Nilesh Shah, managing director and chief executive officer, Envision Capital, is widely regarded as amongst India’s most prominent stock pickers. Shah is a CFA from ICFAI, a postgraduate in management from Institute of Rural Management Anand (IRMA) and was featured in 'The Wizards of Dalal Street' by CNBC-TV18. Shah said auto stocks may continue to stay subdued for the next few quarters because of the kind of stress that is happening in rural India. He also said that FY20 will be good in terms of earnings, especially if PSU banks are done with the provisioning, corporate banks are in better shape and crude prices stay low.

In an exclusive interview to CNBC-TV18, Shah also discussed the current market sentiments, among other topics.

Watch the video here:

Edited Excerpts:

How do the tech earnings look to you, do you still think that will be the island of performance?

Yes, it pretty much looks like. I think the earnings are going to be good fro the tech biggies. I think the growth momentum is still there, volume growth should be good. Clearly for the year gone by and the outlook still on the technology side is still kind of very robust. They have a strong tailwind of the currency as well. So, I think they should be set for either high single-digit or low double-digit kind of earnings growth.

However, what is going to be very important is the outlook that they present for 2019 in terms of how the US is looking especially in the backdrop of some of the big tech guys out there giving some kind of downward revision in their guidance. I think that is going to be far more important. Even seasonally if you look at it, post the December quarter, really what the street is more interested in is knowing how is the calendar year looking rather than how just one or two quarters are looking. I think that is going to be very important.

Are auto stocks pricing in way too much pessimism, is this a buying opportunity or is this a real slowdown threat?

It looks like the slowdown threat is for real. Of course, the industry and most players have been talking about some kind of liquidity squeeze and the NBFCs not having funding and therefore that is impacting demand, but I really do not think so.

I clearly believe that there are banks which have enough liquidity to lend. I am sure all the deserving people still receive 2-4 calls a day in terms of saying take some loan, take some credit, or take all of that.

So, in the context of that, there is a slowdown, that is the reality and I think that is the kind of stress which is there in rural India and due to farm stress etc. I think a lot of the incremental demand in India over the years has been coming in from the rural sector and that is really impacting the aggregate demand for the automobile. So, they could have maybe another quarter or two of a slowdown.

In between if there is any kind of fiscal stimulus in terms of, say, for example, GST rates being cut on automobiles or two-wheelers, that could trigger some kind of buying demand. However, otherwise, if that does not happen, then I think we will have to be content with the kind of current performance of the auto guys.

I take your point on rural demand. Yesterday, the GDP Advance numbers, both in terms of 2011-2012 prices and in terms of current prices, agricultural growth is 3.8 which means there has been no price improvement at all for them from 2011 to now. That can be one reason why there is so much of a pain. Therefore, how will you grade up in terms of the other consumption stocks, staples, they are the performing stocks, we were talking about Page Industries, we were talking about pizza guys, we were talking about all the Marico’s of the world, is that sector still safe?

From a pure fundamental outlook, I think the consumer staples as a sector is safe. I think they will kind of still grow at about close to 10-12 percent volume growth and that is pretty robust in an environment like this. However, as investors, the challenge in consumer staples are valuations. When you kind of go to buy stocks at 50-70 P/E multiples and you are willing to kind of just buy stocks at 1-1.5 percent yield to free cash flows, you are up against a wall in the short term in terms of returns to you as an investor.

So, while as a sector it will keep doing well, the challenge out there is valuations and we have seen, like when growth does not happen, some of these poster boys of basically some of the growth segments, getting clobbered.

Just to follow up on that, the dramatic changes that we have seen on a stock like Eicher or Page where valuations as a word did not exist till a couple of months back and now the market is seriously de-rating these stock down. So what we are seeing in a business like Page Industries, is that a one company issue or is that raising a question mark on overall discretionary consumption?

I clearly believe that what happens is when companies grow at 25-30 percent, investors were willing to pay 50-60-70 PE multiples. The one quarter of just 10-12 percent growth and that is where it is, so the whole paradigm shift has happened from growth at any price to growth at a reasonable price. That is the paradigm shift you are seeing with some of these individual companies and one has to be very careful when you are buying these high PE stocks that is going to be there for next several quarters. Is that long runway of growth that we talk about really happening at every step of the runway or not. So that needs to be kept in mind.

Talking about finance, you have always said that you like the private retail guys – any change to private corporates because they have done so well?

No change because the corporate guys have just caught up. The bigger challenge out there is you really don’t know how things are really going to shape up in terms of asset quality, then leadership changes. These are services businesses and in that the CEO, leadership essentially matters a lot. So it would be better to see for a quarter or two, how the leadership changes.

In the meantime you also have a choice where there are banks, which are giving you that fantastic quarter on quarter growth, there is strong visibility, valuations are not totally out of whack. So, I still believe that is really the space to watch out for.

Maybe a quarter or two quarters down the line it is quite possible that some of these corporate banks may then look attractive when you have a better sense of what is really the new leadership strategic thought process. Probably that is the time to be constructive on them.

First Published:Jan 8, 2019 6:02 PM IST