Q&A | Helios Mutual Fund set to debut on October 23

Arora: I'm too humble to say a rockstar. It was a good performance. We became number one in those days in Alliance while we were competing with all the big daddies of India with big partners, whereas Alliance was 100% foreign-owned in that sense. So yeah, those were great days.

Arora: We hope to relive that whole experience. But who knows how it goes.

Arora: What gives comfort also is that we've also worked over 18-20 years, we have been doing India, and Dinshaw has been with me since 2005. The rest of our team and the senior guys have all been there from if not 2005, although one has been our CIO, our head of research has been there from 2007. So basically, the whole team has now just come back after 2005.

Arora: Yeah.

Irani: Yes. In 2000, I joined Alliance Capital as an analyst for consumers and pharmaceuticals in emerging Asia. But even prior to that, I had known him since 1994 because I used to run a boutique research house as the head of research and used to service him because he was the biggest fund manager in the country at that point in time.

Irani: With this man, one, you can't stop smiling. He's always laughing with you, he is a very good person to work with. He does lose his temper, but it is very little, far in between. plus you keep learning a lot.

Arora: That is not a bad tagline.

Irani: But one they are learning is that you should never first decide what you want to buy. You need to first decide what you want to avoid. Because purely by doing that you cut out a lot of clutter. And that we've termed it as Elimination Investing. It's called EI, powered by EI by the way, that's what we call it.

And the concept is very simple. It's you know what is bad because bad has a definition, good does not. If I tell you a man steals he's bad. But if I tell you he doesn't steal, doesn't mean that he's good. He may have some other flaws. So when you look at companies and you see the underperformers, you know that this company didn't do well because it was overvalued, it didn't do well because the promoter did not have a good background, it didn't do well because the industry theme is not right.

So we have these eight parameters on which we reject stocks. And any one single parameter is enough for us to reject. In fact, just to tell you, we start off with the industry theme, and we end with valuation. So valuation comes right at the end, we don't get carried away by a value trap. A stock is cheap because of a reason. So that's why we keep valuations behind. So once you do that, when we started off in 2005, we put NSE500 through this ring or funnel or whatever you want to call it and at the end, we were left with some 100 stocks. Now, can you imagine the clutter that was taken away from the managers’ minds? He now doesn't have to decide whether you want to buy value or growth.

Irani: No, that was then I am talking about. Any new idea which comes in, any new IPO which comes in, they come through this.

Arora: One more thing to explain further is basically we are saying some companies we say we will not buy, that might be more or less half the universe. Then you have left with 250-300 companies right now in our current model. Out of which, some 100, we will say we will not buy now, because they are very expensive. So those can change over time, because either the growth rates can change or the valuations can fall or by not moving up, they can come in line, then you're left with about 100-125 companies where they cannot be rejected on any of these eight factors. And then we'll search for the good. But first thing is remove any excuse which can lead to a stock doing badly.

Irani: One thing that we done is we kept everything separate. Like Samir Arora’s advisory is separate, the alternate part of the business, which is AIF and PMS, we have a separate team for that, mutual fund obviously, we are separate team. However, what we kept common is the research, because that's where our strength is and that's where we want to focus on. So the research also has a very clear mandate that they cannot have a buy, hold and sell. They are 1,2,3 rating, one is better than two and two is better than three. So that also takes away a lot of pressure from the manager that I cannot buy a sell stock, right, but three rated, if I know that relatively it's doing going to do better. So you're giving that leeway to the manager also. So that's how it is and the whole overall, the team is around 12 odd people who are into investing side.

Arora: Otherwise we have 62 people in India.

Arora: Hiring but in sales and all. And someday more research guys, when we go into midcap funds and smallcap funds.

