Nilesh Shah warns market to be volatile, bets on equities

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Nilesh Shah warns market to be volatile, bets on equities

Weighed down by global concerns, high oil price and domestic inflationary pressure, Indian markets are getting badly bruised. However, experts feel that this is not the time to panic but to invest cautiously especially in midcap space.

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Weighed down by global concerns, high oil price and domestic inflationary pressures, Indian market is getting badly bruised and investor sentiments have taken a hit. However, experts feel that this is not the time to panic but to invest cautiously.

In a CNBC-TV18's special show Investor Camp, Nilesh Shah, Managing Director and CEO of Envision Capital advised that India will continue to remain a volatile market and so prefers systematic investment plan (SIP) in such a situation. "PE valuations of Indian market have come off as compared to 2007," he adds.

Though Shah feels that Indian equities have been sharply derated, he is optimistic on them over the long run and recommends over fixed income investments.

According to him, the Nifty is likely to be in the range between 5000-6000 by December- January and thinks interest rate cycle may peak in the next six months. He is expecting better returns on large cap IT companies than midcaps.

Sector-wise, Shah finds private sector banks to be attractive in short to medium-term but warns that consumer sector looks overvalued. He is cautious on metals space.

Going forward, he expects Chinese markets to cool off  significantly as the country is likely to lead commodity fall.

Below is the verbatim transcript of his interview. Also watch the accompanying video.

Q: Things have been difficult for the market, and it was interesting to see so many hands raised for equity market performance- Do you think that last few years have been frustrating?

Shah: Absolutely. Currently, the way markets are engaged is probably testing the patience of all of us. If one has to look at the market, the last 4 years, the Sensex, Nifty have been around virtually the same levels. Focusing on just the headline data points, it's been almost four years that this market has not appreciated. From that point of view, it's been an enough of a waiting period.

All asset classes go through this kind of waiting period, whether it is bonds or commodities, developed and Indian equities are no different. It's probably just that a lot of the PE valuations, which India had enjoyed in 2007 where our market had peaked at about 27-28 times trailing earnings, the valuations have just come off from there and we are now trading at about less than 18 times trailing earnings.

Even if we don't really focus on what's going to happen in the current financial year, but the earnings, which are available with us that at 1025 our EPS on the Sensex, the 30-scrip index is trading at below 18,000 levels. This means that while earnings have really grown over the years, but what we have seen sharp derating of the Indian equities, which I believe is unjustified. We have really never traded these kinds of PE multiples for a very long time.

On long-term averages, our market has traded at about 18 times, and we are now below our long-term average. These are past earnings and not the future numbers where you are building in projections and painting a rosy picture. From that perspective, yes, it's been a waiting period. However, it's laying the foundation for a strong upmove over the next several years.

It's hard to time whether that strength is going to take two quarters or two years, but it's definitely going to happen given the kind of prospects for the economy and the rate at which the earnings have been growing and despite all the negativism and the pessimism that we see. Clearly, all these kinds of situations bring about a change, which is big bang. I had to be very optimistic that we saw some very big changes in India in every five-seven years and may be some type of huge changes can happen over the next one-two years.

Q: Talking about FMCG stocks, is that a good place to look at and what are some of these dividend yield examples that people over here can invest in?

Shah: I think one of the real good ways to basically invest in this market is to keep identifying companies which keep giving dividend yields, pay out handsome dividends as part of their profits and that's clearly because as I was mentioning earlier that dividends are tax free. Over the next three to six months, if the markets continue the way they are a lot of stocks will become extremely attractive and you would find enough options of companies which  would basically offer you that 4 to 5% dividend yield plus of course good capital appreciation  over the long run. 

And, one company which comes to my mind is basically a public sector undertaking called Balmer Lawrie . This stock roughly is into different businesses but its main business revolves around logistics and then of course it has a small chemical play. It has got incredible amount of real estate all across the country because of its logistics business. If one were to kind of leave that aside because really as individual investors we have really no idea when those assets will get stripped outside and when value would get created but even if you were to look at the core business the stock price is trading at around Rs 500-550 a share. They have been consistently doing about Rs 70 earnings per share. So the stock is trading at about seven times which is more than 50% discount to the market and these are past earnings.

They have just announced a dividend, probably about Rs 26 per share, which translates into a dividend yield of about 5%. This is very good for a public sector undertaking. So, maybe the comfort levels are reasonable in terms of the ownership of the company, the business has been around for a very long time. Valuations are extremely attractive and dividend yield is attractive. So, I think this is just one example of how you could go about identifying dividend yield stocks. I am sure if the markets continue to be where they are you would probably find many more such attractive companies which are not only attractively valued but offer extremely good dividend yield as well.

Q: Anything that's more actively traded? Sometimes people get a bit nervous around stocks where trading is a bit thin. They think they will be left holding the baby with the bath water?

Shah: Well most of the actively traded stocks actually tend to kind of get mucked up quite a lot because there is a lot of momentum in them. Therefore, most of the large caps trade at very high PE multiples. If you were to kind of look at top 30 or 50 names on an average, they trade about 18-20 times and when you have stocks trading at 18-20 times they do not become a good dividend yield stocks. Apart from dividend yield, some of the larger names may not be very good dividend yield stocks, but these blue chip names are available at valuations which are virtually at three to five year low from their PE multiples.

I would just like to kind of put things in perspective. Five years ago, nobody wanted to really buy a Hindustan Lever. Investors probably believed that what kind of returns can you make out of Hindustan Lever? Even five quarters back, investors would have generally believed that some of these consumer product companies are terribly expensive and there is really no money to be made, they would not grow. Those are fair bit of skepticisms on them. Clearly, technology sector today is bracketed on the same lines.

We have top class companies that are available at very attractive valuations from a historical perspective. Names like Infosys which has given a guidance of Rs 125-130 per share available at Rs 2600-2700. I don't think there have been too many occasions in the last five to ten years where Infosys would have traded at valuations which are around 20 times. Surely, there are certain management changes. There are certain board level changes. Probably, there is some kind of concerns being raised on the business model which basically has created some kind of uncertainty. However, when there is uncertainty that's the time you really buy some of these top quality stocks.

We all know that we pay a very heavy price for a cheery consensus. So, today everybody wants to go and buy a Hindustan Lever which is now trading at 30 times. From a three to five year perspective, stocks like Infosys or maybe even in the engineering space BHEL . They have done about Rs 123 earnings per share on a historical basis. Surely, the next one or two years can be very challenging for BHEL give there are issues in setting up power projects, there are issues of coal linkages, interest rates are going up, there is competition from Chinese players, a lot of private sector players are getting into that space. But that's why the price is at Rs 1,900 which is roughly about 15 times. If these concerns were not there then probably even BHEL would be trading at 25 or 30 PE multiple.

So my view is that maybe you would find a lot of attractive dividend yield stocks in the midcap space. But in the largecap space today we are seeing some really very well managed companies, companies which are zero debt have been growing consistently, have high ROE in excess of 20% and are available today between 15 to 20 times which I think either is in line with the market or is at a marginal discount to the market.