Mumbai: Samir Arora, fund manager at private equity firm Helios Capital Llc., said in an interview that valuations of Indian companies were pretty high currently, especially in the frontline stocks. Edited excerpts:
How do you feel about India?
Going forward for the next few months, I am cautious in case of India first because I feel that of the biggest companies in the Sensex or Nifty, I would not touch any of them from all the various sectors. My feeling on the Nifty is: How will it go up if I don’t like any of the large-cap companies in that index?
However, the problem is that the money coming in today is coming in on a top-down basis and wanting to buy India—it buys the same index without bothering over what they are buying inside it.
Bullish mode: Helios Capital fund manager Samir Arora. Bloomberg
In a macro sense, some of the rallies you saw the world over are justified because last year was completely overdone. Most stocks in India fell 80% last year and if stocks fall 80%, it should either be accompanied by an outright fraud or a huge one-time loss like it happened in the US banks or some absolute bubble like valuations. It cannot happen just because you are unhappy as the growth rates have gone from 30% to 20% or 20% to 10%. Satyam (Computer Services Ltd) fell 80% after Ramalinga Raju confessed to the $1.7-billion (Rs7,136 crore then) fraud. But for the whole market to have more than 500 stocks falling 80% was completely overdone and it was more to do with the investors than with investments.
So some of these rallies are more reasonable; it is just that you never know when it will happen, but being bullish for the last one year and longer than that, at the end of it, it is up from every point at least in the last one year.
You would not buy a single large-cap name in the index at this point? You think valuations are prohibitive?
In some of them, valuations are prohibitive; in some sense there are these activities going on, fight, litigation; in some of them because they are in telecom—there are issues related to what their new strategy is; in some it is consumer where growth is negligible. We own three-four of these, but in general, I never know which ones I will buy. So right now, I don’t feel bullish on the index itself.
But as I said, there are two things that I do. One is on a big-picture basis as I have always said that I have bought stocks that are in infrastructure, financial, etc.
The second thing we have done in the last four months, which has helped tactically, is to buy stocks that have been beaten up a lot. But there we know with hindsight that for the last six quarters, their results have not been bad. Obviously, growth rates will be lower than what you may have thought at the end of 2007 but in these stocks, the firms did not lose their relative position within their own space. They are still leaders of their sector and have not done badly in the last six quarters in terms of having blown up or corporate action or governance issue
When we started thinking of this strategy in March, these stocks were down 75-80%. Now they are 40-50% from 2007 levels. You’ll ask what was so great about 2007? The answer is, nothing. But now that we have hindsight, we can say it should not have been too expensive in 2007, not so expensive now, but still, I like the idea of buying beaten up (stocks).
How are you approaching companies that are raising a lot of money? What about people who are doing large-sized follow-on public offers, etc., such as Axis Bank Ltd talking about a billion-dollar-plus issue now?
I don’t know about Axis Bank because they have just announced (it). In general, I bought a few of these QIPs (qualified institutional placements) this year. After being most bearish on real estate, I turned bullish after the first placement of Unitech Ltd. I even bought the second one and a couple others in the sector.
My theory was: their problem in the stock market was getting solved by capital raising. At that point, these firms were poised for bankruptcy and now they are not bankrupt, so now you have to take them back to normal levels—the same thing I said for many other stocks that were down 70-80%, down 50% even today.
One thing is, they are high-beta stocks—Unitech or JP Associates Ltd—but the second was that you drew the worst possible outlook for them at the end of last year on the basis that you will never get money. That they will never be able to raise new capital and get back to business. So many of these guys have done that and because there is optimism on others, it’s worked out.
You said that if global markets do start correcting, you would play along on the way down till a point. What point: 12,500-13,000?
No, I don’t mean it that way, the thing is on the way up, too, we never know how far you will go and it depends on time. If the markets in the world or in India were to correct slowly, it wont change anything because I am able to normally handle that environment as a fund manager and even our investors are able to do so.
What you can’t handle is that the markets fall 10-15-20% in a month and it is not clear how far will it go. It all depends on the pace of the fall. Last year was a panic situation and I can’t fight that any more, so I will go long with it.
You can always create a situation that, yes, this is a 50-60% rally which can be followed by an X% fall, but after that, then what? Everything is a new territory though in a big-picture sense, I don’t think we will have a 20-25% fall because the markets have gone up but no capital has come in — $6 billion of inflow is not much.
Last year, we lost about $12-14 billion and the year before that, in the last six months, we may have got $6-7-8 billion. So for 24 months, we have got no capital, no equity from FIIs (foreign institutional investors).
I am bullish (though) this interview may make me look defensive, and by the end of this year we will get serious money including from hedge funds, which so far haven’t got the same money at the same pace. My investors and the world’s hedge fund investors all redeemed only during November-December of last year. We paid them whatever was worth by January-February of this year while the rally started in March, (and) it was too embarrassing for them to turn around and say, “sorry, take it back.” By the last quarter of this year, as people say, 2009 has been great and that 2010 would again make valuations cheaper, investors can’t keep thinking how they got hit in 2008 and what they did in 2008. They will move on and that is when the money will come. I don’t think this $6 billion inflow is a big amount.
What’s your sense on what lies ahead? Are we still in a groping kind of a situation?
I don’t think so, I think December will be higher than today, but in between if something happens by the end of the year, it will be good. My theory has been that normally as the year turns—today when you talk about a P-E (price-earnings multiple) of any stock, we talk about 2010 March earnings, we just pass it four-five months without feeling aggressive, it will look like we are talking about 2011 earnings, so in everybody’s mind, the valuations become 15-14%.
Secondly, this time around, six-nine months would have passed, let’s say after these guys effectively got the money in their bank accounts. Enough time for them to get over their embarrassment and get on with life because many investors come back saying give us our old watermark, give us some old terms.
Once you redeem, you are like a new investor. So you can see they are desperate, but they can’t turn around within three months and come back as institutional investors but six to nine months later, life will have to move on.
Therefore, you will get more money at the end of this year based on next year’s optimism and outlook than what we have seen this year. It’s just that these days thinking of the week—before when China fell, nobody exactly knew why it fell but if it had fallen another day, the whole world would have followed it without knowing exactly why. Since nobody knows how far the world can take these things, you have to be trigger-happy, which is sad but that’s the way it is.