Nilesh Shetty, Associate Fund Manager-Equity, Quantum AMC, remains cautious on markets. “There are some pockets of value emerging, but still our sense is valuations remain fairly elevated. This is purely on the feedback we get from Corporate India,” he told CNBC-TV18.
Shetty expects 2015 to be sub-par year for equities, unless there is a “real correction”. He thinks private sector banks have fared well, but valuations remain stretched. Even the quality of assets in PSU banks remain questionable, though valuations are attractive, he said.
Below is the transcript of Nilesh Shetty’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Anuj: Are you using cash to deploy now with the market falling 10 percent or are you waiting for further decline before you put some money to use?
A: The stance continues to remain fairly cautious. There are some pockets of value emerging, but still our sense is valuations remain fairly elevated. This is purely on the feedback that we get from Corporate India. Post the Modi government coming into power, the expectations that were built up into earnings estimates were unrealistic. That is what the sense we got from Corporate India and we felt these earnings estimates will not come through. Since then you had a series earnings disappointments but the stock prices have not reacted till almost CY15 and now you had some pockets of value emerging because of correction. But broadly the market still remains fairly expensive. Again we do not know what will cause a correction. We continue to wait and watch. But our sense is 2015 could be a sub-par year for equities unless you have a real correction and value emerging in the markets to deploy our cash.
Ekta: Wanted your thoughts on the banking space. We have seen the likes of Axis Bank react very positively to its numbers and if you look at the guidance that they have projected for FY16 in terms of incremental stressed asset addition, it is expected to be possibly lower than FY15, something that even the likes of ICICI Bank had said. Do you think that maybe valuations could now increase just on the fact that maybe that particular parameter might now be getting factored in?
A: The private sector has faired fairly well in the down cycle in terms of non-performing asset (NPA) formation. And so their valuations remain fairly expensive. They are not at a level where you want to add to them. The big collapse in the valuations has happened on the public sector (PSU) side. But again, there the quality of asset book is fairly questionable. And so apart from the largest bank over there, most of banks at the lower tier, it is very tough to take a call on how the asset quality there plays out. So, there is value emerging in PSU Banks, but you have to be fairly careful in terms of which are the ones you pick out for investment.
Anuj: IT stocks and in specific, the midcaps have seen fair bit of correction and really poor earnings. Is this time to look for bargains or is this a sector that could derate from here?
A: Over a long period of time, there is consistent derating as the base has grown for these companies and the earnings rate has slowed down, growth of earnings rate has slowed down. But again the thesis continues to remain, India remains a fairly negligible share of global outsourcing pull and that share will continue to increase. So, we are not extremely worried about near-terms earnings disappointment, we continue to remain bullish on the larger companies. Our sense those are the companies you should be invested in. Irrespective of near-term disappointment, we continue to remain fairly bullish on the fairly larger one in the space and we think that structural story continue to play over the next decade. And again, these companies continue to act as a excellent hedge in terms of the rupee, especially in our portfolio, whenever there has been a disappointment, rupee because of the bearishness in the market, rupee has moved along with it and they tend to act as hedge to the portfolio. So, not just purely valuations, but as a hedge in the portfolio, each one should have some allocation to IT. And we continue to remain bullish on the structural story in the IT space.
Ekta: Break up of 100 percent equity allocation that you hypothetically might have at this point of time, in terms of how much would you allocate to particular sectors at this point?
A: We are more bottom up, so we do not have sector bias as such. But in terms of value where we see right now, there is a significant value being created in the two-wheeler space. That is where we have a large allocation right now in the portfolio. Again near-term below-par growth trends have been extrapolated into valuations and there is, we see significant upsides over the next three years in the stocks in the two-wheeler space. We also have allocations to the utility companies where again because you had, the assumption was India will have a cyclical up turn, steady returns on equity companies were not favoured and that is where value opportunities opened up. So, these are the two sectors which look fairly promising right now in terms of allocation.
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