While it may be a little too early to take a call on whether the worst is behind us, the India story continues to remain intact, is the word coming in from Nilesh Shah, MD and CEO of Envision Capital. Though the course of the market over the next 2-3 months will be decided by global events, he says.
On the domestic front, issues such as reforms impasse and poor monsoon can play spoilsport with earnings recovery, he adds. To that extent, the rural consumption story may not kick in post monsoon. However, Shah believes that over the next 3-5 years, the Indian market will give more than 100 percent returns. "Today we are at 7,500-7,800, is there a chance that we could be at 13,000-15,000 Nifty in the next three-four years? The answer is yes. So what are we saying is that there is a downside of maybe 500 points on the downside but maybe there is an upside of 3,000-4,000 points on the Nifty," he told CNBC-TV18.
According to him, the only asset class that can outperform equities is fixed income in the next 3-6 months, more so in India if the Reserve Bank lowers rates.
He says the next leg of leadership will come from exporters, who will gain from rupee depreciation, and the domestic consumption theme. The rate sensitives and the cyclical companies with good, strong balance sheet may also provide a good buying opportunity. He also adds that the delta may be with technology stocks over the next 12-18 months.
As far as domestic cyclicals are concerned, Shah says real estate, engineering and cement are the three sectors to bet on. Though realty is the most hated sector now, in adversities lie opportunity, he says. He advises investors to look for companies with strong balance sheet, or companies with a lot of restructuring.
In the IT pack, he believes midcap IT will always throw up opportunity. However, Infosys continues to be his favourite. Shah says it has done all the right things over the past year or so. "Infosys is really preparing itself for the future," he adds.
Below is the verbatim transcript of Nilesh Shah's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Are you getting a sense that the calm has returned and we have tested the lows for now or do you think we are in very rocky waters?
A: Probably it is little early to take that call whether the worst is behind us and we are probably in for a more calmer times and the reason is that next week of course what the US Fed does, is going to be very critical. This correction has been less about fundamentals. It is more about technical, how global macros are placed, how global liquidity is placed, how the global currencies are virtually indulging in a race towards devaluation. I think it is more about that. It is not about saying India is not going to grow at 7 percent, it is not really about earnings, if at all the fundamental picture for India is only getting better with every passing day. Therefore, I think we will unfortunately have to be focused more about how global events pan out over the next few days and that will decide the course of the market maybe for the next two or three months because there are two additional important points. One, the monsoon is turning out to be even worse than the initial forecast. So the initial forecast said it is going to be 12 percent below normal. Now it is 18 percent below normal and we do not know what the final number is going to be. Second, some bit of impasse on reforms. I think these are the two negatives which have cropped up in the last few days or few weeks which might push the earnings recovery a little bit. Therefore, to that extent in the short-term we do not have much of local news to look forward to and it is going to be global news, the global macros.
Latha: How will you look at all these distressed points? Would you look at the next 7,558 as an opportunity to buy because ultimately the India story is intact and these global jitters are occasions to buy?
A: Absolutely. It is cliché to say that take three to five year horizon in good times or bad times but even more relevant now because if we take a step back and say that what are the most pessimist forecast in terms of where the Sensex or the Nifty is headed and we are at 7,800. Therefore, for a moment let us take those levels that either 7,500-7,200 or whatever it is, we are talking of 5-10 percent correction but in the next three-four years does the market have the potential to be substantially higher than where we are today, where we were in at the start of the calendar year. Again the answer is yes to that, it's an emphatic yes to that - that in the next three-five years we were probably be 100 percent higher than where we are today. So if today we are at 7,500-7,800, is there a chance that we could be at 13,000-15,000 Nifty in the next three-four years? The answer is yes. So what are we saying that there is a downside of maybe 500 points on the downside but maybe there is an upside of 3,000-4,000 points on the Nifty. So the risk reward is extremely in favour of a long-term value investor at this point of time.
Sonia: I am just trying to play devil’s advocate here. How high is the probability of the global markets being in a bear phase because of the slowdown in growth and then equities as an asset class underperforming compared to other asset classes?
A: That is quite possible, I think the only area where or the only asset class against which equities could potentially underperform over may be the next three to six months could be fixed income. I do not see basically commodities or real estate as a preferred asset class which is going to even do better even over a shorter timeframe like three to six months.
The only potential is basically fixed income and more so in India if the Reserve Bank of India (RBI) goes ahead with a rate cut in the next three to six months obviously that sounds very long in the current context especially that 24 hours bag everybody is again being clamoring for a rate cut. So, in context of that it sounds too long-term but let us assume that even if there were to be a rate cut in the next three to six months may be fixed income could potentially outperform. But that is about it that is going to be one window of opportunity which you will get and after that you are back to getting 6-7 percent returns in fixed income.
