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Why Samir Arora Expects No ‘Mega Changes’ In Modi’s Second Term

The reality is that the market’s excitement will last till the budget which may lead to a disappointment, says Samir Arora.

A supporter wearing a “Namo Again” T-shirt plays the cymbals while celebrating at the Bharatiya Janata Party (BJP) headquarters in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
A supporter wearing a “Namo Again” T-shirt plays the cymbals while celebrating at the Bharatiya Janata Party (BJP) headquarters in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Helios Capital’s Samir Arora does not expect any significant policy changes in Prime Minister Narendra Modi’s second term, even as Indian markets continue to rally driven by expectations of measures including big-ticket infrastructure spending and support for cash-strapped non-bank lenders.

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“What we can expect is that this government has been around for five years so the first base case is the continuation of the same policies which means fiscal discipline, digitisation, rationalising the Goods and Services Tax—all the things they believe they have started but not concluded yet,” the fund manager told BloombergQuint in an interview. “I bet less on mega changes.”

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While people have been speaking about public sector banks’ stake dilution, there has never been any signaling of that, Arora said. “There is too much expectation from what the new government can do.”

The reality, he said, is that the market’s excitement will last till the budget which may lead to a disappointment.

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I’m going to stay on the positive camp for a month. I don’t believe much will change, but the excitement will keep the markets up.
Samir Arora, Fund Manager, Helios Capital

The S&P BSE Sensex Index has risen 4.68 percent over the last one week, in the run-up to the exit polls on May 19 and the elections results on May 23.

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Watch the full conversation with Samir Arora here:

Here’s the full transcript:

After elections what are the crucial factors that you will watch out for?

The real outcome of this results is removal of negative scenario and that’s the biggest positive. What we can expect is that this government has been around for five years and so the base case should be continuation of same policies which means fiscal discipline, rationalising GST more or helping digitalisation in different ways. All the things which they believe they have started but not concluded yet.

In terms of completely new things, I bet less on mega changes. For example, people say that PSU banks should be divested. There has never been any signaling and I don’t think there is a plan for it. I will rather bet on what will happen rather than what should happen. Because it confuses me also when I stop believing what should happen whereas what will happen which is continuation of same policies. What has happened is the removal of negative scenario of fiscal indiscipline, no clear leadership at the top and all these things which could have been the alternative.

What is happening with domestic institutional investors? A few months ago, when FIIs started to move out before April, DIIs supported the market. Post that, it has been absence from DII desk. What do you think is causing them to sit on sidelines?

I don’t know the breakup. I don’t analyse beyond it. But the mutual fund data has been positive and insurance guys (data) negative. One reasons everyone gave is that the insurance guys are literally playing for 2-3 percent and they just want to make 2 percent a month if they can. They are looking at if somebody is selling and then buy at a discount and if buying then somebody buys a premium. That kind of market making is what they seem to be doing. It doesn’t help them in long term.

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What’s the near-term view you have? One view coming out is that despite the economy not being in shape, despite question on fiscal, why will the government be in a hurry to fix all the problems that Dalal Street believes that the government should fix? They will do it at their own sweet time.

I don’t think much will change. Over a month ago, I used to believe that whatever happens in elections, the market will fall. Because at that time market was going up everyday in March. But it fell so much before, that now I feel there is more expectation from what the government can do. Look at the suggestion which people have made for privatising state-owned banks, bailing out NBFCs. But the reality is that this type of excitement will continue till the budget and the budget may disappoint or deliver one of these things but still the market will be discounted. Right now, I will stay on the positive camp for a month. I don’t believe much will change, but the excitement will keep the markets up. There will be some excitement on what the finance minister’s priorities will be. For the moment, I will be positive and haven’t taken profits.

If you look at any company, say Tata Sons, when there was change of management and Chandra came in and they were expecting that Tata Motors’ problem will be solved and Tata Steel’s debt will go away. Nothing changes so fast. Even in a group or company, things that do well will continue to do well and things which have been bad will continue to be bad.

Once in a while somebody will be helped by a policy action or some order or something because they get something which initially, they didn’t. But broadly things will not change, and we are happy continuing with our own themes.

You would take a few bets based on assumptions of what will be the most likely policy move that could happen. Everybody has given us idea about how infrastructure seems to be a big theme and it has also been mentioned in the manifesto; or mining or liquidity injection in NBFCs. What is your base assumption?

Our base assumption is that none of these things will matter.

We will not take a positive view based on any of these events. It only happens once in a while. Sometimes we may cover NBFCs but broadly I don’t believe they will do anything like that. If you are helping NBFCs, then you are helping five to six companies and they’ll need to worry if that will look politically controversial, whether you are having moral hazel issue, whether you need to focus on those companies, whether somebody who is bad should be punished or not. The market has not fallen and hence you cannot compare it to some other situation. I heard a fund manager say that we should have a Troubled Asset Relief Program- like policy. That happened in 2008 and the market has fallen, and the world was crashing. Here you cannot accept that kind of a scenario and why should the government signal that it is so worried about this.

On infrastructure, there are two kinds of assets or stocks you can buy. One is, infrastructure owners and one is guys who do construction work of building roads or bridge. I don’t think the first one will be done by private sector where somebody puts money for long term infrastructure. So far there is no infrastructure companies and you need some leaders to do well before others can do well. Literally, everyone has done badly and therefore financial problems in India are there because of infrastructure whether it is IL&FS or Essel or anything else. So, I will not buy an infra company.

The construction-type company, because you give them road orders, we used to invest in. But we have realised that in end, you really don’t make money. Government is your customer. The government want to make debt through HAM projects and then you are your own customer and you want to get rid of it when it is ready. It is not normal clean business. We have one company which is L&T and we are happy with it and whatever happen in infrastructure we participate in it because of its multiple interest. Beyond that we are not into buying infra companies.

What is your advice for portfolio building for medium to long term for someone who wants to rejig portfolios?

We find that there are only two or three secular themes in India and for that also there is lot of variety. First is financial sector. Because of various reasons one could transfer a value from state to private, one could be in corporate banks, the problems are less. It could be that some of the NBFCs like Bajaj Finance have got good technology penetration. Even in state owned banks, they are similar to corporate banks, that they have already taken a hit. Based on financial sector, there is long term secular growth and you can move between various things. We are mostly in private sector banks. We have two state owned banks. We have one or two NBFCs, insurance. We liked the theme.

The other theme for India is consumption. Even for some parts of consumer, there is a slowdown, but these companies are well respected by the market and therefore the market doesn’t sell those easily. In a big picture sense again, the theme will not go away because of demographics, urbanisation or more people joining middle class or just catch up of India with rest of world. It is broadly classified as all types of consumption and just not consumer staples.

Third, because we are capital starved economy and we don’t like too much capital, so we like capital light businesses. Therefore, IT which is capital light and also, we earn some dollars. Generally again, there are good companies with long history.

We left out capital goods in infrastructure, chemicals, once in a while we buy it. But I am talking about 80-90 percent of portfolio. 10 percent is for other once in a while bets.