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Business News/ Market / Stock-market-news/  We are super bullish on India, says Samir Arora of Helios Capital
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We are super bullish on India, says Samir Arora of Helios Capital

Arora on how the global fall in oil prices was as big a development as Modi's BJP-led govt coming to power this year

Samir Arora says the oil price decline is worth twice what foreign investors have put into India.Premium
Samir Arora says the oil price decline is worth twice what foreign investors have put into India.

Singapore: India has saved $25 billion from the fall in oil prices, and this is far higher than the $15 billion that foreign institutional investors (FIIs) have put into Indian equities this year, said Samir Arora, founder and fund manager at Helios Capital Management Pte. Ltd. He also said the global fall in oil prices was as big a development for India as that of Narendra Modi’s Bharatiya Janata Party (BJP)-led government coming to power this year. Edited excerpts from an interview:

The Indian markets are up over 30% this year. As someone who invests solely in Indian equities, how do you look at it?

If you say one year, the market is up 35%, but that is a random number. If you randomly took December 2010 as a starting number, the market is flat. If you randomly took December 2007, then the market in dollar terms is down about 20%. It so happens that one-year numbers look good because the market bottomed out last year, but if you give it a slightly longer period of review, then over a four-year period, the market is down. The way to look at it is whether the current valuations are high, whether the expectation of earnings can be higher. Last year, the markets fell a lot—the last three years it did not go up—and that is why it is up this year. The big reason why it is up this year is the change of government. The economic stalling that the previous government had created because of being under pressure and the policy paralysis has been replaced by the optimism that Modi is the right man for the job as India was looking for a leader. The short-term trigger is the oil price decline—that is as big an event as Modi coming to power. Having these two elements in place is why we are super bullish on India.

How important is the oil price decline for India?

Oil price decline is worth twice what foreign investors put into India if you annualize and if you believe that these prices will remain for some time. I don’t think people have understood the significance of the oil price decline. We are currently saying nothing has changed on the ground since the new government has come and that it is all sentiment. All the elements that make the market do well are in place—fiscal deficit is in control, may be primarily because of oil, current account deficit is down, inflation is down, interest rates are expected to be cut, economy may not be picking up but clearly it has bottomed out, and approvals have been given for several projects and they will some day become somebody’s business. Globally, there are fewer choices and India is among those. Domestic investors have rediscovered interest in mutual funds. The oil price is a massive gift if you put the numbers in perspective. During the July budget, oil was at about $115, and now, even say it is at $80—that is a gain of $35 and for each dollar reduction, India saves about $600-$700 million. That is about $25 billion, which is more than one-and-a-half times what foreigners have put into equities this year. After all this drama of opening up, running after FIIs, we have seen only $15 billion come in—but oil has given us an annualized gift of $25 billion. No level of reforms or policy changes could have got you an additional $25 billion in a year.

So has Modi has been lucky?

Luck is part of the package. The role of the government is to assist the growth of the economy whatever happens to global or local forces. Modi’s role has been that since he has come in, there have been negatives, and the only thing you can say is that he could have acted faster. But there has been no reversal—the fact that oil has fallen has given both the government and Modi a few more months to put the elements in place. There have been no detractions from the positives that have been happening on their own because of a cyclical turn. In the previous government, we can specifically say they were responsible for the detractions—for instance, you singled out one multi-national and applied tax retrospectively, and the other MNCs (multinational companies) who were investing in India on their own, without taking any assistance from the government, began relooking at their businesses. Or if someone had invested, and because of the nature of the allocations that were done, if they were later reversed, everything got stopped. Government’s normal role is to assist growth. The previous government stopped the normal cycle.

Where do you see the Indian markets headed?

Much much higher…the current PE (price-earning) of the market, which is around 17 times, comes at a time when the earnings are clearly lower than our longer term average in terms of percentage of sales, or corporate profits as a percentage of GDP (gross domestic product)… In the last 3-4 years, many projects have got stuck, interest rates have been high and in 2006-07, there was excessive investment and people went in despite the risks. In general, we know we are at a low in terms of corporate profitability, in terms of interest rate costs and in terms of many investments not yielding fruit. In that context, PEs are within the broad range and all the microelements are in place. The building blocks are there.

The Reserve Bank of India (RBI) did not cut interest rates despite demands to do so.

It does not matter. The markets have also accepted it and have not reacted. We should wait for the next time—for example, if oil does not go up or there no major goof-ups from the government’s side, RBI will have to do it the next time. If (RBI governor Raghuram) Rajan does not do it smoothly, he will have to cut 50 bps (basis points) at a time.

But I think Rajan should have cut rates today. The reason being, Rajan has already signalled that he is okay with the current price of oil, because he has accepted that gold is no longer an issue. In what situation can he say he does not care about gold imports? He has said they are scrapping some part on the restrictions on gold. He could say that only because the price of importing oil is coming down. If he can accept the fact that oil has dipped, then he has to accept it on the other side also, that this is sustainable. The only excuse RBI has is that it can say oil price fall is due to luck. But, over time, interest rate cut is due. The markets don’t care whether it was cut this time or if will happen next time. It will just correct for a day and it does not impact anyone as it is only a matter of time before interest rates come down. The actual rates are falling—the equity investor cannot wait for the event, but has to anticipate when it will happen. China and Korea have cut rates, and so, why should India not do so?

Will India continue to remain the favourite among global fund managers when it comes to emerging markets?

