Why Samir Arora is betting on fallen tech stars Paytm, Zomato

“If the US is not falling and China is doing well, India may underperform China for 6-12 months, but I still think that on an absolute basis, this year will be reasonably good for India in the range of 15%. when the years are positive, the returns are more than average, 13-14-15% per annum. We will be plus/minus that or higher by the end of the year,” says Samir Arora, Founder & Fund Manager, Helios Capital

What is the reading for the year ahead for the market? It is not looking all that hunky-dory at least to start off with?
I think it is quite okay. The first few weeks have been disappointing but in general, the US seems to be settling down and may have already bottomed or may bottom in the next few weeks or months as the interest rates reach the 5% target and inflation does not seem to be going out of control. We saw inflation in France slowing down in December.

However, the US inflation rate may not reach the targeted 2% level soon and therefore the Federal Reserve may not cut rates so easily but the hikes will stop some time soon which means the market will stop looking at a fall every day. If China also does well – which could be more of a rebound trade – India should not be negative just because at the end of the year, China is up 15-20% or even more.

If the US is not falling and China is doing well, India may underperform China for 6-12 months, but I still think that On an absolute basis, this year will be reasonably good for India in the range of 15%. If we see how these cycles move, positive years are say five-six, then one or two negative years and in those negative years, we give up the last two years’ performance.

So, we have four years of performance in a seven-year period and sometimes five years of performance in a seven-year period with one year being negative and that negative year taking away the returns even of the previous positive year. So when the years are positive, the returns are more than average, 13-14-15% per annum. We will be plus/minus that or higher by the end of the year.

But to achieve that kind of return, unlike 2021 or 2022, will we have to bet on a different set of horses this year? Would you have to be bullish on a completely different and new set of sectors as opposed to what you did previous year?
There are not many new sectors in the world. Ultimately new sectors were a story of the 90s when we were making 60% per annum for many years because there were new sectors like the Indian IT sector and the new companies were getting listed. Even telecom was a new sector. Private media companies were a sector. These sectors you cannot find every day.

I did not mean newborn sectors, I mean different sectors from what you did in 2022.
If you broadly define them, worldwide financials, consumer and IT are big sectors. If you look at the Forbes billionaire list, you will see these sectors have compounded over years and 80-90% of the wealth will come from these three sectors. You may once in a while buy one defence stock or a beaten up stock, but ultimately the main themes in the world are financials, consumer and IT, pharma. Everything else is on and off. There is no history in the other sectors of making long-term returns and maybe once in a while, some stocks will do that but in aggregate, very few stocks from outside these three sectors have created long-term wealth.

Do you think the recent additions like Zomato, Paytm within the new age tech space will get you added to the billionaire’s lists?
We own both these stocks and we bought Paytm when it was down 75% from the top and Zomato was also down something similar from the top, but 30% odd down from IPO. So now we are betting again on these two having now believing that they are survivors, that their competitors have run out, that the people who were funding the competitors have given up because in every business whether it was home food delivery or whether it was fintech they were like 50 start-ups in fintech and maybe five start-ups or more in delivery and those things have run out.

These guys are long term survivors, plus the stocks had been beaten up enough. They are not really making losses anymore and also they both have nearly a billion dollars of cash. So let us see. But we are not betting on any one stock to change our life. Our bet has always been and it has worked quite well all our lives that you buy 20-25 stocks of this kind and seven, 10 of the bigger stocks like HDFC Bank and from these 25, some 10-15 will do well, two, three will end up doing badly and the rest will breakeven relative to the market. But one never knows which one will deliver.

For example, last year, how could anybody have imagined that suddenly Varun Beverages which we own would be up 120% or Lemon Tree would be up some 70-80%? One cannot know that ahead of time. One broadly selects a group of 20 odd stocks and hope that the stats work in your favour and that anyways some 8-9 have to do well. If you can have three do extra well or three do less badly, you outperform.

We all know your overweight stance on financials and banks. Do you need to bet on different horses this time around? Do you have this cluster kind of approach within banks also or do you bet on specific names?
We have HDFC Bank, ICICI Bank and State Bank in nearly the same weight. Technically right now, HDFC Bank may not even be first, it might have become second but broadly they are all 7.5%. And we also own Axis Bank and we also own IDFC First Bank. We do not own the other state-owned banks because generally we have been uncomfortable all our life with those stocks and just because they became cheap for a trade, we can’t buy them. Maybe we should have bought one for the trade but I still do not believe that these companies have got that much freedom.

It is true that they are at a point where NPAs have been written off but for 25 years we have done well betting against all these things. So moving towards them would have been a very big change in our mindset and we were not ready to do that.

But we have a clearly reasonable bet in financials relative to say tech. That is how the financials became so overweight because we took a view that whatever may happen in IT, it will mostly underperform our market which it seems to have done although we did not get it right. We did not sell them all at the top but from January last year, I have been saying and we reduced some then but the rest was sold only in July or August and that money was transferred to financials and consumers.

If FIIs are going to be selling left, right and centre, where is it going to lead the financials? Towards the end of 2022, it was being said that this is the time for the public sector banks. We saw the runup in the share price. Did you get tempted? Are you still preferring the private sector lenders?
We have had State Bank and that is enough of our bet on PSU banks. But let me say that I do not think FIIs would be selling left, right and centre. Even last year in the first six months they sold $28 billion of stocks and in the next six months, they bought $12 billion worth. I think they ended the year down $16 billion but this was only the fourth time in 20 odd years that they sold. The previous years they sold were 2008, 2011 and I think 2018. So the normal trend for them is to buy.

Now let us say that they today believe that China is having a rebound and therefore they need to increase their weight there. Every year in any case they are supposed to put if they want to match the index at least in the emerging market since 29 or 28% into China. I cannot imagine that they want to right now put more than 29% and have to sell from India to buy there. This is the fast money hedge fund money which may be running with a fixed amount of capital but do you really believe that after having seen how in Russia they were marked to zero not as the portfolio investors but even corporates had to sell off like McDonald’s, British Petroleum and all because of US sanctions?

Right now there is a non-trivial probability that something can happen in China versus Taiwan. Just last to last week, that is in the week of 26th December, highest number of planes from China went into Taiwanese territories. The Taiwanese government has changed the military training for their citizens from four months for everybody to one year.

On CNN, I saw that the US is talking about war games and how many planes they will lose and how many ships they will lose if there was a fight. I hope none of this happens but do you believe that some 5-10 years type investor, pension fund endowment not the hedge fund type crowd will now increase beyond 29% their weight in China, if there is even a 10% probability in their mind that it can go to zero in case of a war and the US put sanctions and forces them to sell.

An auto company will now be doing more outsourcing and finding more places from where to outsource. I think we should not worry about Indian money going to China. In the end, I think this will sort itself out. We have to also control ourselves like we are now being worried about the Budget that the government will increase taxes on capital gains. If they do that then that means we are shooting ourselves in the foot and we would not have to blame anybody else but us, Nobody else in the world taxes foreign investors, nobody!