Talking Point | Catch #HeliosCapital's Samir Arora in conversation with Niraj Shah sharing insights on the current market scenario. #BQLive
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00:00 Thanks for tuning into Talking Point.
00:02 I'm your host, Neeraj Shah.
00:03 Our guest today, a very special guest, Sameer Aurora Johnson, all the way from London.
00:07 Sameer, good morning to you.
00:09 I hope all is well.
00:10 Good morning.
00:11 All is good.
00:12 I am starting my week with your interview.
00:15 Very excited.
00:16 Thank you.
00:17 Well, we are excited too, Sameer.
00:20 The markets seem fairly excited as well, at least select pockets do.
00:25 I'm trying to understand how do you think through all that's happening on the macro
00:28 front with yields, with central banking decisions versus this whole preference for India and
00:33 what Indian markets could do?
00:35 And within India, for India, small caps and mid caps and PSUs.
00:40 So it is a bit confusing as to how we suddenly landed here.
00:45 But in a big picture sense, it's not that it's gone up a lot if I look at it over one
00:50 or two years.
00:51 And so generally, you know, it looks a bit much every day if it goes up, which unnerves
00:57 me.
00:58 I would rather have it go up slowly also because we have to launch our mutual fund one day
01:02 soon, better have it invested before it goes up like this.
01:06 But in general, it's good for the existing funds, existing investors and in general,
01:10 not totally out of line with what should have happened or should be happening other than
01:15 maybe a few small capish type stocks.
01:19 OK.
01:20 And I want to talk about the mutual fund thing at the end as well, Sameer, by the way, if
01:23 you have the time.
01:24 But just before that, a lot of foreign funds that I managed to speak to in the recent past
01:34 or people who haven't come on air but responded on emails are all talking about wanting to
01:38 put in money directionally into India, whether they take it to right now or when the paperwork
01:42 gets done in three, six months, 12 months time.
01:45 But there seems to be this really large move.
01:47 Now, you've looked at this phenomenon for a number of years.
01:50 Is this time really different from a global investor's perspective wanting into India
01:54 or is this one of the many cycles?
01:56 So anybody who says that if his paperwork takes 12 months, he is not really interested
02:01 because why should it take 12 months?
02:03 These days, FPI approval stay maybe three, four weeks or maybe eight weeks, but not 12
02:09 months.
02:10 But separately, it has always been real.
02:12 If you look at the size of the FII flows this year, it's not much bigger than what it was
02:18 in previous good years and there have been many like that.
02:23 The only difference this time is that there is because there is simultaneously a big domestic
02:28 push into equities or to mutual funds so that every inflow gets magnified because there
02:34 is no willing seller on the other side.
02:37 And therefore, that is the whole dream that we were living on for so many years that everybody
02:43 will end up buying one day.
02:45 The only thing to be cautious about is that just because there are more buyers, the market
02:49 is not supposed to give you higher returns for that.
02:52 Because the market returns are in theory based on earnings and which is 99.9% of the times
02:59 true, but it may lead to initially a higher spurt and then there'll be a giveback.
03:04 Therefore the best thing is that everything happened smoothly rather than happening in
03:10 spurts.
03:11 I'm not saying the new guys feeling after six months that they came in at the wrong
03:16 time because I don't think that the number of buyers is supposed to change the rate,
03:20 the returns, but they can change the period in which you make them.
03:27 Am I mistakenly thinking that you are a bit skeptical about the broader end of the spectrum
03:32 currently?
03:33 No, my thinking always has been that over time, our Indian market makes 13-15% return
03:40 per annum in rupee terms.
03:42 This time, what we tell the foreigner and also believe it ourselves is that the dollar
03:47 returns might be a little higher than before because previously some 3.5-4% was lost on
03:53 the currency.
03:55 And going forward, if for no other reason than the fact that just last year, the rupee
03:59 depreciated by 10% and then on the margin that the US rates are high, so after maybe
04:05 six, nine months, they'll be cut.
04:07 Or maybe because we are having a slightly better current account situation, whatever
04:11 that you might save, say, people are talking about strengthening, we don't go that far.
04:17 But that if you save 1.5% per annum, that means you depreciate by 2-2.5%.
04:23 Wow, that's like another.
04:24 So that part is fine.
04:26 What I don't get excited about, although it hurts in the short term, is that every piece
04:32 of information is good news.
04:34 For example, it's like an IT company saying that I will grow 8%, let us say 7%.
04:40 And then we accept it in that fall that yes, you're growing 7%.
