We don't have a V-shape economy, uptick just begun: Nilesh Shah

He further advised investors to be wary of stocks trading at expensive valuations on a price-earnings ratio (P/E) basis as they could be vulnerable.

Below is the verbatim transcript of Nilesh Shah's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Your comment on the result season so far, even laggard companies like JSW Steel and Tata Power have posted decent numbers. Is it time to say that the earning cycle is turning up?

A: I think that would be the prima facie kind of conclusion that one can arrive at. It will be suffice to say that perhaps the worst is over. We have seen the trough and a lot of companies which have been debt laden or have been exposed to some of the global cycles or have been vulnerable to some of the regulatory issues, I think have been able to overcome some of those hurdles and as said, in bad times they survive.

However, in each one of these sectors there have been several companies around and the companies which will be able to come out of these problems, could be the wealth creators of tomorrow and end up doing relatively much better versus their peer group. Therefore, this is probably for the first time after many quarters, you are beginning to see at least some bit of broad base recovery. It may not be a dramatic recovery but you are seeing some of those leaders come out and deliver numbers which were better than expectation. So that is a big positive.

Latha: Is it a V-shaped recovery and if it is, in which pockets?

A: It's not a V-shaped because we have already gone through the U. If we look at corporate India in aggregate, it has been almost six-seven years from those peaks of earnings in terms of growth rates. We have not had double digit earnings growth rate now for about five-six years or maybe even seven years. So that's already a long kind of a period and we have gone through that U and that's why I was mentioning that we have seen the worst of the trough. Now the uptick has just started. It is going to take some time for that momentum to come back in terms of that uptick but I do not think that is too far away either. So after a very-very long time at least we are getting the sense that this quarter's numbers were relatively better.

Sonia: If we do see a summer correction in the market, courtesy global cues, would that be a buying opportunity or do you think that this market has now settled into a funk that will take some time to recover?

A: I think that would be the fantastic buying time. I think whenever we have had corrections in India because of global volatility, those corrections also have been steep and deep and they provide fantastic buying opportunities.So what you could see over the next couple of months or maybe even in the next few months is a steep correction in market prices as well as the earning cycle getting a little better versus what it has been for the last many quarters. So you are seeing both prices to your advantage and the value expanding and that is a fantastic scenario for an investor who is looking at medium to long-term horizon.

Latha: How should you look at numbers hereafter? One common trend in the current earnings has been revenues lower because prices are low even if the volume has expanded but in most cases of good companies EBITDA is the place where the action is and margins. How should it be going forward? How do you pick from this vast swath of companies which have shown higher EBITDA and higher margins?

A: The most simplistic way to assume is that these EBITDA margins are not going to be sustainable forever. These are margins which could sustain maybe for a couple of quarters as you have the benefit of raw material or inventory at lower prices which helps for the next couple of quarters. So an ideal situation in this kind of an environment is to look at what have been the mean margins over slightly extended periods of time.Look at what have been basically the stable or the average margins for a period of three-four years and then try and see that these are the kind of margins which the company will have or achieve going forward and then look at what is the kind of a normal growth rate or a normalised revenue growth rate which a company can have, which would be more linked to volume growth rather than pure realisation. If some companies able to get realisation growth then that is a bonus but otherwise to look at volume growth and then look at more sustainable margins and then see if there is value or not but surely the margins which companies are reporting for this quarter, I do not think would be sustainable for the next two or three years.At some point of time even competitive intensity will come in. There will be competition; there will be some players who will pass on excess margins to consumers. So those kinds of things will happen and the market place will decide that but the best place is to look at steady state margins, steady state volume growth.

Latha: Which are the ones that you will cotton on to?

