Jul 17, 2017 06:16 PM IST | Source: CNBC-TV18

Market not at an all-time high in terms of valuations: Nilesh Shah

In a CNBC-TV18 exclusive, Nilesh Shah of Kotak Mahindra AMC says that markets are not at an all-time high in terms of valuations. He also adds that there is froth in certain sections of the market.

In a CNBC-TV18 exclusive, Nilesh Shah of Kotak Mahindra AMC says that markets are not at an all-time high in terms of valuations.

Adds that there is froth in certain sections of the market.

Below is the verbatim transcript of the interview:

Q: Give us your view on the market?

A: Market, at one point of time when it moved from 1,000 to 1001, people said we have crossed 1,000 - a magical number. Today no one cares about 1,000. So few years down the line 10,000 Nifty will be forgotten like 1,000 Nifty or 1,000 Sensex was forgotten.

The second thing yes, we are at all time high level in absolute level of Sensex and Nifty but not at all time high level in valuation. So investors will have to focus on their asset allocation, they will have to focus on the long-term goals and they will have to keep a faith in India growth story. Of course at this level there will be some amount of volatility, some amount of choppiness. Just ride over that volatility.

Q: You have a very nice subtle way of explaining the whole power of compounding in a very easy way. I remember very fondly one of the slides in one of the CNBC-TV18 events, where you said instead of buying Eicher bullet you should have bought Eicher Motors stock and in the ten years from then you could have had a Rolls Royce. Now what is the next Eicher or next big stock to watch out for?

A: Unfortunately I cannot give stock specific comment but I believe today in market there are certain pockets. There is one pocket of froth where very few companies have grown tremendously in marketcap despite not have business models, despite not having fundamentals. So be careful and invest in those companies where there is institutional ownership or there are analysts tracking those companies. Second, there is also some amount of overvaluation in certain pockets of market. These are the companies where businesses are good, management is good but there is too much of expectation in terms of exponential growth and hence they are trading at a very-very high valuation. When you invest in such high valuation companies, you need to have a very long-term horizon and you will have to probably absorb some amount of underperformance in near term. Third, there is a pocket which can be called. It could be telecom stocks, it could be in IT, it could be in pharma and it could be in public sector undertaking (PSU) bank. These are the sectors where some triggers are required to unlock the value. For PSU bank it could be non-performing asset (NPA) resolution, it could be administrative reforms which give more flexibility to manage this banking to the existing employees. In IT it could be movement of company into newer areas of work like artificial intelligence, internet over things, cloud computing, security and so forth. In pharma it might be just related to getting US Food and Drug Administration (US FDA) approval for factory. So there will be triggers for this sectors or stocks and that will deliver value. So keep looking for those triggers.

Q: I want to specifically ask you about one vertical where you spoke about businesses are good, but valuations are quite stretched. The reason I am asking you is there is too much of euphoria among the recent IPOs. All the recent listings have doubled, tripled in a very short span of time. How do you map those companies and what sort of caution investors should approach into those companies?

A: I want people to remember that there was a very high profile IPO of Kotak Mahindra Finance in 1994-1995. It listed at multiple times its IPO price making IPO allottees richer overnight. But guys who give exit to the IPO allottees immediately after listing had to wait for 10 years before they could see return on their investment. So sometimes, 'vanvas' in stock market could be 10 years long if you end up picking up a great company but at a wrong price.

Today, some of the IPOs remind me of Kotak Mahindra Finance, great companies, but you will have to bear longer period of time to see the return.

Q: The other big thing. We keep asking you about sectors and we keep asking you about markets. I want to come back to this FLAME Investment Lab where you are going to speak and give insights of your investment styles to the participants who are joining in. Tell me what have you learned from the legends who were part of this whole FLAME Investment Lab, the likes of Nimesh Shah, the likes of Durgesh bhai. Anything you have picked up from them which you have actually used in your investment philosophy?

A: Lot of things I have picked up from them professionally as well as personally. The most important thing is humility and humbleness. Clearly, they are epitome of humility and humbleness and I think in a market, if you have to be successful then humility is a must. If you have arrogance like Ravan, you will get destroyed. You will need to have humility and these two gentlemen are epitome of that.

The second thing is passion for data, passion for analysis. The way Nimesh bhai can speak about a business model or a balance sheet, I wish I could put similar kind of effort and get similar kind of knowledge. So they are the kind of targets you want to reach in terms of your professional knowledge.

The third thing is the ability to manage fear and greed. I remember, in the 2008 phase, in the early 2008, they were giving cautionary views and in October 2008, at the bottom they were giving confident views. So somewhere you manage the fear and greed, somewhere you focus on your portfolios and your stock rather than too much of macros. Variety of such kind of things at various turning points you learn from them and then you wish that one day, you will be as knowledgeable as them.

Q: How are you seeing this current environment? Are you seeing a bubble in the making or you think there is enough liquidity especially domestic liquidity which is going to take this market further higher from here?

A: There is undoubtedly a bubble in certain parts of the market. It is the low floating stock, especially IPOs which are listed right now. There is no business bubble, but the gap between valuation and fundamental is too wide. It will result into moderate return over a near-term.

There is also some amount of froth in few select stocks like where momentum and some amount of greed money is chasing those prices up, but the businesses are not there. But if you remove those few exceptions by and large, market is still reasonable. It is not cheap, it is a little above fair value, but for a long-term investor, through stock picking, there is still opportunity to make money.

Also watch accompanying video of Saurabh Mukherjea of Ambit Capital to know what he expects from the market going ahead.

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