Mar 20, 2013 05:17 PM IST | Source: CNBC-TV18

Nifty may fall 10% more in 2-3 months: Envision

Given the slew of negative global and domestic news surrounding markets, the Nifty may fall 10% lower from current levels in next two-three months, warns Nilesh Shah - MD & CEO, ECR, Envision Capital.

Given the slew of negative global and domestic news surrounding markets, the Nifty may fall 10% lower from current levels in next two-three months, warns Nilesh Shah - MD & CEO, ECR, Envision Capital.

"A confluence of news is playing out simultaneously. The market has seen bit of support at around 5,700-5,800 levels and if none of these improve then this support could easily break," he said in an interview to CNBC-TV18.

Continuing his bearish tone, Shah added that anemic earning seasons would add to market's pain and he doesn't see earnings growth touching double digit mark in April. However, there is a possibility of market moving higher if crude price corrects meaningfully from current levels.

On specific stocks, Shah expects IT and oil and gas stocks to outperform going ahead, but cautions of downside risk to auto stocks on sluggish demand.  Midcap stocks have become attractive post the recent carnage. "I do not see midcaps underperforming from hereon," he elaborated.

Below is the edited transcript of Shah's interview to CNBC-TV18.

Q: The market has not looked great in the last few weeks. Is there more downside here or would you start buying?

A: Perhaps the market is confronted with the most challenging situation over the last six months. We have a pretty vicious confluence of all factors put together. Be it some kind of global markets peaking or probably a shift away from risk-on to risk-off. Locally too,  we have seen a pretty challenging political turmoil, a hawkish Reserve Bank of India (RBI) and the mother of all realities, which is an anemic earning season.

Come April, we are going to be confronted with an earning season where earnings growth will get back into a double digit mode. So, I clearly think that we are at a situation where there is a confluence of all these factors playing out simultaneously. If there is no improvement in any one of these factors, it is quite possible that the current levels where the market has found a fair bit of support, around 5700-5800 levels, they could easily break.

Q: If your apprehensions come true, what kind of levels could the Nifty sink to in this turbulent phase?

A: For the moment, the current levels should hold on. However, over the next two-three months, if any of these factors materialise, then we could probably see a level which is even 10 percent lower from the current levels. It could probably be in a band of 8-10 percent lower from here. That would be the worst case situation and clearly, at those levels, the valuations from medium to long term perspective would become really very attractive.

Q: What would 10 percent downside amount to for the midcap space? Would you use the same buying opportunity theory for the midcaps? Or does that become an avoid because of the current context?

A: I believe that the midcaps have become a bit attractive post the correction. Clearly, the correction has been much more severe in the midcap space. From the peaks, the midcap index has corrected by about atleast 15 percent whereas the large cap space has hardly corrected by even 5 percent. So, over the next two-three months, we probably might see an 8-10 percent correction in the large cap space.

However, I do not see a corresponding correction of that magnitude in the midcap space. In a worst case situation, maybe the midcaps too could correct by 5-10 percent but going forward, I do not expect midcaps to underperform. In January, when the market had peaked, at that point of time the midcap index was no longer trading at a discount to the largecap index. The midcap index was trading at parity to the largecap index in terms of PE multiples. We are now beginning to see the discount resurface. It is probably now time for the large caps to start correcting in a more meaningful manner. So, I clearly believe that over the next two-three months, we are going to be presented with a significant buying opportunity in the midcap space.


Q: For the first half of this year, from the near to medium-term, what looks like the cap for the market?

A: I believe the recent highs should be a significant cap for the market. The level of 6000-6300 on the Nifty should be a reasonable cap. At that stage, the valuations point well above the long-term averages. We do not have enough evidence to suggest that the earnings cycle is likely to pick up. We are still seeing an extended earnings cycle. So, the recent highs would pose to be significant tops for the market. The only caveat to all of this is if the global energy prices, global crude prices were to correct meaningfully from current levels. That, then could warrant a rerating for Indian equities. However, if that doesn’t happen, then probably the recent high should basically be a cap for the rest of the year.

