Budget 2024: Capital-Gains Tax Hike May Make India Less Favourable, Says Samir Arora

Samir Arora: No, I'm sorry, but I didn’t say that. I was always saying that you have to burst the bubble of derivatives volume. In fact, I was saying it for maybe 6–8 months that the futures and options trading volume is too much.

So I was only saying that you should not do anything on taxes—basically long-term capital gains tax and short-term capital gains tax. I am an Indian in two roles, one as a promoter of a mutual fund, but also as an FII and who has the number one longest track record out of 1.4 billion people, because most of them have retired and I refuse to.

I was saying that on a post-tax basis, India will become less attractive. India has done well on a pre-tax index level, if you look at the index level performance of India versus other countries. But if you put a 15% tax, average, let's say whatever some number, and then you compound with that every year, that’s every year you're paying some long term, some short term and you know make whatever assumptions you want to make, then it will not look as well.

It will still look better than many countries, but then it will depend on phases, because in the last five years India has done well, China did badly. But over time, your attraction by definition has to come down a little.

The most amazing thing I found yesterday was that people were talking about earnings changes of 1% and that in an IT company, the bottom of the range has gone up by 0.5% and therefore that will change EPS by 2%. Therefore, people write research reports of 20 pages of this. But when you hit the earnings of the investor, which is the end result of all that research you were doing by 4–5%, they say it doesn't matter, but 0.1%% change in the earnings matter.

Samir Arora: No, no, I would even think. It is just simple. Let's say, your earnings were 100 before and you were paying some combination of long term and short term. Let's say 50-50, you can just make less more. So you were paying—10 plus 15, divided by two—12.5% tax. Then you were paying a 2% surcharge. So your earnings were at 85.5, 14.5 tax.

Now, you do 12.5 plus 20 divided by two. Whatever you want to change that combo a little bit and then you add a 2% surcharge. So your earnings are 82. So it is not the end of the world. But 82 divided by 85.5 is some 5%.

So if somebody comes on TV as a professional, as an analyst, as a strategist and says this is 5–6%. That is all. What I get upset with unnecessarily even on my holidays, that the guys come and say this is irrelevant. No, it is 5% and this is more 5% direct than 20 basis point change in earnings growth from 4% to 4.2%, for which the same brokers will write maybe 20 pages report and do five conference calls and they say our EPS has gone up by X percent, which by the way, has happened for one or two years.

It means when you do these earnings upgrades, downgrades, nobody knows what will happen in year four and year five and year six because that was not even in discussion. You are talking, oh, there are more marriages this quarter instead of next quarter. Therefore, this earnings have been preponed. Therefore, the stock goes up 10%.

But when you have a permanent hit, at least say this much, it is not going to change anybody's story, we are bullish on India, that is our business and our job and our life. But to say it doesn't matter, just makes me feel that everything else about them is not trustworthy when they come and talk like that, which is what makes me upset even though they are my colleagues and some of them are my friends.

Samir Arora: There is not one brokerage, there are many.

Samir Arora: I agree with that up to a point, because what happened was that if you see the runup in the last few years, some sectors have done very, very well and disproportionately well compared to the market. Let's say the infra types or the PSUs or defence or railways. But they were not like normal outperformance of 5–10% but two times, three times the market or whatever. And they needed the stories more. They needed the Budget to be aggressively focusing on those areas. So for them, I think there'll be a big sector rotation. But, you know, the budget otherwise is very, very good according to me.

For example, to have the deficit target at 4.9%, according to me, means that obviously it's very good in macroeconomics and maybe there will be an India earnings upgrade, the interest costs will all come down. I think the financial sector will be a big beneficiary, but the sectors that were doing well needed that thing. I don't think that the whole market or the IT guys or the financial guys needed particularly great specific target from the budget.

But the sectors that were high flying definitely needed and I don't think they got that. So, there will be that rotation for sure. Anyway, people needed to move away because the expectations built in were so, so high which make it visibly obscene.

Samir Arora: Yes, it is unchanged. But if the year-on-year growth in these numbers is 5–10%, that is normal inflation related growth and GDP related growth,k like that 11 lakh crore or whatever. So those numbers are unchanged, but the market is not unchanged.

