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Interview: India On Bull Dose

Samir Arora, fund manager, Helios Capital Management, Singapore is a self-confessed 'India bull'. In his own words, he wants to personally take over the role of educating the world about India. Over here, he talks about the India story and why he disagrees with the sceptics.

Samir Arora, fund manager, Helios Capital Management, Singapore is a self-confessed 'India bull'. In his own words, he wants to personally take over the role of educating the world about India. Over here, he talks about the India story and why he disagrees with the sceptics.

Can you tell us the change in perception about India a few years ago and today? In those days, we sold India on a bottom-up basis: Stocks in India are very good, the companies have high ROEs (return on equities).

In the past few years what has changed is that people can go and push India at a country level and say that you need to have an India strategy. It deserves a separate allocation. India can now be sold on a top-down basis. Normally, nobody is going to put separate money in Taiwan or Korea. They maybe overweight or underweight but nobody is suddenly going to wake up in America and say I want to be in Taiwan.

Why this change in mindset?
People buy dreams and vision if they are buying single countries. It's different when you just buy the emerging markets theme where a fund manager will be underweight or overweight in say, Korea. For example, you have retail money which comes through the Nomura Fund or the Oppenheimer Fund or Blackstone Fund or Morgan Stanley Fund. These investors are not choosing India vis-à-vis Taiwan or Korea or something. They will be looking at India and maybe China in a BRIC theme.

What they are looking for is a fund that invests in emerging markets and then it is the fund manager who will choose the country, small or big. In the past few years, India has gone into that big picture acceptance so that even an ordinary Japanese or an American retail guy would be willing to put money into an India-dedicated fund and thereby go for an independent India allocation. I think that is what has happened otherwise so many India-dedicated funds would not function unless the world accepted that India can handle a separate side. You can't have so many funds in Taiwan or Korea but you can in China.

So what is the compelling case for India?
Relative to other choices, India is one of the best stock markets, not necessarily just the best economy. In India, the choices that are listed in the stock market are of a much higher quality and much more diversified than those in other markets. Indian stocks actually represent every sector of the country. If somebody wants to bet on Indian consumer, or infrastructure, or media, or private sector or public sector, that is available in India in the listed format. Not so in Russia, Brazil or China.

A bottom-up fund manager will be excited about India because it has so many choices but the end investor is not going to get excited about India because of diversity of choices. He will look at this country only if India gets respect and recognition and he hears positive things about India like NRIs doing extremely well, Bollywood getting more global recognition, tech success, Indian companies closing big deals and conducting acquisitions, and no big negatives in India in terms of some natural disaster or plague or war.

The performance of the Indian stock market will provide the re-enforcement to what he reads and hears and then he will believe that India is doing well. He is not concerned about your PE. That is the fund manager's concern. The end investor is only buying a big picture, a theme or a vision. You never really sell a fund in America or Japan saying that India has five PE and other markets have eight. Instead, you say that India has a billion people, has taken to the path of reforms, the market went up 40 per cent last year, some of the biggest companies in the world are Indian, Indians are very good in tech and so on.

Is that why money is flowing in?
In fact, foreign investors are underweight on India.

Some look at India on a relative basis and say it has got disproportionate money because it got $10 billion and Taiwan only $15 billion. How will you measure disproportion? The person who says this will be using the MSCI as a benchmark. Otherwise on an absolute basis how will you know whether $8 billion or $20 billion is more?

India's weightage in the most commonly used index - Morgan Stanley Global Emerging Markets Index - is one-third that of Korea. Korea is 17.5 per cent and India is 6.7 per cent. GDP of both countries is about the same. Korea's market cap is 750, while India's is 700. Around 25 per cent of Korea's allocation in the index is in Samsung Electronics. In 2003, before this bull run, Samsung Electronics' weightage in MSCI was higher than India's. Today, Samsung Electronics' weightage will be around 4.5, while the whole of India is 6.7. Broadly, this index under-represents India's weightage.

Look at Reliance. Reliance is, say, 50 per cent owned by Mukesh Ambani, and maybe 50 per cent is free-float. Now in case of Samsung Electronics, 90 per cent is free float and only 10 per cent is owned by the promoters. Therefore, in the MSCI, Samsung gets full weightage, but Reliance won't get full weightage. Its weightage in the index will be lower in relation to its market cap. Taiwan's weightage in the index is 13 per cent but its market cap is lower than India, and the GDP is half of India. But its weightage is double. Why? Because in Taiwan nobody owns stocks except foreigners so it gets the full float in the free-float-adjusted indices.

So Bharti, a company with $24 billion market cap, is not in the MSCI because it has got foreign ownership limit. Foreigners can buy it - they already own $4-5 billion of it. If it was in the index, India's weightage will have to go up. So now should I as an individual FII say that I should not invest in Bharti because all FIIs together cannot invest or should I say that anyways I am investing, the rest can go to hell?

That is what is happening. That is why it appears that India is getting disproportionate money. But it is not actually disproportionate. It's just the money which doesn't care for this index. And everybody in this world cannot be caring about this index. But a pension fund, a few institutions money or an index fund - those who live and die by the index - will care and they will be under-weight. They will be using a flawed index.

So by this yardstick, India should have got more money.
Yes. All the guys who have a sell on India are basically those who follow an automatic process, which says India's PE is higher than China. He can't say: “No but India has HDFC Bank and an Infosys which you don't have.” He will say “All I know is from my history of 100 years that your PE used to be X but now your PE is Y”. End of story. Morgan Stanley, Citigroup, Deutsche Bank, HSBC, Merrill, all of them are negative on India in terms of their strategists having an index level lower than what the current level is. And I am not saying that they were bullish before and turned bearish at 12,000. They have been bearish from 5,000, all of them, every year for four years. Money is coming in because the world realises what numbers do not tell. The Indian story is bigger than just stating that my PE is two points higher than the other.

So you don't have a problem with India's higher PE vis-à-vis other emerging markets?
Some sectors are generically low PE sectors globally - oil and gas, commodity, paper, chemicals. And some are higher PE sectors - consumer, pharma, software. This has nothing to do with India.

India has the lowest weightage of generically lower PE sectors and the highest weightage of generically higher PE sectors vis-à-vis other emerging markets. So just by saying that India's PE is high makes no sense. If you adjust for it, the PE difference would look much less stark. For instance, if you remove Infosys, India's PE will go down by 0.5. Those who say that India's relative PE to Asia is highest therefore it's a sell, don't care that India or the world has had a three-year commodity bull run. So the commodity companies have done well but their PEs are low because in commodities when the stocks prices are at a peak, PE is not the highest, but the lowest because earnings have gone up. In fact, you buy commodity companies when the company is making a loss because you hope that now they can't make more losses and that the capacities will shrink and all that. So by definition, commodity-driven countries, at the height of their bull run, will have a lower PE. And India, which has more of everything, not just the commodities, at the height of a bull run will have a high PE.

You have been talking about a great country and a great economy. What is the downside?
If the bull-run in India was driven by local investors, then a bear would say that local speculators don't know what to do with the money and this is causing a bubble. But this bull-run is driven by foreign investors who had a choice. He could go in any market, but he still came to India. Therefore this bull-run has more credibility in that sense. The downside is that it's a single country. Single country risks are higher than a diversified index. Apart from that, other things could happen like the whole world corrects and there is another May.