04:45 Then next day, don't try and excite us by saying that we got an order from somebody.
04:50 That order was in effect inbuilt because of that 7%.
04:53 Otherwise, you won't get the 7% growth.
04:57 Same thing with India.
04:58 If we say that our GDP will grow 7%, let's say, we then don't question that day.
05:03 We say, yeah, yeah, yeah, 7% is normal and you're alive with history.
05:07 But to grow 7% on higher and higher base, all the time means that you have immediately
05:13 accepted that there'll be more infra, more investors, more FIOs, more IPOs, more capital.
05:20 Otherwise, you cannot grow 7%.
05:23 So a large part of this is required to be able to grow at the rates that we took in
05:28 and accepted on day one.
05:30 Therefore, all I say is that, because I also want, I like steadier returns, even without
05:36 any new fund, just because it makes life easier.
05:40 Is that the flow is not supposed to change your return.
05:43 And if it does, then you'll have to give it back in the following year.
05:47 Because the annualized returns will be in this range, based on corporate earnings and
05:52 GDP growth in nominal terms or whatever else.
05:56 Let's add a little bit for your...
05:58 So have the domestic PMS, domestic flows, PMS flows, so on and so forth, changed the
06:06 returns of the small cap space a bit too soon?
06:09 And could there be consolidation ahead?
06:11 They have.
06:12 Yes.
06:13 No, not consolidation.
06:14 They'll have to give it back.
06:15 Consolidation is a very decent word to say that in 2018, these guys, the funds were down
06:22 40, 50, 60%.
06:25 There were many funds about to close and then got saved.
06:28 It's not that suddenly that has changed.
06:32 Because this is not even a real bull run now.
06:35 I mean, even if you take it from March, it's up some 10%, 15%, 20%, right?
06:40 But you look at previous bull runs, after some years, you have to give back many of
06:43 those returns, because the annualized returns over time will be in range of 1% or 2% higher
06:50 per annum for small cap.
06:52 The whole thing is, look at 25-year returns of the small cap index, but don't end it today.
06:58 End it, say, in '19 or '18, just to see what happened in the previous, up to previous cycle,
07:04 but for 20-odd years.
07:06 And then, because there are three, four years are very strong, most probably some of it
07:11 plus minus one year will have to be given back on some pretext or the other.
07:16 Got it.
07:18 Okay.
07:19 So then, Preet, tell me, how do you think about some of these businesses?
07:27 It could be defense, it could be these railways, it could be whatever.
07:31 These stocks are just galloping ahead.
07:34 An 85,000 crore market cap company moves up 20% on a sub-500 crore order.
07:40 Just trying to understand, how do you wrap your head around some of these?
07:43 No, because we have seen it for too long.
07:45 Precisely.
07:46 It cannot last in these stocks.
07:48 And in stocks, in railways and others, we have so much history of 20, 20 years that
07:54 whatever may happen, governments are not able to pay on time.
07:59 Sometimes the government changes, sometimes the state government, like in Karnataka, they
08:02 changed and they, I believe, stopped all the contracts which were given to the previous
08:07 group.
08:08 I mean, not previous group, the previous government had given to whatever group.
08:11 So these things are just going on and will go on forever.
08:14 How can these things stop?
08:16 We are improving in many things, but that doesn't mean that the way a government pays
08:21 its contractors has changed so much or that the style has changed or the bureaucracy has
08:27 changed and neither is anybody expecting it.
08:29 Some of this will be given back.
08:31 You can do what you want as far as I know.
08:33 Now, what happens is that when this stock goes up, because these stocks go up so much,
08:39 in the past, I also used to get carried away.
08:42 Now I have realized there is no point.
08:45 There is enough to beat the market by 5-7% per annum.
08:49 But if you're trying to make a beat the market by 20% per annum, which I used to try by the
08:53 way in the olden days, I did for many years, then in the bad years, you will be beaten
08:58 by 10%.
08:59 I don't like that anymore.
09:01 So the idea that a small stock or a stock with a single order, where anyway you are
09:07 building in 20-30% growth, you see, when you build in a company 20% growth, it automatically
09:14 broadly means 20% order growth, 20% revenue growth, 20% contract growth, whatever.
09:20 So if you get some 500 crore order, first, either you should know that the 20% was already
09:26 covered and this is an additional beyond that.
09:29 And that 500 crore should be so much.
09:32 That means the company is so small that a 500 crore order additional is like 2%, which
09:37 is what a pathetically small company it is.
