Mkt in consolidation phase, next 3-6 months tough: Envision

Nilesh Shah, MD & CEO of Envision Capital feels that the market is in a consolidation phase currently. Speaking to CNBC-TV18, he cautioned that the next three-six months look challenging, especially from earnings point view.

However, if some policy reforms are initiated in that time or new government kicks starts the investment cycle then it could lay foundations for the next cusp of the growth cycle for corporate India," he added. According to him, the measures taken with respect to fuel side are in the right direction, but a lot needs to be done going forward. The central bank’s measures to focus on inflation are also positive. Meanwhile, the cabinet committee on investment’s (CCI) steps to clear projects that are stuck will reflect is a good start, he added.   Below is the edited transcript of his speech at the Investor Camp. The last big top happened in 2008, which was driven by the infrastructure, power, commodity, and cyclicals. One could essentially call them the beta names and where the defensives were underperformers. Historically, a significant deceleration is seen over the last 5-7 years. The Sensex earnings per share (EPS) in 2007-08 was roughly about 800. The Sensex EPS now is roughly about 1200; a 50 percent increase over a five year period; an earnings growth of 8 to 9 percent. This is a consolidation phase as there is enough historical evidence to suggest that. The next 3-6 months look challenging, especially from earnings view, but it is quite possible that if a whole set of policy reforms are initiated over the next 3-6 months during the the government’s rule or if the new government comes in and kick starts the investment cycle; it could lay the foundations for the next cusp of the growth cycle for corporate India. There are some early indicators to that. Firstly, is that while we talk about strong dollar, the prices of a lot of industrial metals have capped. Commodities are all significantly below where they were one, two or five years back. India being a net importer, lower commodity prices means lower material costs. It implies better net profit margins. This may not play out over the next one or two quarters as we have the headwinds of strong dollars, but the best of the commodity cycle is over. If one has to look at a two-three year horizon, lower commodity prices would be very positive for corporate earnings. Second, we seem to have got stuck into a triple five syndrome; growth rate of 5 percent, current account of 5 percent and fiscal deficit of 5 percent. As the finance minister says, we have not crossed the red line. But a lot of other steps have been taken. First of all, on the fuel side, petrol prices have been deregulated, diesel prices have been partly hiked; a lot needs to be done. The RBI governor’s address while we keep discussing repo rate and the marginal standing facility (MSF) rate, but the big headline there is that it is the direction to New Delhi that start focusing on consumer inflation. Before we go to polls, I would not be surprised if there is a diesel price hike, which might be taken by the market negatively on a one to day basis. But that is very positive for the economy. LPG has been partly deregulated. What really leaves to be done is the kerosene subsidy. This will be a huge sentiment changer. Come 2014, whichever government comes in power, it has no option but to kick start the investment cycle. The luxury of a fiscal or a monetary stimulus is over. The only way the economy can be kick started is to kick start the investment cycle. Multinational companies (MNCs) are expected to bring in a lot of investments into India especially if the FDI regime gets liberalized. For them, a big contention was the taxation. The government has said that there are not going to be any incremental efforts to collect taxes from Vodafone till reconciliation is reached. The transfer pricing mechanism has been altered and made friendlier, which puts to rest apprehensions which foreign direct investors have in India. Apart from RBI’s institution, other institutions have started moving to the Cabinet Committee on Investment. The Cabinet Committee on Investment was set up when the government realised that there are projects aggregating to about Rs 10 lakh crore which are stuck. It was in that context that the CCI was set up roughly about a year back. The CCI recently has cleared projects worth more than Rs 1 lakh crore. Clearance of projects is a good start, but these projects now need to be moved, contracts need to be awarded and a lot of the other smaller clearances need to be given.