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00:00Thanks for tuning into Talking Point today. I'm your host, Neeraj Shah. The case for a
00:17chat and right up on your screens here. Are FI outflows a fleeting concern or not really
00:23so? Can Q2 results aid valuations by proving to be a good quarter or will it on expected
00:29lines be a bit of a dampener? Are new age companies the best way to play consumption
00:32if you want to play consumption in the first place? And that's a micro point. But the macro
00:36point is the legitimate pieces of concerns that we probably have around markets currently.
00:41Are they indeed that legitimate? The best person to answer all of that in his own style,
00:46Mr. Sameer Rao of Helios Capital. Sameer, so good having you. Thanks for taking the
00:49time out. Good morning. Sameer, just trying to understand, is this a legitimate concern
00:55that the markets have had in the recent past, this whole allocation to China? Because we
00:59see inflows into China, outflows out of markets like India. Is this a fleeting thing or can
01:07this last? I think this is a fleeting thing. The many things can be there on valuation
01:13and others which may take longer if some people believe that. We can discuss that also. But
01:18on China, my point generally is that many people were extremely underweight and many
01:24people were, on the other hand, extremely frustrated. And these were the large investors
01:28who in interviews or in the newspapers, foreign newspapers, you could read them talking openly
01:34about what their views were on China, these pension funds and endowments and others who
01:41I don't think can change on a dime. So therefore, I think that the large guys will not easily
01:47be moving from one market to the other because let's understand the structure of the emerging
01:52market benchmark or the index. So there are maybe less than 45, 47% combined India plus
02:00China. And there is 50, that means 52, 53% in market like Taiwan, Korea, etc. So if somebody
02:08wants to now invest in China with a fixed amount of money, there are many other places
02:14from which logically you can move to China if you so want. Because these are two different
02:20trades. One is supposedly a secular long-term trade where most of the things are working
02:25all right. And the other is more, okay, it went to extreme value and is already up 30%.
02:31So by switching from here to there, what extra value add will you do in a short period of
02:38time? But in a short period of time, some hedge funds, some people who were caught and
02:43extreme underweight or short in China may be doing it. So I think it's a fleeting trade.
02:48It doesn't change the long-term attraction, maybe of both, but I don't think one is at
02:53the cost of the other. In fact, India is in absolute terms, maybe not in relative terms,
02:59better off if China and all do somewhat well. Because one criticism of India was that our
03:06Indian market valuation premiums to emerging markets have gone up a lot to Asia, ex-Japan
03:12valuations. And a large part of that was triggered by the fact that China was doing very badly.
03:18And second thing is if all other markets are doing well, that is US is clearly doing well
03:23and China also is doing well, then there is less reluctance on the part of the Indian
03:29mutual fund managers sitting on cash. Because if the world is up, we are unlikely to be
03:35down. We may be less up.
03:39Okay. Yeah, that's a telling point too. Just wondering Sameer, I mean, the part two of
03:45the question was this, that at the end of June quarter, FI ownership in India was what,
03:5017 odd percent, 12-year lows, what have you. There were some inflows, right, somewhere around
03:55that. And then there were some inflows, never mind the outflows that have happened last week.
03:59It's not that FIs are really overweight in India as well, right?
04:02Absolutely. If you look at the MSCI index, I think there might be plus minus, there may be
04:08plus one or two, one percent. That is India's weight at the end of August, I think had become
04:1320 point something or 21, which was supposedly just crossing China at that time. And then
04:20with the sharp rally in China, their index rate must have gone back to whatever, some 24, 23,
04:2624 percent. But even prior to that, it was not that India people were so overweight that that
04:33trade will be played, which is sell India to buy China. And that also after a 30 percent difference
04:39between the two markets since a month. Got it. So therefore, the 40, 45 odd thousand
04:43crores of outflows that we've seen, let's say, right, in the last week or if you will,
04:49people would, skeptics would say this doesn't change easily. I heard you say that this might
04:53be a fleeting concern. You reckon the pace of outflows over the next two, three weeks will
04:57moderate? It will moderate. But first of all, you know, the timing of that, I mean, the pullout was
05:04also sort of the same day on the day when SEBI was supposed to come out with the rules on F&O.
05:10And this happened prior to that. I think that day, then in the evening, the thing was that day also
05:15they took out a big amount. So who knows what was the exact reason for taking out? But I can't big
05:22picture imagine that this pace can continue. And I think the pace, by the way, wasn't Friday lower
05:27than Thursday anyway, by two, three thousand crores. So I think it will decline with time.
