If life was so simple in stock market, Buffett won't have underperformed for 15 years: Samir Arora
- Some stocks we buy for future, some for present and some for past performance.
- For us the big picture is financials, consumer and IT.
- I will not be 100% in midcaps names.
How would you characterise the environment, are we in for a long winter or is this the end of the trouble?
It is a very good time. The Nifty is always supposed to be at peak because in theory the earnings and if the markets reflect in Nifty, it should always be at a peak. So ignore that for the moment. We should draw confidence from the fact that the government’s concerns about the market is at a peak or at least in high zone and that is where I put in my bets.
Even if Infosys is down 10% and Nifty is merely flat to up, it shows that the market itself is also reflecting a little bit of confidence and we need that because for two years, the Indian market has done very badly and it is a broader market. We have a lot of room to go up.
Let us not talk about today, tomorrow, this week, next week. It is Diwali time and how do you view the market and the economy? Exactly a year from now, if we are interacting on the same forum, what kind of market and economy do you think we could be staring at?
Obviously everybody knows that today the earnings are down and that our corporate earnings to GDP is low but that also is unsustainably low because anything which is outside of broad range, cannot be considered as the norm.
For example, corporate earnings to GDP ratio is below 3%. It used to be 7% odd in 2007-08 when US was around 10%. So this 3% is a new for us. a), At some point, there will be a cyclical rebound, whether it is because of the fact that the government has granted a corporate tax cut or the economy has turned on its own or because the government seems to have given up so much on revenue front and there could be a bit of fiscal deficit.
If you looked at what has happened in the last three months -- the cut in corporate tax rate in July, rollback of FPI rate hike, plans to strategically divest in BPCL and maybe in HPCL and also as Mr Modi said in New York, we are looking towards bringing down equity taxation to global benchmarks, the reaction of the market should have been better. It is just that because they started on a wrong tone and ever since has been trying to recover from that, the people are more upset. But if we just look at it as one big announcement on a big day, it would have led to a massive rally.
The economy has many things going for it, whether it is lower interest rates or just the fact that there is a base effect, but we broadly know that those are cyclical phenomenon, maybe short cycle, maybe slightly longer but in the meantime, there are slightly longer term reform benefits from privatisation of BPCL and corporate tax cut and maybe under pressure some lower personal taxes and then maybe an LTCG or DDT going away, not because I wish for it which I do, but because the prime minister said it himself a few days ago.
He did not say literally but if he says that we have to bring taxes in line with global equity taxes, what does that mean? These are the only taxes which make us not in line with global standards.
We were just looking at last Diwali to this Diwali returns and it has been a 10% move for the Nifty. I am not even touching the broader markets. With all the presumptions that you were just making, what kind of index returns can we expect for the next year to come?
Normally, I would think this should be more than 15-20% but last Diwali to now, the returns seem to be good because anybody who is a bit active had realised that from October, November, if you broadly had slightly fewer midcaps and financials, everybody should have done better than this 10%.
But in the big picture, if you are on such a low base, whenever the rebound happens, it will be in the 20s in terms of earnings growth. This year, the government gifted lower corporate taxes, but to an equity investor, as long as the EPS increase is sustainable, it does not matter whether it came from lower taxation or higher activity.
People always want higher activity because they think the higher activity is sustainable but we have to believe for the moment that the lower corporate taxes are not going to be reversed again. So, it is as sustainable and is actually simpler to get while we still wait for the top line to improve. But those things have a shorter life and that will happen sooner rather than later.
Last year, we saw major companies across sectors -- be it in real estate, NBFCs, banks or, FMCG collapse. On top of that, we got companies with balance sheet issues. When can we really see the earning cycle restart?
It has happened already. For example, gold sector may be doing badly because of GST or demonetisation, but the companies that are left behind are growing in an environment whether the industry does not grow at all. Similarly, one day in real estate, we will see 80% of the developers are out of business because either they do not have black money or the customer does not believe that he can rely on them to buy an in-progress house. Plus 0% GST benefit versus 5% means that you will only buy a completed house. Whoever is left behind, will do well. The same thing is happening in financials. If earlier, there were 50 companies and every private equity and every bank employees who was fired wanted to start an NBFC. Now there will be less of those and the rest of the world will move on.
