Buy on dips, early rate cut will surprise mkt: Nilesh Shah

Nilesh Shah, MD & CEO, Envision Capital, says that he believes this winter sessions will probably be amongst the best sessions that we have seen in recent times. If the RBI pre-pone rate cut action then that might positively surprise the street.

Also read: Mkt to consolidate further; bet on pvt banks: Mirae Asset Below is edited transcript of his interview to CNBC-TV18. Q: What is your sense? Is a deeper correction slowly sipping in or is this a shallow one, which should be utilized to accumulate? A: This time the correction has a very gradual decline, slowly drifting lower. Individual stocks have corrected about 10-15 percent from their recent highs while the indices do not yet reflect similar magnitude of correction. This time correction looks different from the corrections we have seen over the last couple of years. Q: Will the winter session be a big catalyst in either direction you feel either in terms of encouraging a breakout for the market or causing a breakdown? A: This winter sessions will probably be amongst the best sessions that we have seen in recent times. The last couples of sessions have been a washout and have not truly been very productive. There are possibilities that couple of legislations will be passed. The question is which legislations will get passed? I think various legislations relating to the finance bill and FDI in pension, insurance might sail through but I don't think much progress will be made on critical issues like land acquisition or developments like the National Investment Board. I think this session will be very useful and productive but I am unsure whether it will be productive enough or be a catalyst to drag the markets to breach the recent highs and take the markets to a new high. Q: What is your prognosis for the market over the next quarter? Do you think it might still continue to grind in a bit of a trading range and consolidate or do you see a sharp more than 10 percent kind of a move either way led by either the local triggers or anything global? A: In near to short-term this market may not be able to take out its recent highs, the  which means levels of closer to 19,000 on the Sensex and 5,800 on the Nifty might be very difficult to take out given the fact that the support from earning growth is not yet creeping in. The overall earnings growth still stands into high single digit which is not good enough for an emerging growth market like India. On the other hand any deterioration on global sentiment - be it to do with developments pertaining to fiscal cliff or any issues relating to sovereign ratings could take the market lower. I think in the short-term we could still be headed lower and from an India perspective I think a big trigger could come if the Reserve Bank of India goes ahead with rate cuts much ahead or much earlier than its kind of signal that it has given about cutting rates from between January and March. If the RBI pre-pone rate cut action then that might positively surprise the street. _PAGEBREAK_ Q: What kind of downside risk would you say is present? A lot of people put hope in the fact that it looked like the market was making a higher bottom for itself by the end of this year?   A: This market has been surprising everybody. In the sense that when the markets do rally, you think there is a breakout and the market is going to make new highs and the opposite is true when it tends to go down. But we have seen that the corrections are typically in the range of 10-12 percent. So if one looks at the levels of about 5,800, which the Nifty managed to reach a few days back, and if one were to keep that in context, maybe levels of about 5,200 to 5,300 are quite possible on the market.   Though at this stage, maybe levels around 5,400 would be where the markets could take a strong support. But I wouldn’t rule out the possibility of this market probably going back towards 5,250-5,400 band, before it starts making a fresh upmove.   Q: If the correction that you are suggesting were to materialise, would you use it as a buying opportunity? Or do you think it could be on hindsight, a January-February kind of rally that happened in September and the market may sink lower than what you are suggesting?   A: At this stage, it looks unlikely that this market could sink lower than the levels that we discussed. I think at that point of time, at that stage, valuations become attractive. We have to bear in mind that it’s almost five years since the market has been consolidating in a given range. Over the last five years, earnings growth has materialised. Our sense is probably the period of single digit earnings growth is likely to be behind us.   As we step into the next financial year, earnings are likely to look up; in case the rate cut cycle starts in India, if commodity prices stabilise and if the investment cycle starts picking up.   We think that there are three catalysts, which can drive earnings growth into the double digits from FY14 onwards. It is very likely that the markets will start factoring in a lot of that post this leg of correction. I tend to believe that whatever corrections that we see in the market place, over the next few months, probably are likely to be the last phase of decline in the market and at that stage; one has to be a significant buyer in the market.   