India has always been the favourite of fund managers even before this year. Everyone has liked Indian companies historically for a long time, be it private sector banks, be it tech companies, pharma, consumer... Now, the change is whether we should like state-owned companies or cyclical companies. But even after this rally, people are not liking these companies. Look at it differently—from 2005 to today, India has had two very massive negative events. The first was in 2008, when Indian markets fell double of that of the US markets, and the second episode was from 2011-2013 where the rupee depreciated 30%. After that, Indian market is nearly double of what the US market’s returns are. It also went through a three-year period where the government did nothing. So the overall period—from July 2005—the Indian market has been up 140% when compared with 65% for the US. This year, there has been 30% extra growth. Even without this year’s returns, the Indian market, after having had two episodes—one, which was definitely not our doing, and the other one in which the US was not hurt—even then India was 50% more than the US in terms of its pure performance during this period. For the last 15 years, the Nifty has outperformed the Warren Buffett index. I always say that in India, we like Buffet, but please don’t ignore the fact that our unmanaged index has beaten Berkshire Hathaway. Fifteen years is not a short period.

Has India done enough to shed its “fragile" tag?

It has. If you believe that these prices are sustainable for commodities, then it has definitely not only shed its fragile tag, but has become a massive beneficiary that next year, India could have a current account deficit of 1% (of GDP), or may be even less, even if you assume that when the economy recovers, capital goods imports will pick up again. This is as good as it can get. The Indian government has already deregulated fuel prices—the risk of an oil shock has anyway declined. In a few months from now, the rating agencies will have to upgrade India because our numbers will look good. Even without that, they will see India is no longer exposed to the oil risk. Interest rates will be cut, capital goods approvals will become orders and the oil price decline is not because of some global calamity—it is only because there is a fight between two kinds of oil producers—the US and the other cartel.

Your take on six months of the Modi-led government? Are you in the camp that has been calling for big bang reforms?

The gradualism approach of Modi is not better for India, but talking purely from a market point of view, it is fine. But from a country point of view, we can go faster like appointing CEOs of banks, on regulatory issues… I don’t think we need big bang reforms. What we need is UID (unique identity project) to be rolled out faster, GST (goods and services tax) to be brought in… Opening up retail or opening up to FDI (foreign direct investment) in sectors cannot be called big bang, it is not even a bang. There are already 6-7 Indian companies doing retail and does anyone care if foreigners also come in? If you open FDI in insurance, only about five companies will be interested—these are not big bang reforms. Big bang is if you can implement direct benefits transfer, if you can bring in GST. Big bang is having honest guys like Manohar Parrikar and Suresh Prabhu being in charge of ministries like defence and railways. These guys are delivery guys—this is as big as doing any reform. Big bang is when you don’t blow away the benefits of oil price gains by wasting it. Implementation and governance is big bang. Plucking the low hanging fruit without wasting too much time is big bang. Today, with the Internet, nobody cares about FDI in retail. If the small Indian retailer is hurt, it won’t be from Wal-Mart (Stores Inc.) coming in, but by e-commerce firms. It is foreigners who look at FDI as reform, but real reform is governance. Even if you took the worse policies, but implement them well, it will become a big-bang reform. Take for instance the National Rural Employment Guarantee scheme—people say it is bad—but if you implement it well, create projects, make it accountable, have a mechanism for giving the money directly to people and suddenly it will become a big bang reform. A new policy can never be big-bang. All policies that India needs are already in place.

Big bang is having a strong leader in place in Modi. Already three cabinet ministers have been changed. A strong leader is one who says the party will go alone on Maharashtra and Haryana. What Modi needs is strong No.2 and No.3 leaders who can narrow down the choice for him to take that final decision. He needs leaders with credibility and intelligence to do the spade work.

Where do you see the rupee?

When compared with the dollar, it looks bad, but compared with other currencies, it is very good. We feel rupee is depreciated, but that is only against the dollar. But the dollar has been such a wild outperformer that actually the rupee has performed very well this year. Against the dollar, the rupee will not be allowed to strengthen. When the economy improves, current account deficit will have to go up. From 2011 to 2013, the rupee fell 30%, but from 2005 to 2011, it was exactly the same with massive volatility in between. Broadly 2-4% depreciation of the rupee is acceptable to the foreigner—but, I don’t think that will also happen in the short term.

Despite all the optimism, numbers don’t reflect the India story yet, be it the latest GDP figures or the latest corporate earnings.

In 2008, the market fell 60%, but that did not mean GDP fell 60%, or earnings fell 60%. In 2009, the market went up some 80%—did earnings or GDP growth go up 80%? Till September last year, the market had fallen 30%, but nothing had changed on the ground. What had happened was that our assumptions that rupee will go to 90 or that India may ask for IMF (International Monetary Fund) loan were all wrong. The numbers can be exaggerated in both directions. Over long periods, it will work out, but over a short period, you are either anticipating for next year, or correcting for the past. What has changed is we had a massive event—the elections—and the outcome turned out to be positive. Second is that earnings are up 12% annualized. Market is up 33%—12% of this comes from corporate earnings. For the remaining 20%, we can say the election outcome contributed another 10%. Now, that means the market has gone up only 10% but for these factors—in India, the markets can go up or down 10% several times in a year. So it is not that some extraordinary thing has happened for the market to be up 33% this year. Valuations are the best way to look at it.

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Published: 04 Dec 2014, 11:18 PM IST
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