Samir Arora: I don't care about the 11 lakh crore. I am saying that from a stock market point of view, if your stocks are up 400–500% more than the market, then your story, your dreams, your expectations have to be constantly on the move up.

So for example, many stocks in India are up more than Nvidia is up in the last two years at least, not maybe 15 years but in Nvidia today also looks as low P/E as it was two years ago. Do our Indian guys look like that? Not at all.

Samir Arora: No. I don't buy those stories, because I don't buy well-penetrated stories. What happens is when you are in a well-penetrated sector, then you are relying on India's growth and this very, very macro economic reasons that in the long run, employment will go up and all that.

It's better to buy things where there's some under penetration or basically in simpler terms, because the multiples of this sector are very high, I'm not interested in stocks that will grow instead of 5% volume 3% volume, which is lower than India's GDP growth in dollar terms which is say 6-7 and therefore your revenue will grow 8-9%. I'm not interested.

At least you should try and grow 20 odd percent earnings, or 25% if possible. So the consumer we buy which we call consumer are these Zomatos and Varun Beverages and stuff like that, which at least we feel will grow high. But I'm not interested in a company, which used to grow at 6 saying I will grow at 8. Then, the market gets excited that this is an earnings upgrade. For me, even though the new number is not a good number. So I don't buy those kind of companies.

Samir Arora: That is the correct word you used now. That is our business model and we keep saying to everybody that you are not supposed to define for 20 years what you will buy and for five years what you will buy. You buy 40 companies or 35 companies from which around six–eight companies will change every year, because something would have changed.

Sometimes the Budget would have changed, sometimes the focus would have changed, sometimes market preference would have changed, sometimes earnings would have come and the stocks would have become very high. So you change 6–8 stocks on the margin and you are then ready for the next one year, two year kind, two-year period.

So we say the long term is a series of 1-2-3 years. In that context, we have already sold some of these infra type, defence type and railway type and you change a few stocks. Now that we have to figure out, which we will do peacefully—whether you buy one more IT or two more IT stocks or one more finance stock or some other stock.

You change six stocks, which you will know because mostly the research guys are common. So, plus or minus you will see that in our mutual fund after 1–2 months. But broadly, you need to change six stocks.

Therefore, every day to say this is a 100-year story or a 40-year story, I don't believe in that. I need rotation of 10–15 % and the rest of the stocks anyway continue, not necessarily for 20 years but may continue for five years.

Samir Arora: We are not fully weighted also, because we were underweight for two-and-a-half years. For two years—from June of 2022—we were zero. So now we have, basically one stock that we always had and we bought one-and-a-half. So we are still underweight.

That's what I'm saying, because we do elimination investing. We don't think that anybody knows what to buy. We just know what not to buy or what to trim and all that. So in that, it is now in one of the potential things for this rotation which we'll see. But so far, we have not been overweight or even market weight on IT, as of now.

Samir Arora: That I don't know. But as a fund manager, since I am primarily and actually totally responsible only for the offshore long-short fund, my trades and my views are more about whether to reduce my net and what to do and the mutual fund guys are trying to beat a long-only index.

So they have a different objective and they might change one stock here, one store there. I'm much more aggressive than them.

Samir Arora: That I've already done in the sense that my net exposure, that is a long minus short on around June, going into the elections and even after that was 75%. Now it is below 60%.

Samir Arora: No. That means I have shorted and I've reduced some of the longs on these extra infra type or whatever not infra word capex infra or whatever you call. Those, I have reduced. Not now.

That I had reduced before because I said it on TV also that expectations were too wild. The expectations were too wild and even a good Budget could have not helped them beyond the point, maybe then they would have extended by a few days, maybe a few weeks.

My problem sometimes is that I am very fast, rightly or wrongly in analysing and sometimes I'm right when I'm early. Sometimes I'm wrong also. It’s both ways. But what I'm saying. I just think fast because that is the way I talk. That's the way I act, that’s the way I react, that’s the way I am.

Samir Arora: I'm talking about those names only.

Samir Arora: Yes, we have both State Bank and Canara Bank.

I still like the financials the most, because at the end of the day, they are able to connect themselves to whatever good is happening in the economy. Sometimes with the consumer growth, sometimes cost reduction.

