Speaking to CNBC-TV18 Nilesh Shetty of Quantum AMC said that the forecast for the second half of the fiscal year has always been positive. However reality has always proved it wrong. But this year, there were indications – decent monsoon, and government reforms – that this theory predicting the second half to be better had credibity. But thanks to the demonetisaiton drive, the government has slammed its breaks hard on expectations. “The next 6 months number won’t be great for most companies.”
He said the consumer discretionary sector is the most affected. Sectors which require last mile cash could be hurt, he said, adding that people will postpone their purchasing.
Post December 31, the deadline given for demonetisaiton drive to be complete by the government, Nifty couldn’t possibly move substantially higher than current levels, he said.
Below is the verbatim transcript of Nilesh Shetty’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.
Ekta: It seems as though we are managing to sustain 8,000 as we speak for the past couple of days. What is your sense on whether we have actually bottomed out and the demonetisation impact however severe it might be is probably already factored in?
A: I am not sure. I think most of the people that we have spoken to including the companies are not sure how much of this demonetisation is going to impact the numbers. Again, you have to understand, valuations were pricing in an earnings recovery. For the past three years, the entire thesis has been second half (H2) will show some kind of recovery but it never used to happen. This year that theory had a lot more credibility running to it because you had good monsoon, you had benign inflation, and interest rates were coming down. So, it looked like this year H2, you would have had some kind of earnings traction coming in.
However, after this move, that theory is disappeared. So, now you are just looking at FY18 but by and large our sense is you will have to ignore next six months numbers and then try and value companies based on FY18 and FY19 and figure out which companies are cheap. Our sense is it is a great time if you are looking at sort of three to five year horizon because valuations have come off. A lot of it seems to be linked to global factors not necessarily demonetisation in India but next six months numbers people have to expect would not be that great for most companies.
Prashant: For somebody looking beyond six months, do you think this is a good time and where do you see opportunities where people have sold a lot, stocks have come off a lot but the loss of business may be temporary, so, demand may have been postponed in these areas, which are those sectors or stocks?
A: The primary hit will be taken by consumer discretionary sectors. So, a lot of your two wheeler companies, consumer electrical companies where a lot of the last mile was primarily based on cash, people are going to postpone your discretionary spend and you will see a fairly weak set of numbers coming from these companies. Valuations right now are fairly reasonable and if for whatever reason after the numbers that they report, if they were to crack further, it will actually be a great time for you to go and buy these companies. I think perhaps FY18 you should see some sort of recovery in their numbers and then valuations will suddenly start looking very cheap.
Ekta: What is your sense, December 31 where do you see the Nifty; I know it will be a weekend but nonetheless, that Friday, do you think that the Nifty is going to be at 8,000, it will be above 8,000 or sub?
A: We don’t have a view on the Nifty but I will be very surprised if Nifty moves up substantially given that the Q3 numbers would be a lot more weaker than whatever people originally factored. So, I would be surprised if they are substantially above the levels that we are witnessing right now.
Prashant: Why do you think in a lot of these sectors, consumer discretionary for example, people don’t have the confidence? Q3 we know that a lot of business has been lost so there is no doubt that it will be bad but there is no confidence that January to March will be better or after that by April to June next year things will come back to normal. That confidence isn't there, why do you think that is the case? I am not talking about staples but slightly higher priced products, discretionary essentially?
A: The Indian economy was moving at -- essentially it was like a stalled economy moving at very slow speed. It looked like it was about to gain some traction this year primarily driven by better monsoons, pay commission hikes and lower interest rates. The government has slammed the brakes very hard on that. So, again, you are not sure how much consumer confidence is shaken after that and if you just look around, most people, if they had to spend some money, they would postpone it right now.
So, now you are looking at whether this consumer confidence recovers or will the government have to do something to get it up and running again. So, that is the uncertainty; you have had three years of very low consumer confidence and this year you could have had a better year in terms of consumer discretionary spend but now because of this action, you have just stalled that and hence people are again skeptical in terms of how much a pickup will you see later on in FY18.