A self-confessed ‘India bull’, Samir Arora, fund manager, Helios Capital Management, wants to push India to investors around the world. Issues like high PE and slowdown in privatisation don’t bother him
How do you feel ‘selling India’ to your investors? In your opinion, what makes India a compelling case?
Relative to other choices, India is one of the best markets, not necessarily just the best economy. I say that because in India the choices that are listed on the stock market are of a much higher quality and much more diversified than the choices in other markets.
Indian stocks actually represent every sector of its economy. If somebody wants to bet on the consumer industry, infrastructure, media, private sector or public sector, it's all available in India in the listed format. Not so in Russia, Brazil or China. Over the years, I have been an India bull and was always overweight on India. But now, I don't have to sympathise with any other market and am 100 per cent in India. And I want to personally push India to the world. I think India sells well and works well. When we articulate our views, people listen.
Earlier, we would sell India on a bottom-up basis. We used to say that the companies in India are good with high ROEs. In the last three-four years what has changed is that people can go and push India at a country level and say that you need to have an India strategy.
People would initially just buy an emerging markets theme leaving it to the fund manager to be underweight or overweight in, say Korea or Taiwan. These investors did not choose India vis-à-vis another country. In the last few years, India has moved into the big picture acceptance. Now even a retail Japanese or American, investing in a fund, would consider an India dedicated fund and thereby go for an independent India allocation.
What's your view on the statements referring to India's PE being higher vis-a-viz other emerging markets?
The Indian story is bigger than just declaring that its PE is two points higher than another market.
Many say that India's relative PE to Asia is the highest, therefore it’s a sell. They don't care that India or the world has had a three-year commodity bull run. So commodity companies have done well but their PEs are low because in commodities when the stock prices are at a peak, PE is not the highest but the lowest because earnings have gone up. In fact, normally in commodity companies you buy when the company is making a loss. Because then you hope that they can't make more losses, the capacities will be shrunk and all that. So by definition, the commodity driven countries will have a lower PE at the height of their bull run.
India will have a high PE at the height of a bull run because it has more of everything and not just commodities.
Globally, some sectors are generically low PE sectors — oil and gas, commodity, paper, chemicals — and others are high PE sectors — consumer, pharma and software. India has the lowest weightage of generically lower PE sectors and the highest weightage of the generically higher PE sectors vis-à-vis the other emerging markets.
So just saying that India’s PE is high makes no sense. If you remove software, MNC and certain other stocks which other countries do not have and adjust for it, the PE difference would look much less stark. If you remove Infosys, India's PE will go down by 0.5.
Let's say you come and tell me that I cannot invest in India at 17 PE. I will ask you what you are comfortable with. 15 PE? Then I would say, don't invest in Lever, Infosys or Glaxo. Now take the rest of the companies and choose.
So the higher price-earning does not bother you?
I would have considered this issue if the bull run in India was driven by local investors. If that be the case, then skeptics could say that the speculators are pumping money into the system and driving up prices and the bubble will soon collapse. But, this bull run is driven by foreign investors who have the choice to invest either in the US or Russia or any other country. But yet they are coming to India. Since this bull run is driven by the foreign investor who has a complete choice, it is more credible in that sense.
We had a large company called DSQ Software that suddenly went away. So we may have Infosys but we also have DSQ Software. What could be the fundamental corporate issues?
Let's take the example of the banking sector. There were 15 banks out of which five or six have gone out of business. Even then, if you would had invested equally in each of them, you would have made money, because the ones that that have gone up, have gone up by 100 times. Dangers are there but so are choices. You can't penalise the country for providing choices. In India, even the investors who themselves are not running companies can participate in the stock markets. But in many other economies, you as a normal stock market guy could not have been a party to it. In Russia, how many billionaires have been created because of oil and gas? But in India, Sunil Mittal did not become a billionaire alone. You could have got the stock at Rs 20. You could have bought RIL and HDFC Bank before they went up 50 times.
In India, the stock market gives you the opportunity to participate in every theme. Indian companies, for whatever reason, go public relatively sooner in their lives. By the way, in the US, nearly 300 companies or more have acted in ways which could have taken them to prison because they had issued back-dated options, which is basically cheating. The point is that corporate governance issues are specific to a country, and India is okay.
Retail investors are cautious with the Sensex at 13,000-plus levels. How should they proceed?
Retail investors don’t have to care about an index. Institutional investors worry that if they don’t put the money in the markets and the markets go to 14,000, investors will ask them why the market went up by 7 per cent and their investments by just 2 per cent. A retail investor does not have to prove anything to anyone. So he may or may not take his time. He can wait three months before accepting the idea that 13,000 is just a number. Who knows the answer to that? Or he can do systematic investing. People are programmed to buy at a correction. When that will happen, nobody knows. Therefore, what we tell people is that you should invest only that much money that when it corrects, you can say I want to add, rather than saying “Oh God! I have to pay my bills and redeem”. We tell people to put only half of what they plan to invest in India.
Put only so much that when a correction comes you view it as a buying opportunity. Warren Buffet had said when you go to a shop to buy groceries and you see that grocery prices have gone down, do you feel happy or sad? Obviously happy. So when stock markets go down, and you are in the age group of 30-50, you are buying stocks and have several years before you sell them. So why do you want the markets to be up today?
Do you think the end of the commodity bull run will affect India?
The stock market is not a zero sum game. Ceteris paribus, the stock market every year becomes cheaper by 20 per cent in India and maybe 5 per cent in the world because Indian earnings grow 15-20 per cent as a market. And nobody in this world is projecting that Indian earnings should decline next year. They will say that 25 per cent will become 15 per cent because the commodity bull run is over. But I think if the commodity bull run is over, India is the biggest beneficiary of that because it is a consumer of commodities.
So how does it matter that two listed companies will have lower earnings and, therefore, on paper will appear that the overall index has lower earnings than before? It will be beneficial for all others because at the macro level, we are the consumers of commodities
I have heard statements that the government is not aggressive in its privatisation drive. But, I say that India has the best privatisation track record in the emerging markets. People have defined privatisation as saying that the government should sell companies to private or strategic partners or go public. I look at privatisation as privatisation of a sector — how much of the sector is controlled by private companies? India has achieved privatisation of sectors without ever privatising the state-owned companies.
Isn’t the mutual fund industry privatised? Or is it that just because we didn’t sell UTI, we have not privatised it? In aviation, today, 70 per cent of the traffic is carried by private airlines. Insurance and banking? The government has not sold SBI or LIC to any strategic investor, but you can go to a private sector bank or a private insurance player. On the contrary, go to China and look for a private sector bank. You can only go to a state-owned bank which has a 20 per cent foreign holding but which is still run by the government. Is that privatisation?
You can say that the government lost the opportunity to raise money. If it had sold Indian Airlines to Singapore Airlines, they would have raised more money. By privatisation, the government’s role in the economy should come down and that is happening. In mutual funds, it has come down from 100 to 20 per cent but the government has never privatised its company. Every time you allow private guys to come in, they will win a bit of the share from the government. We have achieved it with genuine bottom-up private sector-created companies rather than selling one big company.
In closing, what's the flip side of investing in India? The downside?
It’s a single country. Single country risks are higher than a diversified index. Apart from that, other factors like the whole world corrects and there is another May.
This interview appeared in December 2006 Issue of Mutual Fund Insight.