Now, for HDFC Bank, balance sheet improvement, whatever, they are able to do that and generally they have a good history and generally, I think even this year, their growth will be higher than every other segment of the market, and many of the other segments would not even go at half their rate.

For example, I guess in the big picture, the financial guys will grow their earnings still maybe 15–16%. Even HDFC Bank will grow maybe 13–15 %. I don't think a single IT guy will grow that much. And if they grow, they will be considered as the biggest heroes that this market has produced.

The consumer guys will never easily grow like this. I mean, the big staple guys. They have not done well for 2–3 years, but they've done well for us and for the market for the last 25 years.

So, otherwise, people don't think that these are some unknown fellows and you know, we are betting or they will bet on some shady unknown names. They have gone through this relative underperformance and that also driven mostly by the performance of the big three 3–4 companies, which is HDFC Bank, Kotak Bank, Bajaj Finance types. But the rest of them actually have done well.

Therefore, we always like and continue to like, and to justify to ourselves are overweight on financials.

Samir Arora: Actually, we don't have even one real estate company right now. But I don't think it is bad for real estate companies.

We had it, but we sold it about a month or two ago because it was just too much. Actually the stock, the big one, hasn’t gone up for the last 2–3 months anyway, because we can see there is too much.

Something has to give up. Every time you announce a project and then you sell X 1000s of crores. Then next quarter is going to sell 2X thousands of crores. How can it go? We also know broadly how many people are there.

Even yesterday by the way, I saw an interview. Maybe they came on your channel or I saw on another channel, basically saying that I'm now hoping that investors will come back into real estate. Excuse me, we always thought all our lives that end consumers are supposed to come into real estate and when investors come, it is going to end in a problem, as it has always ended for the last 5,000 years.

So you don't want investors even I don't think the government wants investors in real estate, because one of the objectives must be to lower real estate prices so that people can afford. For example, in Singapore, if a foreigner now buys real estate, there is a 60% tax, which used to be zero, maybe 10 years ago.

So the idea was to make real estate prices low for somebody to feel proud and now investors will come into this sector. There is nothing much. But otherwise, I don't think it's bad for the sector. It is bad for old properties where you know some tradeoff will be there—whether this scheme is better or that is better. But what is it? That is history. Those guys can make less or more. It doesn't change the dynamics for the new guys...

What I was saying is that you can't make that story that we will now get speculators into our market. How can that be a presentable story? But people talk about different things.

Samir Arora: Actually, I don't think that you need a trigger every day. You basically need that the earnings should come through and your valuation should not be so high that those earnings growth get wasted.

For example, in the last two–three years Bajaj Finance’s earnings grew. But because those kind of valuations were high or whatever, maybe hindsight, maybe that time right or wrong, somebody may have thought but you did not get that in your stock market returns or in your stock gains. So that is the issue with all the sectors. Many of them will grow and many of them will grow less. You should not waste earnings growth by having valuations which are very high.

I'm not saying and I don't think anybody's saying that this market is very cheap. But I don't think it is expensive-expensive. It is a plus-minus the earnings growth you will get. But since that earnings growth has been 10–12% and then you put in a tax which makes India relatively unattractive that you will lose, according to me, 4–5%. For that, whether you actually lose it or that also we hype because our mutual fund guys are getting money, it's a different game.

But please one thing I should say, is the big picture. Let us not think that there is only one country in the world. I only invest in one country. That is my job and for 30 years I have been doing it. Realistically, please understand that there is not only one country.

Just yesterday night, Google, which is a $2.2-trillion market cap company, which means 45–50% of India's market cap, grew its revenue 14% and its profit, I think, 28%. So in theory, a global investor could, instead of putting money here, put 2% or put 1% more in Google. They will get higher as of today and that has been there for long. They will always be able to find 20 companies.

So I'm saying in the big picture, let's make India at least tax neutral, ease of accessing neutral. Then, everything else is in our favour and we are the biggest beneficiaries, if the market does well because of this thing.

But on the margin, in the short term, for the next two months or one month I reduced my net. So I'm telling you that today, otherwise it looks like all these other guys were talking about a 20-year story. It is a different story, but there are 20-year stocks in the world also.