world is maybe 1 percent. People of our experience would be managing world funds where they are investing in 50 countries and we can’t buy growth and value because it confuses us in just one country - our own. No, it doesn’t confuse me.