So unless there are one or two disasters of the kind which bring down not only the company but also leads to a chain reaction, we are okay. We cannot be negative for so long because if I look at my own history, I have been doing this for like 25 years. We have rarely had three bad years in theory and I do not consider this year to be bad in any way. It is an okay year so far, but if you say broadly that we have had two bad years that is 2018 and 2019, I will tell you please rely on the power of the base effect, if nothing else.
Would you say some of the investors -- retail as well as institutional -- who bought into beaten down stocks like Yes Bank, Indiabulls, need to get out? There appears to be bad apples in every basket?
It is absolute nonsense to believe that you will buy 10 companies and that is how you will make money because those 10 companies are the winners. It does not mean that when you started 10 years ago, you could have exactly honed on to those 10 companies. If you are buying many companies in which three go up and one goes to zero, you will make better returns than looking in a hindsight mirror.
Who would have thought for Levers as a bad company in 1999 but till 2007, the market went up 21% per annum and Levers went up 2% per annum. Even today, can you say that Wipro is a bad company? But look at its returns from 1999 to 2007 and compare that to the index? Can anybody say Infosys was a bad company but today see what has happened?
So, we rely on 20 companies because these 20 companies have done well in the past and this is me talking, who actually owns may be 12 of them and actually have been holding some of them for the longest possible time. But that does not mean that 100% of the portfolio can be built with these names. If life was so simple, Warren Buffet would not have underperformed for 15 years. The point is there is no formula, the formula is only of humbleness which is that there is no formula.
Today there is a great interview by Bharat Shah in Economic Times saying you do not start by buying multibaggers , you start by buying good companies and because you are able to hold on to them and because they sustain, they become multibaggers.
I have also understood that you can buy companies where you can predict the next three to five years of earnings. Who knows in 10-15 years, what will survive? So, where do you think there is earnings visibility of 15% to 18% and where valuations are reasonable? Where do you think CAGR returns for next three-five years could be double digit?
Point is, we do not know exactly at which point the market broadens except that it is looking like that it can broaden relatively soon. If you have survived for two years without blowing up where your stock might be down 30-40%, but your earnings were down a little bit or did not grow up as much as expected. We also hold many of the stocks that have done well for everybody except that we just do not make our entire 100% of portfolio with those stocks, You always have to anticipate what may happen and today, I feel that the broadening of the market is near. I still will not go for 100% and even if it broadens I will not be 100% in midcaps names. But I think it will broaden.
But from our point of view, the sectors that look good are the sectors that always look good except that we may not have had some stocks. For example, in the last one to one-and-a-half years, people suddenly started buying ICICI Bank and Axis Bank. Previously, for three-four years, they were not doing so. The big sectors do not have to change but within that, you buy newer companies or companies that may have done badly.
For us the big picture will always remain financials, consumer and IT and within that we will decide whether to broaden or not. We have these $10-15-billion financial tech companies, companies that put logos on some hotels and they are about $10 billion and we have the newer private sector banks trading at say $1.5 billion. We recently saw when Indiabulls did not get a banking licence, its market cap fell by $3 billion or so. Even if we look at it from a Rs 700-Rs 800 price rather than some would have a Rs 1,300-1,400 price. That means the market valued Lakshmi Vilas Bank at effectively $3 billion.
Now if you cannot connect that to other banks in India which are not going under, which are pure private sector and they are at 1.5-2 billion, then you can buy the same 20 companies again.
Would you say stocks like RBL or some of the newer private banks would be a buy?
No comment on stocks.
What about some of these retail names that are trading at unheard of PEs, like D-Mart, Trent? They are super expensive and some have PEs of 100. Would you still be confident on their trajectory going forward? Would you look at getting into these stocks nonetheless?
As I said, there are about 25 such names which could include Nestle, Asian Paints and many others. Out of those 20, may be we have 10-12 names. If I leave out HDFC Bank and Kotak Bank, which also fall in that category but where the numbers are, the growth path is easier to imagine. In other cases, we would have 40-50% in those names. So, it is a mix and match for us.
As far as I am concerned, every year or two, there are new funds that do well. If you are broadly up there for three-four years, you become top number there somewhere. You do not have to be literally in the strategy of that period.
