Nilesh Shah sees Nifty's support at 4800-4850

The falling Indian market is losing investor's confidence and there is a growing fear of another major downturn. Experts are pining hope on the government’s action to help defend the country’s weak market and rupee.

Nilesh Shah of Envision Capital feels that the Nifty may temporarily find support before touching the December lows which is 7-8% away from the current level. "The Nifty could find support in the 4,800-4,850 kind of a zone. Given the kind of global news flow and the kind of deteriorating macros that we see back home, I think in that context it looks very difficult or it will be very challenging for the market to hold on to those short-term supports," he said in an interview to CNBC-TV18.

Pointing out that normal monsoon and fall in commodity prices may support market, Shah sees 5100-5200 to be strong resistance for the Nifty.

However, at the same time he thinks that broader markets may correct more than the index in near-term. According to Shah, valuations of mid cap consumer companies could correct by 25% from current levels.

Also read: Nifty may be headed towards 4800, says Udayan

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Are we headed back to the December lows or do you think we will find support somewhere here?

A: We could temporarily find support before the December lows because the December lows are still probably about 7-8% away. So, it is quite possible that we could find support in the 4,800-4,850 kind of a zone.

Given the kind of global newsflow that we see all around us and the kind of deteriorating macros that we see back home, I think in that context it looks very difficult or it will be very challenging for the market to hold on to those short-term supports. I think a support at the December lows is quite possible. I would say that the probability of that could be very high over the next few days.

Q: What do you expect to see for the rest of the coming weeks, this grind down continuing or a sharper cut? What is your sense of where the market is trying to base itself?

A: The possibility of a slower grind down is higher compared to a sharp cut down. That is because I think most of the negatives, which we see around us, have been kind of discussed significantly and are by and large expected. So, I think the possibility of a slow grind down is significantly higher in comparison to a sharp downmove. That is also because I think the overall leverage positions in the market place are relatively lower, expectations in general are lower.

But that doesn’t mean that there is no downside bias to the market. The downside bias to the market continues. But I think it is the kind of journey that we will go through, during this downside bias, is going to be different in comparison to what we have seen in the past.

Q: What about midcaps? While the Nifty is holding out around 4,900 and drifting down gradually, this earning season, every day passes with at least a couple of stocks falling 10-12%. How do you see earnings having panned out for midcaps and them performing over the next quarter or two?

A: Barring one or two sectors and within those sectors, just one or two stocks’ numbers have been in line with the expectations or have beaten expectations, but otherwise I think that most of these companies have underperformed. I think that by and large as a pack midcaps have disappointed both in terms of operational performance as well as stock price performance.

In the near-term, the pressure on midcaps will continue because if you look at the December lows, the BSE midcap index was roughly at around 5,100, in connection to that, it is at about 5,800, which is still 15-16% higher compared to the December lows. In relation to the Nifty, the Nifty is probably just about 7-8% higher compared to the December lows. So, it is quite possible that while the Nifty might continue to fall gradually, the fall in midcaps would be a significantly higher compared to the largecap space.

In addition to that, we know that when liquidity gets stuff and when you definitely want to exit a midcap basket, the impact cost of that is a lot higher. So, I still think that the pressure on midcaps would be a lot more compared to the largecaps in the near-term.

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Q: In case we get some pullback from here because of the one way nature of the fall, where do you see upsides cap now for the market?

A: The upsides would be capped around the 5,150-5,200 level. That is a level which had held out extremely well in February, March, and April. Despite the fact that we had several negative events, the market was finding support around those levels.

In the event that we have a pullback, if the markets were to be oversold and we have some kind of short covering or we see some bout of investment led buying, I would probably think that the range of 5,150-5,200 would act as a very strong resistance for the market for the foreseeable future.

Q: How do you approach some of these concept stocks? Barring a Jubilant Foodworks, numbers have not been good, not on VIP, not on what came through on Lovable Lingerie, would you buy anything there or do you think that is the space that will correct the sharpest?

A: The biggest challenge in some of the names, which you mentioned, I still think is valuations. The valuations in most of these companies are still north of 30 times, probably in a band of between 25-40 times. That is terribly expensive.