05:33Got it. Geopolitics has only increased, Sameer, I would love to know. For the longest time,
05:39we said Russia, Ukraine, now it's going, the world has learned to live with it.
05:42Then something else, now a heightened Israel-Iran issue as well. Is there a concern in your mind
05:47for markets? So it may be a concern, but why should it be a concern only for Indians or
05:53Indian market? So I'm only driven by the fact that gold is not up a lot, that oil is actually
05:59not up a lot, a lot. I mean, it was down so much that if it goes up, 68% is part of life.
06:05And the stock markets are not down anywhere. So I mean, they're not, I don't know, maybe they're
06:09up actually in US, it's up month to date. And of course, China is up. So why are we taking it as
06:16if it is our sort of duty to reflect that although big picture, you can say it's a concern if things
06:22go out of control, but why only for the Indian market? So one reason could be that India had
06:27generally done well. But as of now, year to date, India has not done anything great, at least at the
06:34index level, or if I look at the Nifty, it is up 15% in rupee terms, and the year is like two,
06:40three months, so you can annualize it and make it 18%. And generally, a longer term returns of
06:47index would have been say, 14%, 14, 14 and a half, 15%. So it's up 3% more than what it should
06:53be. What's the big deal in that? Even if you look at three year numbers, even if you look at five,
06:57six year numbers, the real story is that the small caps and a part of the mid caps have done very
07:06well. And it's that which is responsible for us all feeling that the market is rocking beyond
07:13limits. Just to give you some perspective in the calendar years 2004, 5, 6 and 7, for four
07:19consecutive years, the annualized returns of the NSC index or NSC 500 index or whatever,
07:26was some 45% per annum for four years, that is called a bull run. Here, a small part of small
07:33and mid cap stocks going up is a good bull run, but it is not, I don't think it's some wild thing
07:39that is happening. Okay, so is Sameer Arora constructive on Indian equities from where we
07:49are right now? Yes, yes, we are constructive because my thing is number one is that it is
07:55very difficult to preempt these global issues. So if somebody says, Oh, what happens if tomorrow,
08:00Iran comes in or these Israel guys go in again, attack Iran or something happens,
08:04then we have to react. But preempting these global issues, for example, oh, China is very
08:11aggressive in Taiwan, let's say, not today, but I think in general, what am I supposed to do about
08:15it? Because they may be only talking, saber rattling, never do anything, these things.
08:20For example, if on 21st February, whatever the date was of 2022, you had said that Russia will
08:27be fighting with Ukraine, no, no, these things don't happen normally. There is this, there is
08:34NATO, there is UN, there is, you know, you blacklist these guys, you sanction them, nothing
08:39happens. So these things are very difficult to say. And even there, when I actually got negative
08:46and raised 20% cash for two reasons in 2022. First reason was the my correct view that the
08:54interest rates will be hiked a lot. For whatever reason, I can remind you, I said it even in Jan
08:59Feb of that time, and they were raised a lot. And then the war happened. And we raised 20%
09:05cash and the market did not fall, I think even a percent after that, maybe it went up 3-5%
09:11for the rest of the year. So this raising of cash is a very difficult thing, which is the
09:16end result of whatever this analysis we are doing. And today, I feel that the US market is very good
09:23and the Chinese market is very good. We may underperform for some time, do this, that,
09:28but we are not really falling to make my normal stance and my normal actions very, you know,
09:38negative. Okay, one of the things that came out in conversations, I was out for a few days, and
09:45people cited that the state election exit polls are also turning out to be a bit of a concern
09:52to your mind as well. Is that a concern? I mean, we don't know what the actual result will be, but
09:56Yeah, yeah. But assume that BJP is losing Haryana. I think maybe that one was known,
10:02it might be a little bit more when if they lose Maharashtra. But generally, after the elections,
10:10the day to day thought or thinking that what the government is doing and what policies they are
10:17doing and what changes they're bringing has come down. Now that is good or bad. It could be
10:22considered good in the sense that the market is no longer depending only on government
10:28announcements and steps. Many of them were announcements and they take so long to convert to
10:34reality on the ground and earnings for corporates. But that is true, actually,
10:39since the budget and that's why there's been a change of somewhat leadership, where the PSUs
10:45and defense and railway guys are not doing that well as they were. That I've been saying since
10:51the budget day that that has changed. Yes. Okay. Okay. So Sameer, I'm just trying to
10:59understand because you got this great global experience, right? If you were this large fund,
11:03and I heard you say that those large endowment funds don't change in a hurry, but China valuations
11:10attractive, they are giving stimulus, so on and so forth. India, expensive valuations on a relative
11:15basis, and geopolitics, etc. So if you had a choice of allocating fresh money or reallocating,
11:23would you actually do large changes, if you had the choice to? So that's what I'm saying,
11:28even by the way, we have a global fund. Exactly, which is why I asked. In January, we had bought
11:33two stocks after one of China, Alibaba and Ctrip. And then last week also, we bought Alibaba. Okay,
11:40I'm not the main fund manager there, but I'm sort of part of the gang. So the thing is that
11:46the reality is that it is cheap. Yes. And if it is turning, there is it can go up.
