Nilesh Shah, managing director and chief executive of Envision Capital feels that the market is set for further correction and the current downtrend is likely to persist.
"FIIs have been the ones who have been pumping liquidity into this market. So, if there is any reversal in the flows, the downside could still continue and gather further steam," he said in an interview to CNBC-TV18.
He expects the Nifty to see good support at 5,200-5,400 levels.
Below is the edited transcript of Shah’s interview to CNBC-TV18.
Q: We have had a bit of a pullback but generally markets have been very weak this year. Are you expecting to see more downside by the time this earning season plays out?
A: The downtrend that has set in, still has some way to go. I don’t think we are done yet with it unless of course there is an earning surprise and chances of that at this stage at least look very limited or probably remote. So, in that context, the downside could probably still persist. FIIs have been the ones who have been pumping liquidity into this market. So, if there is any reversal in the flows, the downside could still continue and gather further steam.
Q: How deep is the downside risk to your mind to the market because a lot of people felt 5500 wouldn’t get broken?
A: We have already seen a correction of about five-seven percent from the peak in Nifty. One could still have a correction of another two-five percent which means that levels of 5200-5400 should be reasonably good support. The valuations at that point of time become reasonable given the fact that FY13 is something where we would still have about seven-eight percent earnings growth. If that’s the number we kind of look at even for FY14, then it is quite possible that at those numbers, the valuations look a lot more reasonable. That’s where one could see some long-term investors step in with a two-three year horizon.
Q: How important is Infosys and IT in that context, one of the spaces that has been holding the market up?
A: The earnings of the technology sector are going to be very important. Looking at the last financial year, the earnings for IT companies have grown at more than 12-13 percent, while the overall Sensex earnings, taking a combined kind of pack of the last three-four players, have grown at barely 5-7 percent. So, I clearly think that the IT sector has been reporting earnings growth rates twice the Sensex number.
It is very important that even for FY14, the technology sector continues to play that important role in terms of pepping up the earnings of the Sensex. Even if in FY14, IT companies need to have their earnings growth of 12-14 percent atleast to ensure that we do not slip significantly below the 5 percent mark for the Sensex earnings as a whole.
Q: A quick word from you before we start analysing Infosys’ numbers in greater details? Prima facie, what do you make of the topline and margins?
A: On all fronts it looks disappointing. The dollar revenue growth is completely flat. I don’t think in an environment where the industry is expected to grow in low double digits, a growth rate of one-two percent won’t please the market. The big cause for concern is slippage in the operating margins. To some extent, this was expected and maybe it could have been triggered by the Lodestone consolidation but, it is still disappointment on all fronts. So, this is definitely not something that the street was expecting.
Q: What do you think Infosys will suffer this morning in order to adjust for that?
A: The stock should correct by about 8-10 percent from where it closed yesterday because this is clearly a disappointment on all fronts. A disappointment in terms of how the past quarter was, it was disappointing in terms of how the last financial year ended and I clearly think a disappointment in the kind of quasi guidance that they have given out for the next year. What is going to be even more worrying is that if they have chosen to go ahead with just a revenue guidance of 6-10 percent but do not give EPS guidance, then it is going to crib. The big risk factor that everybody was going to see is clearly on the margin front. The company is not sure about the margins going forward.