Arora: You were there yesterday, you saw the response. Hopefully, it'll be good. But more than this, the thing is wealth creation in the country has been enormous. Number one. Second is the travelling via trains and via planes are very different from what - although I've been traveling a lot anyway, because I always travel for research, but not so intensively. The intensive part is that you're still on schedule that is what the intensive part is other than tiring a little bit. But that way the infrastructure is really different from what somebody else may think. And I did not experience it with this intensity. But it's brilliant that way. So it is big delta from whatever time you may have started. So other thing is that, like in Surat we saw people were making how much money and what businesses and sarees and whatever, and it was serious wealth creation in many of these places, Pune I saw - everywhere more or less.

Arora: Financials, consumers and tech.

Arora: The research guys like it, also they are not working in a vacuum. We've had a history of a philosophy. So that philosophy also says which kind of themes we like, which kind of management we like. And so to make sure that the Helios India guys because the senior guys are all the old guys, they know it, but just as an organization, and for new analysts joining and people who may have joined recently, so I put out some 30 odd page note on how to invest kind of thing. And that note is going to be made public in the next two, or three days. So everybody can read it. If they can do it themselves, please do it. Otherwise, you can put in our fund, but we will tell you exactly the way we do it, the way we think about investing.

Arora: Unorganised to organised brands, because people are buying online that also leads to a little bit of not premiumisation, but least to organized guys because only those guys will go. So in every angle, you can say there's a little bit of upgrading of the --

Irani: Finance actually.

Irani: Yes, yes, the upper end.

Arora: Preferably now, but it depends - after some time maybe the rurally oriented might turn out, but philosophically consumer of any kind is good. But currently, the richer consumer is doing better.

Arora: So the upper end is always there. And the lower end depends on factors and jobs and grades and so many other things. So it depends on stocks, they're falling a lot or not gone up a lot you may add, but you're absolutely right, that the rich are unaffected by many of the day-to-day issues. And so mostly they tend to continue to consume whether it is Mercedes cars or bags or whatever.

Arora: If they want, they can, we have no problem with that.

Arora: Which is where you are supposed to buy them, So we hope that in the mutual fund, whatever these guys decide to buy it, but I know that that these stocks are rated well within our system, yeah.

Irani: Our feeling is that this may be the sector which may be waiting in line. I mean, you've seen a consolidation happening in the sector for a while. And as I said, whenever there's – gross domestic products (GDPs) are driven by consumption, and these guys are the financiers of that consumption, plus, they need to finance the capex that is needed for the consumption. So there's a double whammy for these guys. The only overhang was that probably the interest rate cycles are peaking out and that's why the net interest margins (NIMs) may get compressed. But I don't think that is the biggest story. The biggest story is credit growth. And that is what is kicking in today. In fact, this quarter also supposedly, we're looking at a mid to high teens kind of credit growth kicking in for the banking sector, and that's where the reratings happen. That's why we feel that this is the sector you need to be in.

Arora: It is here because if you are telling us publicly not you whoever the you that we are not hiring that we are not going to campus and we were always made to believe that basically a people arbitrage, person arbitrage. The second thing is if you say that the companies or the clients are not willing to give business now but they are promising a lot of business in the future. That means that business can't be the same Imagine going to a company and the company says I have no business for you right now but here take billions of dollars for next quarter. That means the business for next quarter is not the same business as the business that you are with - these guys only have named it Leaking Bucket or whatever all these very good names. Yesterday we saw on your channel only an interview one company was saying we have 15-day visibility. Now if the company has 15-day visibility, why am I trying for a two-year visibility? So the point is that because other stocks are doing well.

Arora: No, because those stocks are up 15-20%. Tell me if the stock companies actually delivered good numbers, how much were they supposed to be up this year? They were supposed to be 40% - all these stocks? Not all literally every but broadly, all the stocks are up as if they have not had a problem because many of them are up 15-20%.

Arora: Yeah. So if they've actually had good results and good guidance, were they supposed to be up 50% this year? No, normally these big well-known companies broadly will go up 15-20% in a year, but here they are going up as if there was no problem. Leave alone the top two, or three names. So that's why we don't believe it is the case but also because the money is not lying in a bank that we haven't spent on IT. It is in some other stocks and those stocks are doing well so there is no compulsion to seek right now.

Arora: Flexi cap fund.