A: You probably will have to see where the delta is the most because we believe that the high price to earnings (P/E) stocks are going to be very vulnerable and we are seeing it in the market place in the last few days, few weeks that the high P/E stocks will be vulnerable. The high quality, high P/E has been the place to be in for the last many years, but I am not sure whether that is something which is sustainable. High P/Es do not sustain and just a data point, if you look at 2012-13, exactly 12-13 years back for example, Infosys then use to trade at 50 P/E multiple.In this period of about 10-11-12 years, the earnings growth for Infosys has been 22-23 percent - that has been the extent of growth but the P/Es has shrunk from 50 to 20. So it is not about lack of growth. There has been market beating growth. It is hard to find companies which have grown at that kind of rate for 10-12 years. So Infosys has done that but the P/E multiples have shrunk. So it quite looks like that high quality, high P/E which has been the game for the last six-seven-eight years, where everybody has flown to consumer, brands all of that - that itself could be at risk.          

Sonia: Just wanted to take your point on the high P/E and toss it to some of the stocks that are under pressure today. If you look at something like Britannia Industries, if you look at Jubilant Foodworks, there are some reports that many of these bread manufacturers are using cancer causing chemicals to manufacture the breads so maybe that is used as a selling opportunity. Do you think names like Britannia, Jubiliant Foodworks could see some derating because as you said high PE stocks are vulnerable now?

A: I would probably say that is definitely possible and I think it is a high probability scenario because what is going to happen is that investors have been used to high growth rates in these companies that even if they have achieved 10-15 percent topline growth but the bottomline growth has been better. Some of these companies have also benefitted because of lower commodity prices; so lower prices of wheat, lower prices of sugar, all of that has really helped them for many quarters. However, that may not be the scenario going forward or basically that extra benefit is going to vapour away. So, that probably seems to be the more likely scenario.On the other hand, you are going to see a lot of companies which were avoided so far, but are now bringing in the delta, kicking in the delta in their earnings because of restructuring, because of a better scenario, cost efficiencies, value engineering, those kind of things, a bit of balance sheet restructuring maybe that is one area to kind of look at in a more positive and a constructive manner versus the companies which have been leaders for the last five-seven years.

Sonia: What would those pockets be?

A: One is of course a lot of those economy plays and I think those individual companies out there, so while you could broadly say consumer is overvalued but I think within consumer you have a lot of choice so there are companies which are trading at 50 P/E multiples and then there could be companies trading at 20-25 P/E multiples. So, I think at this point of time you need to kind of look out for companies that are trading at discount to industry. So, that is one area.Some of the other areas could even be to do with the microfinance institution (MFI) for example, microfinance as a space is an interesting space. The combination of direct benefit transfers, money reaching out to people, when they get money, they start spending more, they want to take more loans, all of that. So, a lot of MFIs itself could be a very interesting play in terms of what the government has been doing and what the opportunity is there. A lot of the financial services, non banking financial companies (NBFCs) for example, have done extremely well in an environment where the service sector has done well, where millions of people have gone into the workforce and started taking loans for consumer durables, two wheelers, cars, all of that and in the process a lot of NBFCs have actually done extremely well.So, maybe this is a very powerful theme going forward. The third area is basically technology itself where there companies which are basically aligning, partnering with global majors and working on some of the big technology trends worldwide be it artificial intelligence, internet of things (IoT), big data, I think that is a third powerful theme which investors need to look for, for the future.

Latha: Is that your hierarchy in finance - MFIs, NBFCs, private banks? 

A: It looks that to be the case and that is because I think it is all a function of growth and especially for MFIs which will convert to the small finance banks and maybe for them there is even a more compelling proposition as they improve their liability franchise and manage their cost of funds and those were the levers which they exercise going forward. So, I think within the financial services play that would be the pecking order.

However, some of the well run private sector banks could be vulnerable again to high valuations, going forward they may not be able to enjoy the same kind of margins, there could be more competitive pressures, you are going to have dozens of new banks come into the market place, technology is going to be a strong enabler for many of those incumbents or the fresh players there. So these are some of the challenges which they will definitely face apart from the high valuations that they enjoy.