11:53But let's talk now from a point of a fund manager who's invested in India.
11:58And he's unlike this global fund where we bought how much? Okay, 4-5% combined. But if you're
12:04looking at a fund emerging market fund, or other guys or people who have given money to separate
12:09accounts and things like that. And there is, in theory, India plus China plus 53% in other
12:16emerging markets, plus you've done well in Japan. So all that money, and plus, most of these funds
12:23keep getting some new money, plus the trade difference between India and China is already
12:28in one month, some 30-35%. So how many people, how much money do you think will go on that basis,
12:34where separately, India as a secular story is well accepted, was well accepted? See,
12:40it's also an issue of embarrassment. If you go on to the board and said that we are stuck in China,
12:46because of being stuck in private equity, as they've said in many interviews, they said to
12:51us face to face in many meetings, we had in January, February of this year saying that
12:57there is no payout by the PE funds. And therefore, we are not able to invest in
13:02India and China, we are down so much. And suddenly for them to go back, the people who are of that
13:08kind, where they go to boards, where they have investment committees, where they have political
13:14issues of investing here or there, whereas there is a separate ground of hedge fund guys and small
13:21funds, who may be underweight in China, and even with the 30%, just like Indian, or even global
13:29fund managers come to India and buy these IPOs post listing when they are up 40, 50%. And you
13:35can see in these two recent IPOs where people bought them after a heavy pop on day one,
13:44and the stocks are down 20, 25%. Broadly, some of them will have the same experience there.
13:49But even if not, and even if this continues, this is a shorter term trend plus minus 15, 20, 30
13:57days, I think less than that. This part that if any money is actively being taken out of India to
14:04put into China, that trade is not longer than this, I think. But normally, they will do well.
14:10And you know, people may allocate more new money to it. And they may outperform India for some time.
14:15That is possible. It's like value stocks outperform growth stocks for some time.
14:21But I'm saying it's unlikely that we'll be negative if the market is positive. And that
14:29is the first point. No, I find it interesting that the narrative in the last seven, eight days
14:35has moved so much to the FII outflows. But in the narrative for the previous few nine months was
14:40mutual funds are sitting on 1.5 lakh crores of cash. So you know, dips will be bought into.
14:45So you reckon this is a dip that is waiting to be bought into?
14:49Well, it is being bought in the sense that if you see every day, the mutual fund and FII flows
14:54match each other, because that is also the reality. I think the other thing is that,
15:02let's say that Indian market was some 20, people used to say it's 15 odd percent
15:07overvalued compared to its longer term history. That means P of India, and P of say,
15:16emerging markets, or Asia, but mostly emerging markets, say 15, 18, 20%.
15:21Now, with the Chinese market having gone up, say 30%, and it's made in the index about 20 odd
15:29percent, that means it's well, it has itself pulled up the whole valuation by 5-6%. Therefore,
15:35you are now say 10-12% overvalued, or not overvalued, higher than what the longer term
15:41average is. It doesn't have to be that you have to get to longer term average, but it is within
15:45ballpark, you're not going to be paranoid if you're saying that we are 10-12% higher than
15:51our long term average, because then on the other side, we will give you 15 reasons why India is
15:56doing well, it's become a large market, there was still a China plus one trade, our fiscal
16:02deficit situation is better than many countries, our current account deficit is sort of 1% type,
16:09so our currency may depreciate less, blah, blah, blah, we are the fourth largest market.
16:14So when we go up a little bit, also, the world cannot ignore us. You could have said, okay,
16:19we are the great market, but you know, you're like a small cap stock, which doesn't bother me.
16:24So you can say 5% is because of these reasons, or domestic flows, which has reduced volatility
16:31of the market. And when you reduce volatility of the market, that itself, in theory, should
16:37you know, reduce your cost of capital and increase valuation, blah, blah, blah.