Right now, the strategy for this year and last year was go for highest quality, do not worry about valuations. I do not think that is a strategy forever. So, a rotation of funds happens. If we can be broadly up there for four years, we will be number one over four years. Therefore, for me the theory is very simple. It is called mix and match. You buy some of this, some of that. Some we are buying for future, some we are buying for present, some we are buying because they were good in the past and we believe they will be good but nobody knows anything about anything beyond a point, as today’s example of Infosys shows.
The song for this week was market badha ke rakhna hai in DDLJ style, tell me what is the Diwali week song then?
I do not know about Diwali week, but this week I hope that the government does something. We have all timed up for that and if not literally this week, my bet of late has been that the government cannot end the game with just having a corporate tax cut. It must follow with other things because otherwise it makes no sense. The government has done something which is difficult philosophically and politically, Why not do other simpler things? So I hope they do those things. I hope the cabinet approves the BPCL divestment plan or whatever that they get something for Air India. But they must do all these things fast. If they see the market going up 5%, they should not relax just like we do not relax if the market goes up.
In the past, you have never liked PSU stocks. Are you relooking at them considering that the government is seriously looking at divestment this time?
Budget is too far away. We need steps along the way, maybe this week. The budget is like months away. No, I do not buy PSU stocks because I still am old school. I do not even believe that so much is possible. Although that is a great thing that they have announced, but we do not have institutional capacity to do two deals simultaneously. We have not done that in our NCLT cases.
Even if you see the number of stories that come out on business channels how this company is taking over that company, how this company is getting a strategic investor, in the end, these things take too long and therefore I would be very happy if it happens, but I am okay with my stocks.
Given that what is happening to promoter balance sheets, what has happened to the Zee Group in terms of promoter leverage, how Bajaj Group is suffering because of excess exposure to power and sugar, there are a lot of challenges facing a lot of individual promoters. Where will the capital commitment or ownership come from?
It will come from new companies in the sense that if you look at the tax cut, the animal spirit for the economy will come and it will happen relatively soon. More foreign companies will come to manufacture in India to take advantage of the new tax rate which is only valid if you start production by 2023 or whatever because you will save 20% or so import duty.
The corporate tax is more or less the same now in the region and in India, you can save nearly 20% import duty for an electronic company or a consumer durable company. How can they not set it up when their margins are 5 and 10% or maybe a little higher at 12-13%? I think that will happen.
Second, in India if they do a little bit of personal tax cut and all that and why is the BPCL or one of these privatisations important? BPCL is a profitable company. In theory, it does not matter to the government but the way we account for our fiscal deficit is that if you sell all of it at one shot, our fiscal deficit is under control. Therefore the government will feel that they can do a bit more of personal tax cut or maybe GST rationalisation, just because of the way we account for things.
It will give them confidence to do more things and then the animal spirit will come. I can produce animal spirit for you in 30 seconds if you just now say that long term capital gains tax is zero. We do not have to start animal spirit from the real economy. tHE stock market is the cheapest way to get animal spirits because we are the least greedy among the economic players. If you give the stock market guys zero LTCG and maybe DDT, we do not ask for labour or legal reforms. We do not ask for land, we just start animal spirits from here and everything else which is connected will pick up.
The prime minister of India said in New York that we are aiming to get equity taxes in line with global benchmarks. If you lay down all the taxes related to equities, the only ones which do not align with global benchmarks are first is Dividend Distribution Tax and Long Term Capital Gains Tax for foreigners. Now since you do not have to do it only for foreigners, you might as well do it for the Indian public also and do it for everybody, just restore it back to Feb last year budget. The point is if the government is keen, this is how animal spirits can be raised.
The fact that markets are reacting so viciously to a bellwether like Infosys on a whistleblower report on a couple of key transactions which may or may not be transactions that will reflect on earnings going forward. How are you perceiving the 15% knockdown that we are seeing today?
I have always said that nobody knows anything about anything beyond a point. So this is exhibit A of that and secondly you go and say that I own 10 of the best companies, but the only way you know it is the best company is because the stock has not fallen. Otherwise, by no definition could you have not said that this is one of the best companies. But today they will not say it, even the guys who do not own it or the ones who own because the stock has fallen 15%.
Fortunately, we are neither long nor short Infosys. But in general, the idea is not to think that you know anything you can only remove as much of the negatives as you can and then you are subject to luck and circumstances beyond your control and that is why after being here for 25 years, I feel less in terms of having conviction of the highest level on any one company. No company deserves that and can get that highest level of conviction, that is the way life is.