Q: Of the factors you mentioned, which one do you think has the biggest potential for damage inflexion on India? Will it be a weak earning season in April due to which the market starts fretting again or will it be domestic policy headwind because of politics or the global landscape?

A: Of the four factors, I am least concerned about both the political and the hawkish monetary stance because that is something which is reasonably well debated. It is, to some extent expected, anticipated and would have anyway gathered momentum during the course of the year as we head for the state elections in December and the general elections.

Instead of that risk playing out in a back ended fashion that is probably now playing out in a front ended fashion. However, the global sentiment or a shift from risk-on to risk-off is a significant risk. The expected correction in the large cap would happen because of the shift from risk on to risk off. But for a very sustained bull market or uptrend or for that to lay its foundation, we really need a pick up in the earning cycle.

While some of the select large cap stocks have been doing well, I believe that the hundreds and thousands of companies and the rest of the pack has essentially been witnessing a pretty sluggish earnings outlook. Till that does not change, we would see an underperformance. So, the earning season is likely to be an important risk between THE April to June period.

Q: Which part of the market do you have comfort buying into right now? People are buying IT or hiding in fast-moving consumer goods (FMCG) again. There is nothing else that the money seems to be going in?

A: That is likely to be the trade for a few more quarters. While valuations are attractive on the IT side and given that the sector is likely to come out of a sluggish spending in the developed markets on technology, it is quite possible that IT still has a strong chance to outperform. This is given that its valuations are still at a discount to the broader market. I believe that IT is likely to be the big sector where a lot of liquidity will flow in.

Pharma valuations are not expensive and one might still see liquidity getting allocated to it. I believe that on the consumer side, it is fairly overstretched. We have seen some of the consumer names crack significantly, for example, stocks like HUL, Tata Global Beverages, where valuations over stretched themselves. There have been corrections so, I am not quite sure that consumer is the place to hide in given that valuations have become frothy. A lot of the growth which companies have been showing in the consumer space has come in largely from inorganic initiatives or geographical expansion outside India getting into markets like Latin America and Africa.

IT and pharma is an important pack where one could see pockets of outperformance. I believe that oil and gas has a chance to outperform. However, given the political development in the last 24 hours, I am not quite sure how easy it is going to be continuously hike diesel prices. The outcome could be a very constructive gas pricing policy and it is quite possible therefore that oil and gas too could contribute to outperformance.

Q: What about all the supply that is coming in from the government. There will be the Steel Authority of India Limited (SAIL) issue first and then Coal India. How would you approach those?

A: The whole offer for sale (OFS) in terms of reduction of promoter’s equity as well as disinvestment, both put together is a risk to the market. Over the last few months, that has essentially been crowding out capital which could have potentially flown into the secondary market side. That is something which is probably not healthy in the current environment, but I believe that from a very macro perspective it is important because that is an important variable which can really help achieve that fiscal deficit target of 4.8 percent.

It is also important that this target of Rs 54,000 crore is perhaps achieved in the first quarter because if that target is achieved, then clearly the government has the money to start spending on various capital projects. If this Rs 54,000 crore target is not achieved in the first quarter then that is going to put a lot of pressure on government finances and therefore, will restrict the government’s ability to spend on various infrastructure projects particularly the road construction projects of about 3,000 kilometers. While it may not be directly positive for the market, it might actually be negative for the market. But I think from a macro perspective, it is good if the divestment target is really achieved and that too on a front-ended basis.

Q: The really crunching blow has come to the entire auto space. How would you approach that- have valuations corrected enough or do you think demand is going to contract some more as will prices of these stocks?

A: I still believe that there is a downside risk to auto companies. I think that the consumer sentiment or the demand sentiment is pretty weak. That is manifested over the volume data that we have seen for the last few months where one has actually seen on a month-on-month basis increasing deceleration in terms of growth. That is worrying. I don’t see a situation where that is going to reverse in the next few months. My sense is that demand is still going to be sluggish for the auto companies and in that kind of an environment, it is quite possible that the sector could continue to outperform and there could be downside risk to prices and valuations.

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