16:41So therefore, big picture, plus minus a few percent here or there, you are like you were
16:47before, which means reasonably valued for reasonable returns. Reasonably valued for
16:53reasonable returns. Perfect. So, Sumit Arora, if you are putting in money to work, would you,
16:59by nature of the first answer that you gave me, be inclined to put it more in the larger
17:04pockets versus the midsize small size ones? In general, yes. In general. But what happens is
17:09the analysts in our firm and in every firm come up with these ideas saying my smidge cap is very
17:16good. So you simply bought up, you know, the large caps you buy only saying, okay,
17:23you know, they haven't gone up, but there is no real bottom up excitement in them.
17:28And therefore, it has to be a combination. And even when we keep saying that
17:32large caps will outperform, in the end, we do at the same time talking and buying
17:39mid and even small because that is more bottom up fun. But yeah, in a big picture sense,
17:47it is large cap. Actually, by the way, although it was not intended to be that,
17:52but Helios is just launching a large and mid cap mutual fund in India in a few days.
17:59Okay, but you're saying it's not intended for that, but the theory would have been...
18:03I think I didn't plan it with you and you didn't even know that this was leading up to this great
18:09question. I am not into all that. We can do without all these things. But I think in general,
18:15yes, even we felt as a firm that large and what I'm saying is, but you know, in a flexi cap fund
18:20or in my offshore fund, it's not that I've absolutely stopped buying a mid and small
18:25because in a big picture sense, I feel that mid and small have done very well because you feel
18:32more excitement and more discovery kind of thing in something in that sense. So it's both.
18:39Okay. Sameer, you mentioned that 45% CAGR performance for the NSE 500 2004 to 2007
18:46and saying that that's the real bull market. So am I to assume that you believe that this is still an
18:52ongoing version of a bull market, if you will? So let's do numbers only. So just to give you
19:00what is a bull market. So right now, if you look at the last five year returns of the NSE 50.
19:09So Nifty, I think will be some 17-18% per annum. Okay. Depends on which day you start and you drop
19:16off some day there. And the market if you do longer term will be some 14-15. Depending again
19:22on which period you consider long term. So you are some 3-3% more per annum for five years.
19:28So that's a cumulative outperformance, let's say of 18-20%, 17-15%. And now that 15% if you're
19:37overvalued, as compared to a longer term average, how many things will you change for that?
19:45Because it is not wide beyond limits just to give you a perspective of what is a bull market and
19:51what is a mad bull market. In the year 1999, the NAV of my fund, which was the Alliance Equity Fund
19:59in the calendar year 1999, went up 280%. And that balance fund, which is now both these are Birla
20:06funds, the balance fund, which was Alliance 95, now called Birla, Sun Life 95. The NAV was up
20:13170% for a mutual fund. That is what I call a bull run. And then in 4-7, the annualized return
20:22of the market was 45% per annum. And my fund went up plus minus that, which is only 60 net.
20:29So that is a bull run. Here the bull run is limited to a few stocks. And those stocks if you don't buy
20:37or you buy less off. So recently, Kotak put out a report and Kotak is negative, as you know, on
20:42caps and all. Sanjeev Prasad must have been the author, I think. That they look at the mid cap
20:49150 stocks. And they did only for one year, I think. And they say that 25 of the 150 stocks
20:58were responsible for more than 50% of the index. And some 30 odd stocks were below 10%.
21:05Right. So large caps haven't done great, because we know the banks haven't done great, the IT
21:11hasn't done great, the traditional consumer hasn't done great. But some other things have
21:16done well, like these oil and gas and PSU and others. So therefore, maybe that index is okay.
21:22And then in the mid cap index has done well. But again, there is a bit concentrated according to
21:27at least for the last one year or whatever. So don't buy some of those. So our conclusion is,
21:33don't do the obvious bad things, rest you can continue to do. And according to me,
21:39one obvious bad thing is not that don't buy IPOs. But don't buy an IPO after listing.
21:47That is height of ridiculousness, particularly when they are popping 30 40 50% on broadly very
21:53expensive IPO price to buy that, that is overdoing the madness. Okay, so what is obvious,
22:04non silly things, I'm just trying to understand. So what you gave us the avoid list. So maybe it's
22:08a defense. Obvious non silly things are financials. But that's a large gap.