The reality was that about a year to a year and half back, when these stocks had surged and the market did assign those valuations to them, it was on the premise that these companies would be able to continue to post volume growth, would be able to stir their way through competitive intensity and would be able to protect their margins. I think that thesis has not played out. The reality is that most of these companies have not been able to sustain the margins that they had reported. So, I think they have, therefore, on the back of that underperformed.

What we have yet to see is basically a challenging demand environment for them. The demand environment still continues to be very good as these companies post double digit volume growth. But I think when the demand environment for them subsides, the valuations will fall off further for these kind of stocks. I still think that there could be another 20-25% correction in some of these midcap consumer names even from the current levels.

Q: How do you approach IT in a market like this? The annual report takeaways from Infy seem to suggest it is an organisational issue as well, not so much what is happening in the industry. Given what you saw on earnings and given what you are seeing on the currency, does that become a good space to buy or are you avoiding IT as well?

A: Clearly, I believe that the largecap IT has become a lot more attractive post the correction over the last couple of quarters. Ofcourse the correction has been justified, given that some of these companies have not met their guidance and have given a guidance which is below even the industry estimates.

However, the guidance, which they have given, has got validated by some of their peers. So, to that extent, one couldn’t say that they have been ultraconservative. But I think the valuations have now become very attractive. The fact that some of these companies are now trading at 14-15 times, which is basically in line with the market, I think presents a good opportunity for long-term investors.

The midcap IT space, I still think is challenging as some of them have lot of balance sheet issues and currency issues. So, I think given the kind of shave off that we have seen in valuations, I think the largecap IT space presents a good long-term investment opportunity.

Q: What is the general view you hear on the street? Are people still bullish saying that this is just a correction of that big January-February rally and we remain in an overall bullish kind of framework for the year or has that confidence dissipated completely and people are saying that was a flash in the pan, we remain in a bearish groove?

A: I clearly believe that the confidence levels right now are very low. It is not just about the confidence in the market participants, but I think confidence about corporate India itself is very low. We have to keep in mind that most of the market players would basically derive the confidence from corporate honchos.  I think most CEOs have toned down their expectations. They are kind of a lot more guarded about their prospects in relation to a year back or two years back.

In that context, right now I would basically say that the confidence is pretty low. The broader view seems to be that the rally that we saw in January and February was more a rally from a completely oversold situation and basically a trade on the risk-on trade that the world was witnessing.

I think clearly most players do believe that it is completely played out. We are back to reality in terms of our earnings growth. The earnings growth has been disappointing. That disappointing situation or the challenging situation, from a purely fundamental and earnings perspective, might remain atleast for a few more quarters. I think that is basically the kind of reality, which most market participants have begun to now believe.

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Q: How the rest of the year will pan out? Will you just be in this ranging kind of a grind mode or any trigger that you see which can lift us out of this morass over the next three-six months?

A: I probably think that there could be two-three catalysts that could basically drive the markets higher and lift it out of this downward bias right now. If we do have a normal monsoon, that could provide a positive fillip for the market.

Two, I think the correction in commodities, which has been pretty sharp and swift, I think that is extremely positive for India as an economy, given that we are net importers. That has positive implications for the government’s balance sheet as well as outlook on the currency. I think if this correction were to continue and if commodities correct another 10-15% from the current levels, it is going to be extremely positive for India. It is going to be positive for margins for corporate India.

Third, which I think is right now wishful thinking, is that if key legislations go through, particularly in relation to things like GST not so much about FDI in pension or FDI in insurance, but I think more to do with things like the passage of the GST bill. I think these are the three big positives or three big catalysts which could basically take away the doom from the market and revive confidence and bring the earnings trajectory back on track. So, I would probably think that these are the three catalysts. If they play out over the next two-six months, I think we could be in a much better situation in comparison to what we are today.

Q: From the two other markets though, which one do you think could exert more pressure on the equity market in the next couple of months, do you expect to see a sharp resurgence on the yield or do you think it is the rupee that we will continue to track?

A: I think both the markets would remain coupled. I don’t see a situation where both the markets could witness strong divergence. The pace of movement and the short-term direction could vary because clearly in the currency market, you always have some policy intervention. That could basically alter the direction in the short-term. But I clearly think that both the markets currently are in a weak spot. I would probably think that their broad trajectory, in terms of movement, would mimic each other over a span of few weeks or so.