Envision Cap tells you why next 3-6 mnths are key for markets

Markets are at a crucial point now and global headwinds might make the next 3-6 months challenging, feels Nilesh Shah, MD & CEO of Envision Capital.

Shah expects events like the US Presidential elections, rate decisions by US Federal Reserve and India’s Reserve Bank, GST implementation and UP elections to remain key triggers driving markets until early 2017.

Corporate earnings are still sluggish and not across-the-board, he says, adding, the expectations of earnings growth revival will now be pushed to FY18.

He also shared his views on certain specific stocks like Infosys, ICICI Bank, Glenmark, and Arvind among others.Below is the verbatim transcript of Nilesh Shah's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: Your thoughts on how the market is likely to pan out now. It has been a stock specific market do you expect that to continue?A: I think the markets are at a crucial point. There is really no doubt about it and it still looks interesting, it will remain a stock pickers market, but the next 3-6 months could be very challenging. The headwinds could come in from all the global factors that are there, be it the outcome of the US presidential elections or more importantly the US Fed’s stance, these are the two most important events that you need to kind of see, but spill over to 2017, the early part of 2017 the two or three big triggers are there are basically the implementation of the goods and services tax (GST) in terms of what specific rates and all of that which come out, what does Reserve Bank of India (RBI) do in terms of interest rates going forward and three of course is the UP elections.I think these three are going to be the most important factors. Earnings have been a little still sluggish, earnings growth is not yet there across the board, it is not an all pervasive kind of growth which is happening - - so I don’t think that earnings are going to be the trigger for the next 1-2 quarters. It looks like that the earnings growth which was expected in FY17 on an all sector basis that really not happening and our view was that probably that is going to spill over into the next financial year.Sonia: From the earnings this time, anything that caught your eye in terms of a positive trajectory that can perhaps continue and somewhere where you can put in some incremental money?A: Two areas where the earnings have been very good are basically the private banks and the NBFCs and that kind of lot, there the earnings growth has been fantastic, they have growing at a 20 percent plus. The second area is auto especially some of the two-wheelers and some of the four-wheeler that pack has done relatively well. Of course it is a mixed bag, so some of the two-wheeler guys who are exporting they have not done as well, but then the guys who were pure domestic plays have done exceptionally well.I think financials and auto have really been the two bright spots and along with that of course the auto component players riding on the wave of auto companies doing well. In the midcap space a lot of the auto component, auto ancillaries have been doing well. These have been the 2-3 buckets which have done well, but step out of these 2-3 buckets their especially on the top line side the growth has not yet kind of materialised.Anuj: We were talking to you on Infosys day when Infosys tested our patience and came out with numbers. Are you surprised to see that stock immediately go back to its 52 week low so soon and is it now offering a good bargain yet again?A: If you recollect that day, we were saying that levels below Rs 1,000 should be a good value zone for it and I still think that be the case. The reality is that I think some of these the big IT guys they will still have a bit of the sluggish growth yet for a couple of more quarters, that 9-10 percent. Somewhere that 10 percent growth in dollar terms which had become kind of a floor is now really becoming the ceiling for the big boys and that challenge will remain for a couple of quarters.I think for Infosys the good news at least is that they are aware of the challenges and over the last maybe 4-6 quarters, they have tried to kind of move towards a strategy which helps them capture the newer growth opportunities in the technology space. Obviously, that is taking a lot longer than what was kind of expected or anticipated, but that remains a challenge. It is quite possible that could still take them a few more quarters to get back into a 10 percent plus growth in dollar terms, but along with the top tier IT stocks underperforming, a lot of the midcap IT stocks have also underperformed, but they would be in a position to grow at a much faster pace, because they are small, they are niche, they can be more agile and that really where the big opportunity could be.Sonia: Just coming back to the point you made about private banks, what’s your view on ICICI Bank because there has been a significant rerating on that stock, post the news that came in from Essar but ICICI Bank comes out with numbers as well next week on Monday. Are you positive as we head into earnings?A: I would be more positive from a slightly more longer term. You could have still some more pain for a quarter or two, because you really don’t know what exactly is sitting in the books of these banks and there could be some negative surprise as well, but I think by and large a majority of the pain is behind them.I think ICICI Bank has done a commendable job in terms of trying to address the issues of asset quality and some of the developments in recent times have only helped them. I probably think that things may not get significantly worse for them and relative to the valuations of some of other private banks, the valuations are attractive notwithstanding the fact that it is kind of run up quite well over the last few months. I am not too sure how it is going to play out over the next 1-2 quarters, but I probably say that the worst is over for them.Anuj: You have been a long term pharma watcher, your thoughts on Glenmark and in fact the entire space. It look like the bear market has ended in the pharma stocks and we are started to see a lot of rally in some of these names now?A: Absolutely, I think Glenmark is being a great story of somebody which is home-grown and has tried to kind of break the ceiling and do things on areas like drug discovery and all of that. It has been a company where over the last 15 years or so has grown at 30 percent