Samir Arora Lists Three Sectors To Avoid After Underwhelming Q2 Earnings Season

Veteran investor Samir Arora has listed three sectors which investors should avoid in the aftermath of an underwhelming corporate earnings season seen in India for the three-month period ended September.

The quarterly earnings of Indian companies have been overall disappointing, but they have been "quite bad" for two-to-three sectors or themes in particular, which should be avoided, said Arora, the founder and fund manager at Helios Capital Management Pte.

The foremost among the sectors to be avoided is "microfinance or those (companies) involved in lending small consumer loans", Arora said, while speaking to NDTV Profit. One has to be careful about this sector and avoid for at least the "next six to nine months", he added.

Notably, the margins of microfinance companies were hit in the September quarter, and several among them logged higher delinquencies on unsecured loans. Most entities under this sector posted lower-than-estimated profit, while increasing the capital earmarked for provisions.

The second sector that is to be avoided is automobile, according to Arora. "I've never really liked this sector...Worldwide, there is still confusion over the adoption of electric vehicles, and whether it should be subsidised. There is also confusion over investments in the sector, and there is no clarity about whose EV will find traction in the future over internal combustion engine vehicles," he said.

The third sector which is to be avoided is consumer durables, said Arora, as he pointed towards a mismatch in the supply and demand.

There were three-four major suppliers in the segment before, but now "more than 20 people want to do same thing", he said. There are major retailers like Croma and Reliance (Digital) who want to tap the consumers in this sector, and there are also plenty of South Korean, Japanese and Chinese companies competing in the segment, the expert added.

Arora "strongly disagrees" with the idea that since the Indian middle class is growing, they would continue buying more television sets, air-conditioners, microwaves and refrigerators, which in turn would keep this sector growing.

"Also, as per a thumb rule, if there is no major company in the world in a particular sector, then it is unlikely there will be a big company in that sector in India as well...And currently, I don't know any big TV or fridge company in the world that one looks at or admires," he said.

The Helios Capital fund manager is not in favour of buying stocks that have dipped on the bourses in the aftermath of weak results in the September quarter.

"We are not buying any stock that disappointed in the second quarter, even if the stock has fallen by 5-10%. That is because these things don't improve in five-six months," he said.

On the other hand, Arora recommended buying stocks of companies that did well in the last quarter, even if they have "jumped by 5-7%".

Arora is particularly bullish on new-age platform companies, including food delivery aggregators Zomato Ltd. and Swiggy Ltd., along with fintech majors like PB Fintech Ltd., which owns PolicyBazaar, and One 97 Communications Ltd., the parent of Paytm.

These firms "are doing okay" as they are not reliant on end-growth of consumers, but are relying on the way consumers are buying things, he said.

According to Arora, there will be a "shortage of very high growth names" in the Indian market in the next six to nine months. This could pose some concern from an investment point of view, as one needs at least 10–20% of the portfolio to be comprised of stocks that grow somewhere between 20% and 30% for at least two to three years, he suggested.

The overall outlook for the Indian market, however, remains positive, Arora said. "There will be more winners and losers, but that does not mean that the market is bad. But, it is not as straightforward as before."

The exit of foreign institutional investors, who have been net sellers for more than a month, may taper off soon, Arora said. "It already appears to be reducing sharply, from Rs 4,000–5,000 crore a day to now less than Rs 2,000 crore a day. I think it will end soon."

Disclaimer: The views and opinions expressed by the investment advisers on NDTV Profit are of their own and not of NDTV Profit. NDTV Profit advises users to consult with their own financial or investment adviser before taking any investment decision.