Whereas in equities what you could do is may be lose out may be another 5-10 percent on an extreme situation even from here. However then over a three to four year period it is going to be fantastic. Equities has the potential to deliver you superlative returns versus other asset classes I think the probability of that is going to be extremely high.
Sonia: So in terms of sectors then in the next leg of this rally as and when it plays out who do you think the leaders could be?
A: I still think that the leadership for may be the next year or so will still lie with both the exporters as well as basically the domestic consumption themes; exporters because obviously for them it is a windfall. Rupee-dollar at 66-67 per dollar is clearly a windfall. A lot of the demand for their products or services is non-discretionary so to that extent their customers really don’t have too much of an option. Yes, there is some option in terms of price tweaks here and there but otherwise I still think that technology as a sector still has the potential to outperform.
Consumers, no matter what the monsoon forecast is or of the fact that the rural economy is a little sluggish I still think it has the potential to do well. However, if you kind of look at where the next bull market would come in it could definitely be in some of these beat down sectors, the rate sensitive’s, the cyclical where companies have sound business model. They have a good balance sheet and would be able to really position themselves well for a recovery in India’s investment cycle.
I think it makes sense to take a contrarian view point because leadership does change every three to five years. If you look at the history of Indian markets over the last 15-25 years leadership has changed every three to five years. I don’t see this time to be any different then what it has been over the last 15 or 20 years.
Latha: Leadership within the IT pack you mean or leadership sector only?
A: Sectoral leaderships, I think, because clearly this market, I think equity markets are all about delta in earnings. Where is the change, where is the velocity of change how strong is that velocity.
Latha: Where are you seeing the delta now?
A: Over the next year or so I still think it would be with say the technology pack because of the windfall that they gain. Some of the technology companies are implementing smart growth strategies. There has been change of leadership, they are implementing some smart growth strategies so I think all of that will play out over the next 12-18 month.
However, I think if you take a step back and say what could play out over the next three to five years I think domestic cyclical have a very strong chance. Rate sensitive’s have a very strong chance and as India progress on the investment cycle, as you see more infrastructure getting created I think that sector has a very strong chance.
Sonia: You were telling us about IT and the last time we spoke with you is during Infosys earnings, when the stock was at around Rs 930 or so, it has moved very swiftly post its numbers now close to Rs 1,100, will Infosys still top your pecking order or do you think that there could be more lucrative opportunity in some of the midcap IT names as well?
A: I think the midcap IT will always keep throwing up opportunities because that is very bottom up, very specific to a company but I think among the larger guys, I still think Infosys would clearly be the favourite. Infosys as a company has done all the right things over the last maybe one-two years right from where Narayana Murthy came in and made those changes and then the new CEO coming in and again doing a lot of things. They are doing a lot of smart things out there and they are preparing themselves for the future. I don't see any other company investing in the future the way Infosys is doing right now in terms of training and upping the skill sets and focussing very clearly on areas like automation, artificial intelligence. These are going to be the growth drivers of the future. The future of the technology business globally is going to be in some of these areas and that is clearly where Infosys is doing it. Maybe there are other companies who are doing it but it is very discreet, the way Infosys is doing it, it is positioning itself very well, thought leadership is back at Infosys and I think that is very important when you look at a company of that size.
Latha: You were speaking about the domestic cyclical. What is the favourite in that space? Would you venture into public sector banks, would you venture into real estate? They are the beaten down sectors or would you stay with the private financials which everyone likes?
A: I think within that real estate, engineering and cement are the three sectors to bet on. First, real estate; it's the most hated sector now, every media report only talks about how prices are going to decline, how you have so much of inventory there, how sales is going to become difficult and of course fractured balance sheets and things of that kind but in adversities lie an opportunity and in real estate either you look at companies which are good, have a sound balance sheet, do not need to do too much of restructuring and will ride the next wave of demand. I think one looks at either that or look at companies where a lot of restructuring is going on, for example I do not know whether DLF is yet an investment candidate or not but the kind of changes that they are effecting in terms of restructuring the balance sheet, it is possible that maybe few years down the line where the demand is strong, it is quite possible that there is a rerating potential out there but still the preference would be for companies which still have a lean balance sheet within real estate and where you do not need to do too much of restructuring. Second, engineering, components is a very big area. Third, cement; whenever housing demand kick-starts, whenever infrastructure construction starts, cement will be a very natural beneficiary especially with freight cost down, a lot of further cost down and a lot of cement companies have been doing value engineering, they been trying to reduce cost becoming more efficient, improving the process and that makes them operationally more efficient and on top of that when you have demand kicking in - that's the icing on the cake. Therefore, from a medium to long-term these are some of the sectors to look out for.
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