Arora: We'd like you to invest in our fund. You are allowed to invest in mutual funds.

Arora: No, but actually the levels are not very off. If you look at the last five years, 10 years, 15 years, 20 years, 25 years returns of the market, in rupee terms, they are in the range of 13-14-15% per annum they don't come evenly but over those periods. So if you look at the market now for this calendar year, in NSE 500 I think it's up some 12-13%. So, broadly in line with what annualized numbers are. If you look at last year, the market was a 4.4% NSE 500. So in 20-21 months, it is up less than what is our normalized number if you convert it to dollars because last year the rupee depreciated whatever 10%. So in dollar terms, a foreign investor has made 5-6% in 21 months so he also does not feel that he's missed out a lot. So these are the things. I mean the levels are okay. They can be cheaper, but then our current, investors would be hurt. So it's a balance between all the time what you want for the new and for the old.

So it's okay it's broadly not - it's not wild that.

Arora: Broader market also other than some one or two sectors or sub-sectors and maybe small cap stocks because anyway in a flexi cap fund 50% or so will be large-caps. We have raised in the past in our PMS and I saw between 40% and 70%. So 50% is okay because we are saying large-caps are okay. So then that 50% we have to buy some midcaps, a little less smallcaps maybe not avoid the category but avoid those kinds of stocks that are up a lot for if they are up for no reason which I think many of them are up for no reason.

Arora: Yes, I agree. Because if you see any big cycle, the smallcap when they go up a lot they go down a lot and then they get sorted and then someone survived and they become midcap, but people say oh you should buy smallcap because they will all become - all large companies were initially smallcaps but all small companies do not become largecap or even midcap.

Irani: If you look at the fact is that the markets have gone up based on reratings happening, right? Every single quarter - last three quarters in fact, the earnings have got upgraded, they have not been downgrades. So it's obvious that these valuations are holding up because of upgrades happening. In fact, this quarter will again, we're looking at some - there'll be sectors, obviously there'll be downgrades happening. But bulk of them whatever advanced number that we are seeing from the analysts, they're looking at upgrades happening. So also if you look at the valuations, if you look at the last six, seven years, we are somewhere close to the average. I mean, in fact, in certain cases below the average, but 10 years, we probably one standard deviation away, so it's not too overpriced a market, but our belief is that we're in a good space today given that the growth is maintained looking forward.

Arora: Yes, there was a lot of debate.

Arora: Anybody who has debated on the other side would have been fired. So nobody debated on this.

Because we have not come from a background saying that we are desperate to do some new business so let's go into financial business. We have been active fund managers or fund managers or research heads or whatever even the other founders were all from Alliance, everybody is active, we understand the power of active and we have done well by being active. So not only we are not doing it now we are mostly not doing it for three four years after that who knows.

Arora: We don't want to do one fund and we don’t want to do 18 funds, we'll do four or five funds because it gives more growth opportunities within the firm so more people join and then they add value. And secondly you need a certain bouquet for the distributor also so that when you are tying up with great difficulty with some good distributors and he has four things that he wants to buy, you want to say okay, we have them but we will do only those where we believe that's why we are not doing every category, every sector, every month like some funds do.

Irani: As I told you we have these eight factors of rejection, and that helps a lot. One recent company came up and it got rejected on the promoter level. That's the fourth factor of rejection. Very exciting industry, it was in defence, and it was supplying a huge order book. I won't talk about the name of the company. The listing also was very good. But then the numbers came out and things came out in the open that okay, fine, there were certain issues and the stock is down half of what the listing was. So that helps in a very big way. These factors are rejection are universal across industries, they are sector agnostic, so you can work on those and obviously, that helps us.

Arora: In terms of new models, we've had Paytm and Zomato. Now every day. I mean, we didn't buy but there have been many new - there's been airport facilities management – lounge management. There've been many, many companies.

Arora: Those actually, I mean, I didn't think of that, because that business was always there in the private space. In the list it is new. So at least that business is easy to understand. But this Paytm, Zomato is even more complicated to understand as a business and we got both of them right.