09:40 So you broadly know, and it's just that is the experience that there is no reason to
09:45 get carried away, which by the way, please let me explain, I also got carried away in
09:49 the 90s by looking at such companies, and it has never worked.
09:54 Not that it worked once in a while, but hardly never.
09:57 And how do we know that?
09:58 Please tell me today, other than in the last three years, a big company, which has got
10:03 orders from railways and become big, tell me one company.
10:06 So how in the last 20 years, nobody became big, because as soon as they got three rounds
10:10 of orders, and somebody didn't pay them and they went back to zero.
10:13 And then again, they got two rounds of orders and then went back.
10:18 QED.
10:19 Okay, same argument holds true for defense?
10:23 No, defense is a little different.
10:25 Because defense is you know, first of all, in the railway, there are private companies
10:29 and companies and you're doing L1.
10:31 I'm talking about the defense, which is government owned companies.
10:36 At least you can say that they are an arm of the government and the government knows
10:39 that this is quite for more than just, you know, some order, it is a strategic thing.
10:45 And now after the China issues in the world and Ukraine, that the world is concentrating
10:51 on having its own defense production.
10:53 Plus, for that, the government has had a big policy and things were being imported.
10:58 So you are substituting.
11:00 So it is in your control also, you were anyway spending this much money.
11:04 Now you might say that for some things, I will encourage domestic production.
11:09 And therefore you were anyway spending that money.
11:11 But when you give it to an Indian or your own state owned company, you might know that
11:16 if you don't give them and they go under, or not under, but that they can't take up
11:20 bigger orders, then you know, in a sense, you are hurting your whole big policy.
11:25 Not in railways or in road or in water treatment or these things, you are anyway, there are
11:30 10 guys and nobody cares for any one of them.
11:34 Got it.
11:35 That's what I would think.
11:37 Okay.
11:38 So the other thing that a lot of people are pondering over is what's happening to some
11:43 of these private financials, which are lagging.
11:46 I mean, for the last few months now, it's not just HDFC and Kotak, even the others have
11:51 kind of stopped.
11:52 I see, I see.
11:53 All paused.
11:54 So what's happening?
11:55 I mean, by the way, I mean, kudos, you were constructive on SBI, but not too many people
11:58 were and it has given you fabulous returns, I'm sure.
12:00 But not this year, this year, not this year, otherwise it's up from three, four times,
12:04 but not this year again.
12:06 So we are, so since because, you know, mid caps are doing well.
12:10 So overall, everybody's beating the benchmark and we are beating it by some 8-9%.
12:15 So therefore we are okay.
12:16 And in some sense, the top three holdings are not working.
12:19 Okay.
12:20 HDFC bank, ICICI bank, state bank.
12:23 So the only way to reconcile that is to say, okay, this is my, I'm putting, saving money
12:28 in a piggy bank and next year I will get from this my returns.
12:33 So as long as the portfolio is doing well, which is doing well because of the PTMs and
12:39 Zomatoes and other things, you know, like IDFC first bank or some other stocks, or even
12:46 some landmark voter or something, something is working, the main three are not working.
12:51 Sure.
12:52 So that means if you look at it in a big picture sense, and you say that these, not only me,
12:57 but many fund managers are outperforming and their top holdings are not working.
13:02 So what does it show about the randomness of this business where in theory, the top
13:07 holding you had higher conviction, whatever, whatever, whatever.
13:11 But that is also in some sense, the signal or sign that this thing can go on for long
13:17 at a market level, because someday those stocks will do well, A, they are doing well fundamentally.
13:23 B, somebody could say that some like ICICI is a consensus trade or something, which they
13:29 can't say for HDFC bank anymore.
13:32 Okay, so I have one consensus trade and one anti consensus trade.
13:37 But the point is that if FIIs have to come in, they are going to buy 25-30% financial
13:43 because that is the weight.
13:44 The domestic guys, if they are raising money, they have to buy, now they can buy 3% less
13:49 or 5% more, but that money has to come into these stocks.
13:53 It is also easiest for anybody to buy them over time, because they can say we are buying
13:59 it at two-year-old number price and not re-rated.
14:03 It is just that you need one starting trigger, like it happened in ITC, and then everybody
14:08 wants to catch up.
14:10 So that is not happening, so people are buying railway, if they are.
14:15 But you change a little bit, which will just happen without exactly knowing what will be
14:19 the trigger.
14:20 But as long as these guys are clearly growing 15-20% in earnings, and the stock hasn't done
14:26 well and the rest of the world is moved on, it's a matter of few months here or there,
14:30 according to me, but we don't know exactly when.
