Nilesh Shetty, Associate Equity Fund Manager at Quantum AMC says the market will correct a lot more from the current levels as the reality at the ground level — absence of capex, demand and good earnings — has begun to unfold. The disconnect between corporate India and stock market is more evident now which is why Quantum prefers to stay in cash for a fairly long time. "It is one of the highest you have seen in the history of the fund and we continue to wait," he said.
Below is the transcript of Nilesh Shetty’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18. Anuj: What do you make of the recent correction that we have seen? It is the first real correction of this bull market but has it corrected enough for you too go out and buy fresh and use any kind of cash that you may have? A: Our sense it is not even close to a decent correction which we expect. The correction has been primarily the levels that the market sort of rallied to in anticipation of a transformational Budget. But once that Budget never materialised we had given up those gains and we are back to sort of January 2015 levels. Again if you sort of go to corporate India and talk to them at the ground level, things remain very weak. Demand remains weak, no fresh capex is coming through and the balance sheet of corporate remain fairly weak.
Ekta: In context of what you said that things have not really picked up on grounds as per the companies you have spoken to in that context do you expect a weaker Q4 earnings as compared to Q3?
A: A weak Q4 is already factored in. Most of the analysts are not looking at Q4 anymore. What they are looking at is guidance on FY16 and what kind of guidance is coming to from Corporate India. If the guidance also continues to remain weak then you will have a lot of downgrades in earnings estimate for FY16. Of course a lot of corporate that we are speaking to are already seeing FY16 could be a very flattish year and it could be FY17 which could be sort of an uptick year in earnings. However, we see that getting postponed every six months. So a year ago it was FY16, now we are talking of FY17 and if we do not see any major uptick in terms of corporate guidance, we will have a correction on our cards.
Anuj: Which sectors do you think are still prone to more correction? We have seen banks correct 15 percent on an index level or some of the top ones have even corrected 20 percent. Do you think there is still more correction there or do you think IT and pharma are vulnerable to correction because they have not corrected as much as some of the other sectors have? Which are the sectors or stock do you think where we could still see some more correction from here?
A: From our point of view the substantial disconnect is primarily in capital good and engineering companies where the earnings could be down 20-25 percent. While seeing calendar year 2014 the stocks were up 50-60 percent so that is effective highly vulnerable to a correction. Pharma again because it acts as a defensive sector in a risk averse environment you do not see them correct a lot. IT again given it is a proxy for the rupee in an environment where you might see rupee depreciating IT stock then to do well. So these two sectors might not correct a lot. However, cyclical sector where there is a high expectation build up, there could be disappointment. You might see a correction in engineering, capital goods, banking and some other highly cyclical sectors
Ekta: How would you approach telecom?
A: Telecom, our sense was the industry competition intensity ease out about a couple of years ago. Since then prices stabilise and again you had steady profitability. One of the problems with forecasting sort of telecom earnings is you really have no clue how the auction will go through and whether that means sustainable earnings for the companies for next decade and what happens after that. So to forecast long-term earnings becomes very tough so in that sense you are trying to price in the auction capabilities of telecom companies rather than so to be business capabilities. So again we just have a small exposure to telecom and so far we have not seen a major sort of opportunities open up there in terms of valuations.
Anuj: What about PSU banks because this is one space where we have brutal correction? About 1/4th of market capital has been lost from the high point,any value emerging here?
A: No again the quality below the largest player is very shaky so most of them are technically negative net worth companies, if you add the non performing assets (NPAs) and the restructured assets. So there is a massive dilution there which is expected to happen over the next two or three years. Whatever value that you see based on price to book is sort of a misnomer because the book itself undergo a change once dilution happens. So below the largest player we do not see any major sort of quality in the PSU banking space. Optically they look cheap but we would stay away from those stocks.
Ekta: Would you have any confidence in say some like an infrastructure space where this would be a time to possibly accumulate in the hope of seeing a more formidable recovery going into FY16?
A: That is what people have been banking out for the last one year and if you see host of infrastructure stocks they are up 100-150 percent over the last 12- 18 months. While at the ground levels things have not moved, even if the recovery happens, a lot of the aggressive recovery is already in the price. So you might not have outperformance there and if there is any bit of disappointment on the infrastructure capex cycle then again you might have a sharp correction in these stocks. Our sense is it is highly overvalued right now and you do not need to touch these stocks at the moment.
Disclosure: We are an asset management company on my personal capacity I do not invest so there is no major disclosure from my side.
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