Q: Would you change your purchase preference in that case? Would you start looking at high beta infrastructure or would you still go with a very expensive but the well performing spaces like FMCG, pharmaceuticals?   A: It is quite likely that for the next year or so, or for the next few quarters, the consumer names may end up being underperformers. Especially the consumer staples, with valuations in the band of 35-40 times are likely to lose their defensive flavour. Probably the best in terms of volume growth or margin expansion is behind most of these names.   On the other hand, if we see stability in commodity prices, if we do see interest rates beginning to come down, and if the investment cycle starts picking up in a small way, it is better to start looking at the conventional high beta names. Though within that high beta, one will have to be very selective, cherry pick the quality names and companies, which have reasonably good balance sheets. Companies, where it looks like the P&L will start to perk up and look a lot better once the business momentum starts building up.   I think there should be a mark shift in terms of allocation. One should be lot more positive and benign on the conventional high beta names.   _PAGEBREAK_   Q: Do you buy the turnaround story in media?   A: The turnaround story seems to be very realistic. I think the media sector is headed for better times given the kind of changes that we have seen in the distribution landscape. If one were to look at three different pockets in the media segment; one is the top tier broadcasting companies, second is the tier two broadcasting companies and third is the distribution companies. The first segment, which is the top tier broadcasting companies look better, though the valuations are not very attractive neither are they terribly expensive.   It makes sense to switch out of some of the defensive consumer staple names and get into the top tier broadcasting companies because they have established business models and they have a very well established distribution stream of revenues.   In the latter two segments, particularly the distribution segment, by and large the trade is over. The kind of steep rise that we have seen in stock prices factors-in the future potential. The reality is that most of these companies would still have leveraged balance sheet and the operating cash flows would not be positive. I would probably stay away from the latter two segments and probably have a bias more towards the top tier broadcasting companies.   Q: What about telecom sector that has been such a huge underperformer? Not only did they not go crazy in the auction, there are early signs that they maybe considering tariff hikes as well. Is it time to buy telecom?   A: You could have a trading rally in telecom stocks but from a structural perspective, the best is over for the telecom sector a few years back. The kind of problems which the sector faces is going to continue to prove strong headwinds for the sector. Most of the incumbent players in the sector have a lot to do to basically start improving profitability and register growth.   There might be a small tariff hike but I do not think it would have a meaningful structural impact on the sector. Therefore from a pure investment perspective and a medium to long-term perspective the sector is best avoided.   Q: Tactically, how would you position yourself? As an individual investor is it prudent to start looking at individual midcap names, high quality names and build a portfolio? Or do you think the market scenario is such that maybe one should be just sticking to some of the blue chips?   A: A lot of the blue chips are pretty expensive; post this rally that we have seen during the course of the current calendar year. So the bias should be more towards the midcap names and have a bottom up strategy. Look at midcaps on a very selective basis; look out for companies which do not have too much of debt and are trading at that broad band of 8-12 times PE multiples. We see such kind of opportunities in the midcap IT space or in the auto component space, which are more a play on either the export market or the replacement market back home.   There are individual sectors, which offer sufficient opportunities. Investors should be well positioned to get into some of these sectors and take a good medium to long-term investment call on some of the best names here.   Q: If the winter session is a washout and there is no significant headway on a lot of the taxation issues etc, would you say it could amount to a 10 percent type of impact on the market? Or is the market fairly sanguine about disappointments from the political end?   A: If the winter session doesn’t turn out to be productive enough then the concerns would enlarge significantly because post the winter session, everybody would be talking about the budget session and the Budget itself. So, if not much is achieved in this winter session, then concerns about the Budget being a lot more populist would come out and play in the market place. That itself could be an important trigger for this market to be headed lower.   It is very important for our markets, from a local standpoint, that the winter sessions turns out to be a lot more productive compared to the past sessions. Otherwise an unproductive winter session coupled with expectations of a populist Budget may not bode well for the market from a sentiment point of view.