14:33 Got it.
14:34 Okay, last couple of questions.
14:36 The second last question is on something that you had told me earlier, which a lot of people
14:40 lapped up, which is your view then on fintechs.
14:45 I remember you sat down and you said, this is a story which I have heard enough times,
14:49 I don't want to buy it.
14:50 Then you bought into one fintech, admirably so, and it has done remarkably well.
14:56 What is the change in stance if there is one, and how do you think about these businesses
14:59 now?
15:01 So I'll tell you why initially I went and said that many of them will go bankrupt, because
15:05 there were many fintechs.
15:08 See the problem in India, BC versus the world, BC, is that in the world, many companies are
15:14 being made first, and then people want to copy them.
15:18 For example, the first guy, if you made Amazon, it was made by whatever Bezos or whoever,
15:24 but without the world scrutinizing it.
15:27 Then when it becomes successful, then say Indians want to copy an online business, then
15:32 some 40 businesses will be funded by 40 entrepreneurs and 40 PE funds.
15:39 And then in the end, two will be left.
15:41 And then those two will also do well, because the business model or the concept is right.
15:46 But the problem is that when you are copying, it will never be the case that one guy will
15:51 copy, because then there are so, so collectively, these PE guys, according to me, don't make
15:56 much money.
15:57 But what happens is sometimes one guy will have the winner, the end winner, by chance
16:03 or even by research or whatever.
16:05 And so the issue with the fintechs was that there were too many.
16:09 And now the issue is that there are only two food companies and they will not be a third
16:12 food delivery company, you can do what you want.
16:15 But fintechs, there are still five, six, and maybe five, six are okay.
16:18 But previously, about one and a half, two years, I think there were more than 150 fintechs.
16:25 So you know, broadly, that's, you know, maybe one.
16:27 So we like Paytm.
16:29 And we might one day like some more guys if they are listed, who knows, depends on when
16:34 they list or whatever.
16:35 But now that part is over of saying big picture that they are gone, because they are already
16:41 gone.
16:42 The ones who are left are survivors and survivors are valuable.
16:45 Yeah, that's true.
16:46 And of course, credit, you were consulting on Zomato anyway, which was back then too.
16:50 And I think it's played out very, very well.
16:52 It is Zomato we bought at 52.
16:54 And the logic was, and actually, this is from a book called the platform delusion, that
16:59 the many to many is not an easy platform to copy.
17:02 Many, many decide, many decide, many customers, many people in the supply chain, riders and
17:10 restaurants.
17:11 But the second thing is, it is not a tech company, it is a logistics company, it is
17:16 not easy to just sit in a room and do it.
17:19 It needs so much coordination, so much this thing to keep everybody happy.
17:25 It cannot be done easily.
17:27 And then because one more angle we got right was that Swiggy is unlisted.
17:32 And the unlisted guy does not have bargaining power.
17:35 He has to say sir, sir to the listed guy, because the listed guy's price determines
17:40 his going public.
17:42 And so we said that there is no way that Swiggy can drive the competition and bring down,
17:49 if Zomato's price falls, then Swiggy will not be able to go public.
17:53 True.
17:54 Okay, my final question, and I'll have a detailed chat with Dinshaw about this, but
17:58 hey, you're launching a fund, it's coming out in a couple of months.
18:02 Why this move?
18:03 And I think you briefly spoke about it and how different could this be from your perspective?
18:09 What is it that you will look to do via the mutual fund business?
18:13 So first thing is that, you know, I was the original mutual fund guy.
18:16 I was the biggest mutual fund manager among the private guys and I totally enjoyed it.
18:22 We had done it from scratch.
18:25 Alliance was 100% foreign owned company and without having local partners and competing
18:30 with guys who were big domestic companies and had foreign partners, so they had the
18:36 best of both.
18:38 We became number one against the HDFC, the ICICI, and Binla, all the big foreign names
18:43 and big domestic names.
18:45 So I just enjoyed it too much.
18:48 So I always dreamt of doing it again.
18:50 And if we can do half as well on performance, then we are in business, boss.
18:56 That I'm sure you certainly will be, Sameer.
18:57 So wishing you all the best for that.
18:59 Closer to launch, we'll talk more and we'll get Dinshaw to talk about that as well.
19:03 But thank you so much for taking the time out today.
19:05 Thank you.
19:06 Thank you.
19:07 Bye.
19:08 And viewers, thanks for tuning in with this edition of The Talking Point.
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