compounded. Glenn Saldanha has done an extremely great job.Overall, pharma sector right now is a good contrarian bet. Most of the stocks have come off. Decent quarterly performance have not been good, but that because they have certain challenges in terms of USFDA approvals or some of the price ceilings that have got implemented back home, but nevertheless most of the pharma companies are run by great managements. They have seen this kind of challenges in the past. The big opportunity is still there. The runway is still very long for them - - just kind of give them a quarter or two and I think individually you will start seeing a lot of pharma companies bouncing back. Like I say Glenmark for example did nothing for 2-3 quarters and then one great quarter and you saw the huge rerating. I wouldn’t be surprised if one by one this starts happening to a lot of pharma companies, so the long term opportunity is intact. These are great companies and they will remain wealth creators over the very long term.Sonia: A lot of stories in the textile space names like Arvind where they are focussing on newer businesses like brands etc. Is this a stock that you have been interested in or space that you are following?A: Yes, I think the space is something which we like the whole textiles and apparels as a space is something which is good. For Arvind what has been positive is the move away from the conventional commodity denim business, which is in so to say a kind of a bulk mass commodity business to a business which is more oriented around fashion and brands and the choice is very good.The sector on the branded side has not done particularly well especially over the last 5 years - - over the last 3 growth has been a bit anaemic 10-12 percent growth. If you really look at the prices of garments they haven’t kind of move significantly, so the inflation effect has not yet come down on the sector, but our view is that we are very positive on the space and we think over the next 2-3 years this can be a relatively outperformer in the entire consumption kind of basket as basically the whole digital wave comes in and people start buying more online.I think overall the space is ought to basically do extremely very well over the next 3 years. I think I would say that watch the space and where you see value, you just need to go and buy out there.Anuj: Couple of market participants have said maybe time has now come to look at telecom after years of consolidation and underperformance. Would you be in that camp?A: I wouldn’t. This is honestly a sector which is fantastic for a consumer. I think I as an individual I just love the sector because it makes my life so easy. It gives me a new deal every month, every quarter that’s great, but as an investor I don’t think this has been a wealth creator at all. You look at Airtel, over the last 10 years top line has probably grown 15-20 percent and partly aided by acquisition etc that they made, but as a stock it has not given me any return, hardly any returns for the last 10 years, maybe more like a savings bank interest return and some of the laggards out there the number 2 and number 3 players have been wealth destroyers and this will continue.You could of course have those burst in between, when somebody comes in and says I have added new subscribers, but beyond that there is really nothing to look forward to. It is a heavily regulated sector, you will have to pay loads of money to basically get your licences when you bid for them or you participate in auctions you have to spend thousands of crore in the sense that you have to invest and then you have to again compete in the marketplace and keep offering better and better deals to your consumers.We already have a billion mobile subscribers in the country, but look at the number of unique customers that number is not going up, so the only way you can grow is to go and takeaway market share from somebody else and now that may not necessarily be a profitable strategy. It may not be a profitable growth strategy. Clearly, yes prices might look attractive and as a trader you might make those 10-20 percent from it, you had those one month where a stock just flies but overall as a long term investor you should avoid this sector.Sonia: You started off by saying that you like the auto space quite a bit, but do you continue to buy some of these premium stocks like Eicher Motors, Maruti or do you now start to look at the relatively beaten down names like Ashok Leyland?A: It is always better to look at the relatively beaten down, because these are now stocks which are virtually priced to perfection. The kind of PE multiples that they are trading at I am not too sure whether there is value. You could again over the next 5-10 years, you could still take a call in terms of the number of volume in cars will go exponentially and therefore Maruti will be a wealth creator that could be good for the next 5-10 years, but over the next 2-3 years it may be better off to avoid some of these high PE stocks and look for value in either some of the beaten down auto stocks or look at the auto ancillaries, which will grow because of growth across the board, be it two-wheelers or four-wheelers or growth in their export business. I still think you need to probably look out for better value in the auto ancillary space versus the auto space.Anuj: At last samvat if someone had told investors to go out and buy commodity stocks, everyone would have laughed off, but actually was the biggest wealth creator. Stocks like Vedanta, NMDC, Hindustan Zinc have created enough wealth this year. Does this remain a trading play or do you think there are some more gains for the stocks?A: I think they would probably just be trading plays. The reason is why the stocks have done really well is because they were significantly a beaten down and then over the last one year thankfully the Government of India has taken some steps especially relating to steel, where to some extent there have been some restriction on imports and all of that. I think these are being the two big contributors and third of course there has been some stability in the global steel prices. I think these 3 factors have basically contributed. By and large these 3 factors, the impact of that is already played out. You could still have some momentum related upside, so you could see some advances in these stocks yet for another few months or so, but I doubt they did be kind of significant wealth creators over a 2-3 year horizon from here.