22:15Yeah, that's a large gap. But you know, in financials, at least the rest of the financials,
22:20not only the banks, even others, at least they grow properly. They grow 15-16%. Here we can find
22:28that there is rain. So this fellow instead of growing 3% will grow 7% or something that I don't
22:34like that, but that somebody may do or not do. But I saw your initial listing, that what is the
22:40best way to buy a consumer? Is it to buy the new age? Some of it we agree since we have now all
22:48the three new age companies, which is Paytm and Zomato and PB FinTech. You think that growth story
22:59nevermind the valuations is still intact and alive and kicking and will deliver returns?
23:05That's what we think that the growth is very good. And here is a shortage of high growth.
23:10And there is no real big competition. In the case of Paytm, which we own, let me again explain.
23:18The thing is that a second company cannot go public unless this guy does well. You know,
23:25all these other 25 FinTechs can go dream of getting listed. This stock doesn't do well.
23:31And in a big picture sense, what happens is it's not that they start buying the stock to make it
23:35go well, but they change themselves and they try to make some money so that they can go public by
23:41saying we are not loss making or we are making very less loss. And therefore that helps the
23:46listed company. And you can see that literally happening. And me indirectly telegraphing it via
23:52Twitter in about six, nine months ago, that Swiggy cannot go public unless Zomato does well.
23:58And so what happened was Swiggy then introduced or maybe they followed but
24:02the platform fee came in and then Zomato did well. And when Zomato stock went up,
24:08Swiggy can say hello, I'm coming at a discount to you. So these things happen in every sector
24:14where the first guy has not done well. The second guy cannot go public and if the second guy has no
24:20money, and the first guy is public, and has money, then sometime later, the second, third,
24:28fourth guy have to start competing less and worry about their own profitability. And as soon as they
24:33worry about their profitability, the first guy also does that despite the picture thesis. But
24:38otherwise, also, the growth rate in these things is better than our 5-7% growth that, you know,
24:44these staple guys do because rain is coming. I remember in the 90s, our office was in Burley,
24:51and we would go out and the joke used to be that if you see rain, that's where the fund managers
24:56are sitting, then you go and buy Hindustan Levers. Those days, I think, are not. I don't want to do
25:01this. Okay, since you're talking IPO, Sameer, going public, etc, the talk of town will be the mega
25:07Hyundai IPO as well. I'm not asking for your view there. It's the first auto IPO after a long time,
25:12and no scarcity premium. A lot of people compare Hyundai valuations in Korea to Hyundai India's
25:19valuations is, I mean, maybe partly faulty argument, because everything in Korea is cheap.
25:23I'm just trying to understand, what do you think about autos per se, and therefore,
25:26maybe an IPO in this space? I have said it in a big picture sense,
25:31the number one most ridiculous trade in the world, not just in India is auto. It is absolutely
25:38top down, so easy to prove that it is a wrong trade. How? There are these auto companies,
25:45which I've said many times, so I feel like repeating myself, but you have these IC engine
25:49car manufacturers, and the system or the society or whatever, consumers or climate distinct say,
25:57now you have to make EV cars instead, if you want to basically be remaining in business.
26:04All these guys spend millions of dollars to move to new technology, but there is no promise that
26:10therefore, the market size will go up, or that your profitability will go up. You are basically
26:16spending all this money to remain in business. That itself would have been a very big capital
26:23destroying activity. In addition, what happened is that there were new competitors who had no
26:30plans of being in IC business, and suddenly when EV business started, they said, oh, this we also
26:36can do for whatever reason that they thought they had. From Tesla to BYD to Arola, all these guys
26:44who were not there in the original industry structure are new players. Again, has anybody
26:53ever said to you that because we are all moving to EV, then the market size is going up from what
27:00it was, say, before this happened, or that the profits will be higher? No, for the same industry,
27:07the number of players are more. And you are all having to invest. Now the only thing we can say
27:13in India is, oh, we are protected. You tell me how much multiple will you give to a company which is
27:20making its money because of protection. And you know that the every guy, not just the Korean guy,
27:27every guy in the world has warned about declining sales. Their stocks are down 20-30% this year,
27:34whose multiples are four to five. But no, we are here. So in some things we also accept,
27:40but this is too blatant, according to me, on every angle.
27:44Sameer Arora, thank you so much. Trust you to call us Paid As Paid, always. But thanks for
27:48taking the time out. And festive greetings in advance. Sameer, hopefully we'll talk once
27:53around the Diwali season. Okay, thank you very much. Bye.
27:56And viewers, thanks for tuning in to this leg of Talking Point.