Moneycontrol
Dec 23, 2016 04:28 PM IST | Source: CNBC-TV18

Next 12 mnths not good for equities; see hit on GDP: Quantum AMC

Speaking to CNBC-TV18 Nilesh Shetty of Quantum AMC said that the long-term structural story isn’t damaged, but the near-term outlook looks a bit shaky. There will be impact on GDP growth, he said, from demonetization. The next 12 months are going to be tough for equities, he said.


Speaking to CNBC-TV18 Nilesh Shetty of Quantum AMC said that the long-term structural story isn’t damaged, but the near-term outlook looks a bit shaky.

There will be impact on GDP growth, he said, from demonetization. The next 12 months are going to be tough for equities, he said.


He is cautious on NBFCs/MFIs as a sector owing to political interference. The demand has collapsed in these sectors he said.

Transactions have dropped by 50 percent even after the first one month, he said. It will start showing in GDP and earnings estimates of these companies.

Below is the verbatim transcript of Nilesh Shetty’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.


Prashant: Do you believe that this is a bigger correction or a bigger fall that we are in for, something has changed fundamentally?


A: There are two things; one is a long-term structural story, which I don’t think is that much damaged. The other think is the near-term outlook, which I think by and large whatever channels checks we have done and we have travelled a bit internally in tier II tier III cities after demonetisation, our sense is the kind of demand destruction that has happened has not been factored in analyst estimate as yet. I think even the gross domestic product (GDP) number will show it with a lag.


We saw that after Lehman Brothers, one year after Lehman even though the initial estimates did not show that kind of slow down, the numbers that came out one year later and when they revised that number was sharply lower number. I think that is something that can happen this time as well. At least when you go to tier II tier III cities the consumption there is down by 30-50 percent even one-one-and-a-half month later after demonetisation. So, it is inconceivable for us that GDP will not show some kind of contraction in Q3 and Q4 whether the official data captures that initially is suspect.


However, by and large we believe near term you will have sharp drops in earnings for a lot of companies which right now the street doesn’t seem to be factoring and as time goes, if the market reacts negatively to that you might have better levels in the market to enter these companies with a three-five year horizon. I think next 12 months could be tough for equities.


Prashant: Let us just assume that there is no earnings growth in financial year 2017 – zero. So based on financial year 2016 earnings where is the market trading at according to you - 19 times?


A: We avoid looking at market levels based on consolidated numbers. We have a stock specific view but you would be very close in terms of earnings multiple for the market.


Prashant: If it is trading at about 19 times then at an aggregate level, a general comment to make, not very much by way of margin of safety, still yet?


A: The long-term average has been about 17 times, so we are still above long-term averages for trailing multiples.


Ekta: This research that you have done in tier II tier III cities have you picked up anything formidable in terms of what is happening especially on the non banking financial companies (NBFCs) and micro finance institution (MFI) sector how deep is the pain there?


A: Again the last mile primarily was cash and it was not specific to MFI we just wanted to see what was happening to demand especially in tier II tier III cities and at least demand has collapsed rapidly there. Transactions have dropped dramatically; if you go to any shop and ask him, even one month later you are at 50 percent of what were you before demonetisation, so at least our sense is that pain will at some point start showing in earnings estimate of companies and GDP numbers of India.


Ekta: Would you buy a Bharat Financial Inclusion post the correction?


A: Again, we don’t have a stock specific view there. We have been very careful in that space because of the political interference that space has, so it has really been tough for us to identify companies where we have been comfortable given the kind of political interference that business has. We have not, at least in the fund; we have not had any exposure to that space so far.


Prashant: This is no exposure to the microfinance right?


A: Yes.


Prashant: There is always political risk, as someone called it political capture is possible because you can ask your based or not repay loans and say while I will take care of it and then you kind of create a moral hazard. This is a proven business model as well, default rates are very small. Wouldn’t you think with the largest player which has been around for a long time at a good price makes sense to look at or you think it is too risky I mean as a business you don’t like it?


A: At a price we might look at it, but the price that these businesses are quoting at they are getting businesses with multiples even in excess of HDFC Limited which was for we have never understood that. A company with long-term track record of negligible credit cost, again we have to gauge these businesses in downturns not necessarily in up terms. It is very easy to grow your size of asset in these businesses. We want to see what happens to these businesses in a downturn. Again these are not the best quality of credit where they are lending and whether you price these businesses as if there is no NPA risk, is something we have not been comfortable with.


Prashant: What would you be comfortable paying? Our research team worked out some numbers and they said let us take this just using as an example Bharat Financial is now trading at about 2.5 times book. What would you be comfortable playing?


A: We will pay a lot lower than that.


Prashant: What one time book?

A: I cannot share the multiples that we have for the companies, but inherently we believe these businesses are lot more risky than a lot of the stable businesses which are trading at a lot lower multiples than these companies.

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