Samir Arora says expect 15 - 20 % return from Indian Investment

Fund Manager of Helios Capital, Samir Arora believes that earnings slowdown related prices is already reflected in the prices. Arora expects a 15-20% return from the Indian market and is currently bullish on India.

According to him, auto stock prices factor in the rate hike impact, however, he mentions that they don't own any of them. He favours private banks compared to PSU banks.

Arora expects one more rate hike from RBI. He continues to remain bullish on Infosys and the technology sector.

Excerpts of CNBC-TV18's exclusive interview with Samir Arora:

Q: How are you feeling after this correction?

A: The correction has been there and expected in some sense. But as I had earlier said, we are bullish now - of course, we have to define what is bullishness. In the past years, bullishness meant 30-40% returns now bullishness may mean 15-20% return. So that is still possible and achievable in India.

Q: How will the next 3-6 months pan out in India, with concerns about interest rates, earnings slowdown? Will we get back to new highs anytime in the next 3-6 months?

A: New highs is a difficult thing because we do not relate so much to the Index. But if you look at the fact that earning slowdown is related with interest rates, I think some of that is already reflected in the prices. If you look at Indian market performance relative to China; the Chinese market is up 24% this year and I think the Shenzhen is up 50% odd and Brazil is up 9-10%, India is down 4-5% in dollar terms. So it is not that the market has stood still while the interest rate went up or inflation fears went up. Also, earnings expectations for this year from the most bullish estimates are not more than 15-16% EPS growth for '08 or '07. So the point to note here is the markets do not stand still while the rest of the economy changes.

The market predicts that the anomaly is not going to react to things which happen concurrently. This means if something happens today, the stock market, in theory, other than once in a while should have taken that into account 4-5 months and it appears that it has done that in India because the Indian market is down, while two of our other three BRIC peers are up a lot

Q: Because of those earnings concerns though, do you think the markets need to tamper a whole lot more? Do you think a lot more adjustments are required?

A: If adjustment is required, it is required in a few sectors. Even there, we are not sure that it is required but one needs to look at what happened to the market on Monday. From Friday night to Monday, the only negative that happened was that the RBI in a sense affected an increase in interest rates. So why did Reliance have to fall 5% on that day and why did Infosys, HLL, ITC and ONGC have to fall that day?

So the point is that the market overreacts at overall levels. It is possible that certain sectors need a correction. But the point is that it doesn’t mean that the overall market has suddenly become negative because we have a higher interest rate. Everyone has been saying that the direction or the extent was not a surprise. It's just that they expected that this will happen on April 24 and it is sad that it happened on March 31.

Q: Even so, it impacts several key sectors like autos, banks, real estate. In fact in autos, EPS estimates are being downgraded to low single digits from what was double digits, is there problem in those sectors?

A: That’s what I am saying - it is possible in those sectors and it may take some 3-4 months to figure out whether the customers overly care about interest rate in the case of auto. In case of property, if you look at it in a macro sense, there is no beneficiary of higher property prices except 5-6 companies, all of whom are not even in the Index and all of which are up 30, 40, 50 times except if they did an IPO recently. Even then, they are up from what they thought their own company was worth a year ago. So property prices may correct and may adjust but we should not care about them and actually hope and pray that they fall off lot more.

But in auto, we don’t know the exact response of the customers to this new higher interest rate and you are most welcome or anybody is most welcome to wait two, three, four, even six months, if they desire. But normally, if you look at something happening currently and then you react to it, you will lose money most probably. On Monday morning, if you had come in because the market opened gap down and you had shorted the Index, as of right now, you are losing on that trade. You are only gaining if you did the trade on Friday evening. If you did on Monday morning, you are losing already.

So the point is that auto will correct. Their earnings expectation maybe lower but so have the stock prices. Maybe it doesn’t correct as much, and even if it does, you are most welcome. We don’t own any auto, not for this reason, but generally, we have not owned on a simple theory that what doesn’t make money in the rest of the world normally doesn’t make money in India and we never owned it. But the point is that somebody can wait for that but it doesn’t change the overall opportunities in our market.

Q: What about banks - how have you been positioned on the Indian banking sector, public or private?

A: We have always favoured private because of our logic that we compete with the government in particular sectors in terms of our stocks, and again, those stocks have corrected a little bit and maybe they will correct a little bit more. But in general, my belief is that inflation may have peaked or near peaked and interest rates may have peaked or near peaked.

So you may have one more to drive home the point that the government or the Reserve Bank is particularly looking at it. But as of now, the EBITDA evidence is that it might cool off in one or two months. So you cannot overly time that. But in an opportunity sense, we know the market cap of Indian companies, banks vis-à-vis other banks in the region.

Q: What’s your call on cement after all that you have heard from the government over the last two-three months?

A: We have never as in ever owned a cement stock in our new fund since 2005, so we never participated in the bull run and we didn’t participate in the bear run. But in general, the point is that the market, and particularly foreign investors, who have a three week memory have found it very disappointing that the Indian government intervened in one sector and this is going back to the control era and the control raj. I think what they forget is that less than about three-four months ago, there was a coup in Thailand; since then foreign investors have put more money into Thailand and the market is up 12%.

In Hong Kong, there was a company called Pacific Century CyberWorks where the government refused to allow a takeover by private equity funds, and one day later everybody moved on. So let’s not overdo this, the government in these countries, our country, every country, after all we are an emerging markets, so let’s allow one-two of these things and not make it as if the government is now going after every fellow who is ever made money in India. It's not like that, it's part of the game of being in an emerging market.